Empire Company Limited

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

Today, we will provide summary comments on our results and a further 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. There is a short summary document outlining the points of our quarter available on our Web site as well.

Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer; Michael Vels, Chief Financial Officer; and Pierre St-Laurent, Chief Operating Officer, Full Service. 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. I think it's clear to see from our results this quarter and throughout fiscal 2019, Empire is not the same company it was just two years ago.

We are stronger, more customer oriented, more innovative and poised for growth. Our teams strategy and focus on execution have improved across-the-board.

Having said that, we realized with the heavy lifting over the past 2 plus years is only the beginning. We’ve much work to do to execute even more effectively and innovate.

Our potential thrill our customers grow market share and greatly improve our bottom line is still in its infancy. We're hard at work on finalizing a strategy detailed roadmap and financial goals for the three year's post Sunrise.

Significant customer and financial prices cannot be attained because we have our infrastructure and disciplines more firmly in place. Robust sales momentum continued in the fourth quarter.

Same-store sales were 3.8%, the strongest in a decade. Food same-store sales, which exclude pharmacy and fuel were 4.2%, internal inflation was 2.2% for overall tonnage of 1.6%, our fourth consecutive quarter of positive tonnage and the strongest in almost nine years.

Customer count was up, basket size increased in sales rep in all regions across all banners. In fiscal 2019, we increased sales by almost $1 billion, the majority of the improvement in our sales numbers can be attributed to sharper in-store and marketing execution and the early success of category resets.

Farm Boy also played its part contributing about 20% to the sales increase. These weren't empty calories sales either.

Gross margin rate was 25.4%, up 70 basis points from Q4 last year and 120 basis points over Q3. This quarter we continued to see the beginning of the category reset margin improvement fit.

This will progressively amp up over the next four quarters. EPS was $0.46, 2.5x higher than our Q4 fiscal 2017 EPS when we announced Project Sunrise.

On top of that, our adjusted EBITDA margin of 4.8% this quarter is up 70 basis points over the prior year. We're closing the gap on our competitors.

Most of the current gap to our major competitors is nonstructural and we intend to close that gap significantly going forward. EBITDA margin is now our most closely watched number.

Mike and I have talked a lot with you of our capital allocation. We worked hard to cement a disciplined approach to capital allocation and we are investing in better projects that generate solid returns for you, our shareholders.

Last year at this time, we announced a capital target of $425 million and we came in at $427 million excluding Farm Boy's capital expenditures. We refreshed them for our stores, continued construction of the Voila, CFC in Vaughan, converted three stores to FreshCo with 15 more on the go, open two new Farm Boy stores and 10 new stores across our banners.

For fiscal 2020, we will increase our capital spend to $600 million, which includes capital estimates of approximately $70 million related to the expense of the Farm Boy store network in Ontario. More and more, our base capital will be deployed to renovate and refresh current stores and invest in advanced technology including data analytics.

Mike will walk you through this in more detail. Our strong results in capital spending discipline in fiscal 2019 have put us in an enviable free cash position.

As a company, we have a strong belief in returning the appropriate cash to you, our owners. To that end, we announced a 9% increase in Empire's quarterly dividend per share from $0.11 per share to $0.12 per share commensurate with our strong cash flows and confidence in the business.

Our company also believes that share buybacks are useful additional tool to utilize excess cash. We will file and execute on a normal course issuer bid with the intent to repurchase up to $100 million of Empire shares in fiscal 2020.

We expect that share repurchases will be a key part of our capital allocation arsenal over the coming years. We do not expect that the dividend increase nor the share buyback will impact the timing of regaining our investment-grade rating.

Back to the business. We're seeing very good progress on our major strategic initiatives, project Sunrise, FreshCo expansion, Farm Boy and Voila.

We are more than two thirds of the way through our Sunrise transformation, and this initiative is progressing better than we originally anticipated. With $200 million Sunrise savings achieved in fiscal year '19, we can now confirm that we expect to exceed our Sunrise savings target off to $500 million, which Mike will discuss further in a few minutes.

Category resets which will drive a large portion of our total Sunrise savings are well underway. Our merchants have nearly completed our negotiations with our supplier partners.

In parallel, our teammates in our stores have done a great job realigning our stores, tranche by tranche, ensuring our shelves are stocked with the items customers want most. We are especially cognizant of the customer experience 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. In April, we launched our FreshCo banner in the West, opening three stores in British Columbia and two stores in Winnipeg to date.

It is still early days, but we are extremely pleased with how the stores are performing and with the customer reaction. Our expansion of FreshCo to the West allows us to participate in the growing discount segment by converting 25% of our poor performing Safeway and Sobeys stores to FreshCo stores and markets that are better suited to discount.

We remain on track to open two [indiscernible] FreshCo stores in British Columbia in July and 11 additional FreshCo stores throughout the remainder of fiscal 2020. Our strategy to grow share in Ontario where we have historically had a low market share continues to progress well.

We're announcing stronger results in our existing Sobeys, FreshCo and Foodland banners, and we continue to see improved sales in customer metrics as we convert all FreshCo stores to the new FreshCo 2.0 model. 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.

We 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 this growth will be in the heart of Toronto.

Farm Boy coupled with Voila, our game changing e-commerce solution will position us beautifully to expand our presence in the GTA. Voila is on track to test and soft launch in the GTA about a year from now.

In May, we announced that we would be opening our second CFC in Montréal in 2021, which will serve major cities in Québec and the Ottawa area, building on our already successful iga.net home delivery service. The world is moving quickly and we have the exclusive rights in Canada for the best e-commerce technology in the world.

We want to put it to work. But Voila is not the only innovation happening in our business.

As we shift from defense to offense, we're focused on positioning the company to innovate for the long-term. Shopping in the grocery store looks pretty well the same today as it did 50 years ago when my mother was pushing me around in a cart and that needs to change.

We're putting in place the teams, tools and culture that we need to drive innovation on our business and to win the next generation of grocery retailing. Empire at its heart is an innovative company and now with much of the heavy lifting of project Sunrise behind us, we were able to focus our attention on innovation.

Our vision is to be the most innovative retailer in Canada. This won't happen overnight.

We have a focused roadmap to achieve that goal. We are not innovating for innovation sake.

We're focusing on a few innovative projects that will drive the most impact for our business and for our customers. At this time we're keeping these projects close to the West for obvious competitive reasons.

I am really proud of my teammates and what they've accomplished in fiscal 2019. I would like to especially congratulate Pierre and Mike on their well-earned new responsibilities.

More than ever now, I believe that we’ve the structure, disciplines and team in place to perform at a very high level. And with that, over to Mike.

Thanks, Michael. Good afternoon, everyone.

We are very pleased with our margin performance this quarter. Margin dollars increased due to the strong sales, and just as important our margin rates are up by 70 basis points.

The 70 basis point improvement is even better after some mix impact related mostly to higher sales and businesses that have lower structural gross margin such as Québec discounts and wholesale. Excluding approximately 25 basis points of this mix impact, we were actually up by almost a 100 basis points on our gross margin line.

The two most significant drivers of this improvement are Farm Boy, which has a higher margin rate than the rest of the business and impacted the rate by approximately 40 basis points with the remainder accounted for -- by an approximate 60 basis point improvement related to category resets. In conclusion, we grew our sales and banked positive impacts of our category reset project.

The strong sales this quarter pushed our variable SG&A expenses up, mostly in store labor. SG&A as a percent of sales were flat to last year of 22.9%.

We accomplished approximately 45 basis points of Sunrise savings in SG&A this quarter, largely through indirect sourcing cost reductions and continued improvements to store operations. This is partly offset by Farm Boy's higher labor cost model impact, increased the same-store and back office incentive expense accruals and some increased investments in marketing expenses.

Combined, we’ve approximately $80 million of savings reflected in our earnings from the quarter just related to Sunrise. For those of you keeping a score in home, you will note that we exceeded our public estimates for the year.

I’m pleased to say that on a cumulative basis we’re now ahead of where we thought we would be at this time by approximately $50 million. Looking forward, we're targeting to earn approximately $250 million of incremental earnings through Sunrise in fiscal 2020.

These amounts will be spent roughly evenly across the year as category resets are executed in store and we also continued to reduce our cost base through indirect sourcing and store improvement projects. Equity earnings contributed strongly compared to last year.

This is principally the result of increased earnings from our investment in Crombie. The Crombie results were impacted in the quarter by gains recorded on their disposal of a parcel of assets, Empire share, of which accounted for $8.4 million, of the $12 million increase in equity earnings over the prior year.

Crombie recently announced a further significant sale transaction impact of which will be recorded in our second quarter 2020 results. These gains from Crombie had an approximate $0.04 after tax impact on our earnings per share.

Although this was offset by a higher effective tax rate during the quarter. The tax rate of 25.5% was significantly higher than last year accounting for about a $0.04 impact on earnings per share compared to last year, which itself was positively impacted by an internal reorganization that we undertook last year to simplify our corporate structure.

For fiscal 2020, excluding the impact of any unusual transactions or differential tax rates on property sales, we are estimating that the effective tax rate for the next year will be between 26% and 28%. Our cash flow for the quarter and the full-year continues to be strong.

During the quarter, increased capital expenditures principally due to timing and the sale of properties to Crombie last year that didn't reoccur, accounted for lower free cash flow compared to last year in the quarter. For fiscal 2019, excluding Farm Boy, we invested $427 million in capital expenditures, which was in line with our public estimate of $425 million.

For next year, we expect to invest approximately $600 million in capital. This estimate includes approximately $70 million for Farm Boy with the rest of the business accounting for the remainder, which we have said should over time maintaining at a level of approximately $500 million.

For the capital spend in fiscal 2020, we expect to accomplish a great deal, including an aggressive store renovation program, spending of approximately $65 million for 13 FreshCo conversions, continued investments in our Voila e-commerce business and increasing investments in information technology and innovation. In Farm Boy we will be on construction on a number of new stores and one Sobeys Farm Boy conversion with the expectation of three of these stores will open in fiscal 2020 and the remainder early in fiscal 2021.

Looking to future reporting, we have an update on IFRS 16 in our financial statements. Last quarter we gave you an estimate of the expected impact of IFRS 16 and noted at that time that the discount rate was a key assumption and would be finalized on our transition date of May 5.

Since that time we updated our discount rate to reflect changes in market discount rates as well as some new leases and lease modifications. The expected impact on our balance sheet of IFRS 16 is the inclusion of $4.6 billion to $4.8 million of liabilities, which are largely new lease liabilities and $4 billion to $4.2 billion of additional assets primarily right of use assets.

Final numbers are expected to be within these tighter ranges and will be recorded in our first quarter. In the statement of earnings, current rent expense will be replaced by depreciation on the right of use assets and interest expense on the lease liabilities.

There will be no change to the amount of cash exchange related to lease transactions, but now these cash amounts will be classified as financing cash flows rather than operating. To help you out, we have disclosed in our MD&A that in fiscal 2019 we paid approximately $500 million of net cash rent.

This gives you a sense of the material impact this will have on the calculation of metrics such as EBITDA and free cash flow. Once again, however, I will 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 changes related to debt ratings or financing costs.

We expected in the short-term DBRS and S&P will monitor the effects on their issuers including us, and continue to use their own metrics in the short-term. Our own assessment is that the effects of IFRS on our statements will align to our credit metrics very close, will align our credit metrics very close to both agencies and we therefore expect little to no impact on their assessment of our credit quality related to these IFRS 16 changes.

Regarding the impact of our bottom line continue to estimate that adoption of IFRS 16 will not have a material effect on earnings per share. We will be hosting another very exciting conference call in July to further discuss the impact on the IFRS 16 adoption of Empire.

Lastly, we've several large initiatives happening in fiscal 2020 and we know it's helpful for our shareholders to have a bit more insight into how these initiatives may impact our future earnings. Firstly, FreshCo expansion in the West.

We recently announced six Safeway stores that will be closed and converted to FreshCo stores. incurred closing costs and will be charged to earnings in the first quarter and have an impact on that quarter of approximately $12 million before tax or about $0.03 per share after tax.

These costs may have up of inventory write-offs, severance and fixed asset write-offs. We further expected later on in fiscal 2020 we may announced one more tranche of store closures, although we’re not yet ready to fix the timing or the quantum of these right now, but will update our communications and disclosures as these actions are finalized.

As Voila ramps up to a soft launch in Spring 2020, we estimate that there will be a relatively immaterial impact of about $0.01 per quarter impact in fiscal 2020 as the team grows and we incur the cost of putting a new business in place with the potential for increased marketing costs over and above that in the fourth quarter. In fiscal 2021 with our CFC and GTA launched and beginning to ramp up design and construction of our second CFC in Montréal, we do expect further earnings dilution for fiscal 2021 and we will update our estimates closer to the launch.

Our strong top line margin discipline and success in capturing the benefit of Sunrise in the bottom line, coupled with disciplined capital management has created a new level of strong consistent cash flow generation. This has provided us with the flexibility to spent on our growth and innovation agenda, look after our store fleet, fund our growth initiatives and still consider the opportunity of returning cash to our shareholders.

In addition to the dividend increase and share repurchase, we will also retire some debt during the year. With that, I will hand it over to Katie for questions.

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

Good morning, afternoon. Sorry about that.

Just looking at the fiscal '20 and '21 outlook, it sounds like you remain confident that you can get to a sustainable 5% EBITDA margin through a number of the initiatives. But you’ve also mentioned that you feel confident that with the new programs coming into play over that time frame, you thought you could higher and close the gap versus your competitors.

Beyond Farm Boy, which obviously has higher margins, right, what are the kind of initiatives that you could talk about. Do you see driving you towards that successful outcome.

Thanks, Jim. It's Mike.

So you’re right. That is the message that you -- we have to bank some more Sunrise savings in 2020.

They’re not immaterial. And as we said pretty consistently, our expectation is that the bulk of those should fall to the bottom line and that’s certainly going to help EBITDA margin.

But we’ve also said pretty consistently that that's not going to get us all the way there. And we still need to improve our cost base, both cost of goods sold and our SG&A and we think there's continues to be opportunity to do that and we will keep working on it.

That's an element of further closing that gap. And we need to improve our top line productivity, of sales productivity and that’s going to come through a variety of initiatives, which we are working through and we will certainly shed some more light on as we complete our strategic CNs and start to think forward to 2021.

But those include getting even better at the pricing from our optimization, improving our marketing presentations in the stores, improving our customer experience, we are becoming much more of a destination store etcetera, etcetera. So it's a relatively long list, but realistic when we think about it we just reset our foundation.

That's given us a lot of immediate benefits, but the very, very exciting thing about it is it gives us a ton of opportunity going forward and those are some of the items that we are referring to when we conclude that this is not even half over and we have a lot of improvements left.

Okay. On the comp store sales, very strong year, obviously, inflation was in excess, but you had very strong real comp store sales, but we don't have the exact numbers.

Certainly some transaction and traffic growth, which I assume resulted in some repatriation of market share that have been lost in the past. You're now going to be entering a year where you are up against some much improved numbers on the top line.

I assume that there is some benefit that could be taken from category reset. Was Farm Boy included in comp store sales for this quarter like you plan on reporting it that way over the course of the time?

Yes, yes we do it Jim. It was included in this quarter and we are going to continue to do that.

We had about a .1% impact on the same store sales number from this quarter.

Okay. So, again, I guess there is going to be some stuff here you are not willing to talk about, but how should we be thinking about fiscal '20 from a comp store sales standpoint?

There is still a belief that I think generally inflation will slow, although the May print head of CPI was strong. How do you feel about continuing to be on the offences Mike mentioned earlier and gaining more volume growth through 2020?

I mean, I think we feel pretty good about our experiences that when you have some momentum it tends to carry over, harder to turn the ship when you’re not doing so well. We believe that our execution in all areas of our company and from a supply chain to a marketing in-store, digital, it's so much better that it was even a year-ago and we have plans for all of that.

We won't get all the way where we want in the next year, but we are going to get quite forward. Yes, we're going to be trying to stack some good quarters.

It's hard to call what inflation is going to be, so our goal is to grow tonnage and grow market share smartly and earn it and still keep it strong margin. And we're very optimistic that we continued the strong path we are on.

I would like to see some summer, personally and businesswise, I think. And I would like to sell more popsicles and cold drinks.

But that, its first time I ever mentioned weather here at Empire, hopefully the last. But we just keep doing our job and I'm really, really optimistic about our chances to grow that market share.

Mike, upfront you mentioned that invasion, as we think about fiscal 2020 both on branding, positioning of the conventional business, marketing initiatives including digital component. Like should we be expecting a big splash or are these initiatives going to come in spread out over time and so just build towards, we call a new conventional offering?

Yes, I don't -- I mean, I’m not, as I said it's not innovation for innovation sake. I think the biggest change we have made over the last six months is we are gearing up to be able to use data analytics and AI in a way we have never done before and I don't use AI loosely.

I think people are using it a bit loosely out there in the business community, I mean, really driving our business to be smarter and test and learn and especially to take -- see more productive as we go forward. We have some initiatives right now underway that we are starting that -- we expect to see by the second half of the year, we will start to see some small impact and growing over time, rather not share that.

At the same time, the -- with Sandra leading us in marketing, you're going to see much more personalization, much better use in digital and you're going to see us testing early on in the fiscal year, some things in the store and some things online that we intend if they work which we expect they will to spread across our business. Innovation is a lot big word and people throw it around a lot as I do sometimes, but a lot of it is back of the house.

It's using data analytics to serve your customer better and to take extraneous costs out. But in many times too, and that's why I talked about how grocery stores are not that interesting, have not change as much as hard and soft goods.

Retail stores in this country there is an opportunity to thrill our customers not only online, which we obviously are going to do, but in our stores as well. And I think we have the team, they are buying into using innovations smart, but in ways that serve our customers better, not just doing it to get a headline here and there.

Great, thanks. Thanks, everybody.

Thank you.

Hi. Thank you.

On the inflation, so I think you said 2.2% and CPI was something like 3.5% I think for your period. So can you talk a little bit about what you are seeing in the store, the degree of trading down and the ability to pass through the full cost of goods sold, that kind of thing?

I think it's Q4 was a bit higher than Q3. It depends of the category.

We need to be extremely cautious on how we are passing cost increase, we need to remain competitive. In same time, the comparison with CPI we need to look at it carefully, because basket is very small and it's changing over time.

So, once again, we need to look at metrics, many metrics in the same time to make sure that we pass cuts increase effectively. I think we did it because our margin is much better and we continue to expand and increase same-store sales.

So it's an average, the 2.2% in the CPI and the average was small number of items, we monitor it very carefully week after week and that's the average result we have in Q4 versus Q3.

So are you seeing people trade down or trade out of certain category?

No significant change from over the last four quarter in the customer behavior. Some comment the -- rising faster than other, but no significant change in customer behavior.

Okay. And Ocado, how soon can we expect to hear about commitments for the third and the fourth potential sites?

Is there a certain window that you have to commit to or risk losing your turn?

No, not at all, Michael. So when will you hear about number three, number four, the short answer is I don't know.

We are working through Montréal right now and figuring our timing and design for that facility, we are just knocked down the building that was on it. As I think you probably know.

So -- and that's really our primary focus at this point. We don't have any deadlines.

I think that’s what you're getting at to repay in exclusivity. That's not what drives us here.

It's really going to be a very direct business timing for us.

Okay. All right.

And then if you look at the -- if you look at your EBITDA performance for the full retail side year-over-year, I think it's up about 30 somewhat -- $30 million, $40 million. You had $200 million in Sunrise savings, but then clearly you had minimum wage headwinds, you had drug reform headwinds, things like that.

But there was also some other investment that doesn't account for all of the difference. So what other cost are you seeing that are inflationary that are -- that is holding back more of that $200 million from showing up on the bottom line?

You’re talking about the full-year, right?

Exactly.

So we refer to a number of items and certainly, may be Pierre talked about our early trading, but -- so clearly minimum wage what was an impact we had very material freight cost increases that we referred to earlier on in the year. And then a number of inflationary impacts on commodities and currency that we didn’t pass through.

I think we are pretty clear about that earlier on in the year as quickly as we wanted to and that resulted in solely for the first half, lower gross margins than we would have anticipated. So those will be the headwinds that can help with the -- with from a trading perspective.

I assume in asking a question that you have already accounted for things like the B.C. buyback, FreshCo store closures and that sort of things.

So obviously I’m not going to bore you with those details, but that was probably the primary reasons.

So like the freight commodity currency that was there in the first half, I mean are you expecting to be able to recapture all of that or do you think …?

I think that's -- I mean, I think if you look at our progression here, we have done pretty well in terms of maintaining margin of growing sales. And yes, we would hope to continue to expand and make sure that we price for cost increases, but I think I am balanced with the fair to say that we ended up absorbing some of that.

Okay. And just regionally, I know you don't want to get too specific, but it looks like Quebec operations were quite strong, if you just kind of use the noncontrolling interest changes as a bit of a guide.

What do you think you are doing in Québec that is really helping you?

Full Service. Yes.

Fruition is strong in Quebec, but have been strong also in the rest of the country. When we look at the same-store sales, we got very good Q4 across the country.

And I think the things working more and more together and the sharing good practices across our country. So -- and there are good practices in English Canada that Quebec using now.

And I think collaboration has been great and category reset project has been a very good powerful project to bring all people together and behave as a one big company. And I think there is more to come, especially in fresh.

And I think also -- I think Pierre's being a bit modest, his team in Quebec have been very good on -- I think in terms of promotional effectiveness, I think some of the promotions we had out there in the last 4 to 6 months, I think the first statement very effective and he says a replay into move some of those proficiencies across the rest of the country.

Right. Thank you.

Thanks and good morning everyone. Really intrigued by your commentary around post F 21 and beyond and where you want to take the company around innovation.

Recognizing that you are not going to tell us what you're going to do, wondering maybe if you could give us an idea of who you do think he's doing in-store innovation in a really good way both in food, but also perhaps another categories or that you might be able to emulate.

I think a lot of people are doing good work in Canada, but I think -- we let this down in the United States looking at retailers in the really good job down there, I'd say that the one that we holding highest team in the United States are Kroger, Wegmans and H-E-B and we're watching a lot of what they are doing. A lot in terms of prepared foods and what they're doing in produce and some of the other areas, but also in terms of -- at Kroger where Kroger has become a very innovative grocer.

Not all that’s applicable to us, but I think there is a lot to learn by seeing where they are. And they probably are couple of years ahead of offers in terms of some of the innovation, but I think we can catch up a little bit.

We are not a large company, we are not going to invest as much in terms of these projects, we are going to be more selective. You can see that from how we talk in terms of our capital spending and all that.

But I think when you see what some of these companies are doing behind-the-scenes, but also customer -- in terms of the customers. In terms of the e-commerce I think we got the best solution what will be the first in North America to have that.

Understood. And that sort of leads in to my next question which is clearly you are investing in data analytics and capability.

What are you adding, where are you adding, what is the magnitude and where do you see the greatest potential impact of that? *

Well, we have done a lot of work as a team and with our Head of Human Resource, he is very strong, Simon Gagne. And we have done a lot of work looking at which companies have done it well and which countries are just spending a lot of money, we believe we need to be extremely prudent and not gear up too quickly.

But it is very difficult for any individual company to staff up right away and have the kind of data engineers and analytics that people talk about and the best companies out, they are doing it and many of them are European, build slowly and concentrate on a few key innovation and AI projects at the beginning and ramp up their capabilities there and that they partner. They don’t just have something way off and doing whatever they want.

They partner with the operators and the merchants and the market is to make sure its relevant. So I think that as we -- I think we actually have some skill right now.

We are doing something especially merchandising there, they are going to pay off for the next year and two and in marketing. But you got to be very careful not just to sort of -- we did a lot of work to become a very efficient -- more efficient company.

We have a lot of more work to close that EBITDA margin gap. And throwing money around willy-nilly and doing innovation for innovation's sake is not the strategy we want to pursue.

At the same time our goal is to be the most innovative retailer in Canada. But it's not going to be in the next year.

We will do it in the right way as we have benchmarked.

Understood. And just one final, against sticking with this whole discussion, certainly as part of the category resets in general, you really raised your game on private label.

Would you be willing to talk about where the penetration is, Wire is coming from and how important you see that as you move forward.

I’m going to turn to Pierre who hates to give away any competitive information at all. So let's see what he says.

We know we are under index in private label. Once again, the category reset exercise has been extremely positive to identify specific role for private label.

And so for we are seeing very encouraging results on category we executed a store level. So we are expecting having a fastest growth in private label than -- this because we are all under index and just because now in every single category private-label will have a specific role to play and in some category private-label won't play a role, and just because there is no room for private label and so we are very -- category reset was really good exercise to identify this opportunity and so far we catching them and we see positive results.

So we are expecting increasing our penetration with private-label going forward.

That's great. Thank you.

Hi. Thanks for taking my questions and congrats on the quarter.

In terms of the new efficiency program, call it, Project Sunrise 2.0, do you anticipate that the efficiencies from that will offset the costs that you have relate to all these growth initiatives that you have going on, or is that something more than, something substantially like what we saw in the first iteration?

Well first, I'm going to say it's not going to be called Sunrise 2.0, but that is -- I don’t know how you know it, our working title right now. But it won't be the final title.

Well, I think it would be fair to say that, as we said early days, working through it. We also still have to bank a big number for 2020.

That’s what most of our operating people focused on. But as the management team we are focused on aggressively growing our bottom line.

So one way or the other where we have point this business as in terms of strategic direction. We have to eat day and grow tomorrow.

So I think you’re going to expect that we will have aggressive goals in terms of growing our year-over-year earnings numbers. How that works out in terms of the combinations of dilution will take on a discount expansion versus improvements and promotions etcetera, etcetera.

That’s our. Certainly, we are not going to take a vacation from growing our bottom line.

Okay. Thanks for that color.

And just in terms of how far you are in terms of identifying the opportunity. Is this something that you'd say your pretty far down the road or is it -- and you mentioned the word early days we still don't know what the opportunities are working out to figure them out.

We have some strong perspectives. Our strategy sessions and finalizing these things did happen just sort of in the early fall October, November time frame, that’s when our directors -- Board of Directors will get good looks at it.

So as I said, still ways to go. And you can probably expect to see and hear a little more about our thoughts 2021 and beyond as we progress later through 2020.

Okay. Thank you for that.

In terms of in the quarter when implemented these category resets, just an outsider looking in one might imagine that these kinds of initiatives will be very labor-intensive and may have hit you a little on the SG&A line, may be you can give me some color on if that was, in fact, the case? And do you see that cadence, if I'm correct, improving as you move on?

Like you mentioned, like resetting the stores.

Right, right. If that impacted your labor costs as you want to …

Oh I see, okay. No, no.

The labor cost impact that I referred to is primarily the sales driven. So we didn’t have increases in our sales that -- sorry in our store labor that would merit isolating or discussing in the context of our fourth quarter.

Okay. And in terms of the category resets, I believe you mentioned in the script, generally satisfied with them right now.

How long does it take you to get a good read if the customers are reacting negatively towards them? Are you -- does it take one quarter, a few months, a year?

The execution of the category reset should end in October. It started in the beginning of -- end of January, beginning of February last year.

Grocery, it's -- I would say 70% of the execution is done. We are in good direction.

I mean, grocer will be finished at the end of August and we go aim consciously category by category. There is no big disruption in store, so it's well geared let's say process because it started in January and we learned a lot in every tranches.

So there is no disruption, no major disruption, I think. So the process is going really well.

And this fall the remaining category will be in fresh. And in many fresh categories, there is no realigning required.

So I think that the biggest part of realigning is behind us. There is still some quite a bit ahead of us.

But we are confident to complete that without major disruption and without any customer dissatisfaction so far. So we're really pleased about that, that's over our expectation.

We did a lot of pre-work led by the merchants to go through every category and understand how customers approach it what they're looking for. We expect a little bit of pushback in terms of some of the realigns -- given the realigning, you’re changing some of the categories.

I think we are a little surprised actually, Vishal how well all of this is played out. I was going to say we’ve had de minimis effects.

I wouldn’t even say it's de minimis, it's just non-existent in terms of the categories, every single category we have realigned. We are pleased with the changes, from a customer point of view and from a sales point of view, we think the very, very positive growing forward.

Okay. And maybe just a high-level question here.

A few years ago, analysts used to ask the question about conventional and its positioning in the Canadian gross replace the traditional conventional grocery store and its positioned and whether it was over stored from that standpoint of the conventional grocer? Wondering if you have an opinion on that?

And I know you're growing discount in select markets, but what's your view on just generally conventional grocery and how they have to compete?

I think reset 2.5 years ago, that there's a big place in Canada for full service. What you call conventional, we call full service grocery.

There's a place for discount. Many customers shop both the different times, we at that time saw that the matured in a way that there was a good mix of full service and discount in Central Canada, and I think that's the way it's played out.

Two things, I would think to mention one is, you can see from our results over the last year. I think we’ve grown tonnage and same-store sales, strongly more strongly than anyone else in the country.

So -- and almost all of that is in full service. So that kind of carries that out and that we thought that there was a real opportunity in Western Canada that owe in some markets to convert to the discount, but the FreshCo 2.0 which is pointing out grey.

And we will take advantage of that, but I think you build a store, whether it's discount or it's full-service, or you put up put up Voila and if it's great for the customer, it does great. And I think right now I’m happy with the stores we have.

It's our duty to make them even better to real customers and keep drilling them.

Thank you very much. I have two questions.

My first one will be for you, Mike. You indicated that you're ahead of plan with Sunrise by about $50 million.

Of course, raise the goal from $500 million to $550 million. I'm just curious the extra -- the $50 million where you're ahead of plan, is that primarily related to extra gains that you got from the category resets or is it broader than that?

I think it's broader -- would be the very superficial top line answer. So when we originally set out our expectations, if you think about what as we kind of reformulated this a little, if you sort of think about it maybe in this context.

We -- as you can imagine we do drive our internal people to higher numbers because we always worry about missing it. So I think we’ve managed to bank a few of those fresh targets that would be really across the board firstly.

And so I wouldn't point anyone particular item or event on that secondly, I think we actually have said it a few times that we actually got going on the negotiations and the category reset work, probably at least the quarter earlier than we had originally set out when we set that $500 million target out. So there is some -- it's a little bit of timing there.

And then lastly if you think about what we have said here, where previously we said we would be annualizing $500 million by the end of 2020. If you look at that math, we will be almost fully capturing that $500 million by the end of 2020.

So those will be in the things -- probably the things that have caused us maybe to be higher. Its shooting a slightly higher target being a little bit ahead of schedule.

Okay. Thank you, Mike.

That's helpful. And Michael, if I may, I have a question for you.

I was very intrigued to hear you in your opening remarks talk about innovation agenda, and I know you've already been asked a few questions about it. Fully understand why you're not going to tell us what the projects are.

But I have got sort of three little questions around the innovation agenda. First of all, exactly when in the course of the last year or so did the company turn to being able to have innovation as part of its strategic priority and started doing the work and thinking about this?

Then secondly, who is in charge of this, who is spearheading it? And thirdly, echoing back something you said on that analytics and, in fact, that you thought the people who do it right are the ones who take small projects and get their feedback on those but importantly involve the operators and the merchants.

So would I be right in assuming that these innovation agenda would be projects, which would involve all kinds of different areas and operators within the company?

Yes. That’s a great question.

Thanks, Patricia. I always thought it would take two years to put the infrastructure in place to really be able to go at innovation.

5, 6, months ago that we could -- and without taking too much of attention away from category resets and from all the great work we’re doing and in the stores and the merchandising. You can see the results of that we could start training our mind too.

Also its been innovation, but especially data analytics. And so right -- it was almost on schedule that after 2 years I think we felt that way.

Innovation has to come from the operator, like the operator, like the operators are merchants. It doesn’t take hold and if it's just CEO and some crew or strategy and innovation people trying to shove down their throats.

We’ve been fortunate to -- I’ve been fortunate to inherit and now grow the team to include people who not only are really tough on execution, really good at it but they embrace innovation. If they see that innovation is better for the customer and better from the bottom line.

And so, we are going to bring in a head of innovation, we are going to announce that pretty soon. And that person though I have to be someone who can collaborate at work and coordinate across our businesses, because that person on their own can't do much at all without working across the businesses, but I am very, very optimistic about the type of person we are going to bringing into that role and even more excited about the security team we have here to lead innovation.

I'm sorry, what was your third question?

I think it -- it was when, who and the breadth. And I think you've answered all of those questions.

Okay, good. I’m glad.

Well, I appreciate that. I look forward to hearing about the newer higher.

It's important to note, a lot of people talk about innovation, I talk about a lot. But it's kind of be part of the business, it's got to be plant.

Innovation without process, without discipline just coming up with crazy ideas don't do anything, just spends a lot of money and throws you off what you're trying to do. We are building this into -- the three-year plan is going to be about execution, innovation and then many ways that’s going to be [indiscernible] and that much of the efficiency, not only the sales growth and the customer satisfaction you’re going to see is going to be from innovating new ways of doing things.

Well, I can tell you peer is becoming quite the expert on AI right now among other things. So that gets me excited and that I know we will have real tangible effort rather than just as I said getting some headlines, something which doesn't do anything for us.

Just Michael or I don't know who will answer this question, but on sticking with the topic of innovation but not talking about product innovation, I noticed that at the beginning of the season, you guys -- Sobeys kind of led with the beyond meat burger on the front page of the flyer for the holiday weekend. Just curious if you could tell me how that went?

We made many changes in the structure when we did Sunrise and we brought in our team new ideas, new teammates, beyond merchandiser with the combination of experienced people. And you know what, our young people are very fan of that type of product and the sound that it was a huge opportunity to thrill customer.

And we approached that company as 1 or the other for some it was our first launch coast-to-coast and we have been attractive for that supplier to enter those -- the only product in Canada. And that's just the beginning and the power of working together and we have been able to do that statement in our flyer because we made a good deal with the supplier.

and the supplier was happy to do that and with that so that's beginning of a great partnership with suppliers going forward and our expectation is to become the best retailer to work with for supplier by having good partnership and promoting their product when we think that it's relevant to customers.

Thank you very much, Pierre.

Hi. Its Emily Foo for Peter Sklar.

Just a question on the benefits that you're getting in fiscal 2020 from Sunrise, the $250 million, how much of that would be in that category resets or vendor [indiscernible]? And along the same line of vendor negotiations, like how are those going and are they still ongoing?

A high percentage, more than [indiscernible] of that would be in -- related to the work we are doing of category resets and vendors. To -- as to the second question, in terms of how far along are we?

I think Pierre mostly covered that when he said we are probably about 70% way through in terms of negotiations. Grocery negotiations pretty well done.

Now we enter execution and some fresh negotiations along the table for 2020. So I think it would be fair to say that that estimate for 2020 is based on some very high visibility we have, having completed a very material, in fact almost the majority of the negotiations that really count.

Okay, great. Thanks.

And on to FreshCo 2.0, so it seems like the launch was a success and we’re just wondering what in particular resonating with the customers there? You've had any lessons and if you've seen any response from any competitors in the regions?

Yes, its Michael. Let me -- I'll give a bit of an overview and I'll answer your question.

So stores -- the stores we’ve opened today are doing great. We’ve five open, we saw strong opening sales and very positive customer reaction.

As we totally expected, as we take -- as we go in and take market share from people, they don't like that. And they’ve felt our arrival when they’re reacting to it.

So -- and that’s totally expected, that’s what I would do too. But we are going to aggressively compete out there full on to thrill our customers and take away competitive market share.

So all is going according to plan and be better than planned. We can't wait to get these FreshCo stores open.

I think there's just a need -- there was a need that we identified two years ago for a store of that size and that caliber to enter these markets and to bring discount prices to markets that for the most part we are getting. And I think in this case -- if I maybe so bold that before when we would open something, whether it would be FreshCo in Ontario or Price Chopper, we weren't aggressive enough in terms of our marketing.

We have put together a great marketing program to introduce this brand to these communities and awareness is extremely high. And we are -- when people come to do it they’re being thrilled.

And we just -- more and more we just have process and discipline behind things that we do, and we are not just opening the open store, we are making sure before we open these stores that everything including supply chain is ready to go. I would say that I’ve been very, very, very impressed with our FreshCo team led by Mike Venton.

Mike's a solid experienced discount retailer and I think that combined with the talent we already had here has really made a difference. And so we have a great strategy, we are doing the right thing and we are making customers happy and so we can't wait to get those all 65 opened.

Great. And lastly on Farm Boy.

It -- has it been to your expectations?

Yes, we are right on. This is the well run machine.

This is run by a fantastic and small and efficient team that cares so much about the customers. For the most part of my job is not to get in their way.

To give them all the help that a large company can give including real estate without in any way changing their offering to the customer or the brand. I think we’ve more than accomplished that, although at the same time I believe that they brought value to us in their knowledge of -- customers, brand but especially in terms of setting up a store to meet customers' needs in an urban market.

So I would say -- I was going to say right on, but I would say it's better than right on since we’ve purchased, it's a great outfit and that's why we went after it so aggressively.

That's great. Thanks for your comments.

Thank you.

Hi. This is actually Krishna Ruthnum on for Mark.

I wanted to come back to an earlier question that was asked on the benefits of project Sunrise is flowing down to the bottom line. But given that we've lapped many of the headwinds that you faced in this past fiscal year sort of looking ahead to the $250 million in savings to be harvested in 2020 -- fiscal 2020.

How do you think about your ability to trickle those savings down all the way to EBITDA?

We think about it the same way as we did beginning 2019 really. Our goal will be to record as much of that on bottom-line as we can and frankly, our senior management is in fact incentivized to do that.

The success of doing that is obviously dependent on a number of things, internal execution, market factors and to some extent some really investments and things like marketing and other things just a little bit of this quarter. So it's our expectation that the vast majority of it will end up on the bottom line in our earnings.

Okay. Just moving onto SG&A, so I mean, it grew fairly significantly this fiscal year.

I just wanted to know if you can elaborate more on the piece of SG&A growth or maybe just give us some guidance on how you see that evolving from the first half to the second half of the year?

From the first half of 2020 to the second of 2020?

Yes.

Probably not guidance. I mean, clearly, we have some more work to do and a lot of and a lot of that Sunrise target for 2020 will be in the SG&A line.

So at the same time we do anticipate Farm Boy -- full-year Farm Boy to have an inflationary impact if you recall that on the SG&A line because their service model and their in-store model is more expensive than ours and comes with a higher store labor rate than our full-service or our discount stores. But it is a goal ex Farm Boy and ex the impact of higher sales, does drive higher installed labor.

It is our intention to continue to reduce that SG&A line as a percent of sales. So that's our intention.

At the same time, we do have some intentions to invest more in innovation marketing at this stage it will be finished we don't have a total fixed on the number. And that’s something as it occurs, if it occurs, we'll certainly disclose it.

Okay. Moving onto CapEx, so just considering the $600 million number aside from the $70 million set aside for Farm Boy.

Can you give us a sense of how that splits out between Voila GTA, Voila in Quebec and then the FreshCo rollout at West?

I think I gave the FreshCo number in my comments, which was $65 million. That would be an element of it.

The largest element of the remainder of the spend is store renovations which is going to be a very significant focus for us in this year. And the completion of -- as you said of the Voila, GTA warehouse and Montréal will be another component.

We're not in a position to put numbers to that yet. We are still working on Montréal and timing of the design and construction as we get closer to that we will be a little more had going about -- disclosing and talking about those numbers.

Yes. So I want to ask about the store renovation budget, if you can quantify that and how many stores you're intending to touch and sort of what the nature of the projects you have in mind?

We are not disclosing that that number at this point, Keith, but some color on it is -- we have isolated our fleet into probably -- and segmented it into a program that's going to take 5 plus years. So this is a long-term and a consistent program that we anticipate to invest in over the year -- over the coming years, because it's a very important part of our brand strength.

Some of these are fairly light touch renovations. We are finishing up the FreshCo 2.0 packages in Ontario and there are some heavy ones where we're redoing significant elements of the store.

So the cost of each of them is materially different and how we impact the store is different as well. It will be fair to say that if you had to say where is most of the spend occurring, significant amount in Quebec that will be consistent with prior years.

We will be doing more in the West in 2020 than we have before. So a commensurate decline in Ontario in the East.

And of course we have the conversions as I talked about in the FreshCo stores.

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 join us for our first quarter fiscal 2020 conference call on September 12.

Talk soon.