Empire Company Limited

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

Today, we will provide summary comments on our results and leave as much time as we can for questions. This call is being recorded and the audio recording will be available on the company’s website at empireco.ca.

There is a short summary document outlining the points of our quarter available on our website 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'm extremely proud of our team.

They have transformed our company from one which had quarterly adjusted EPS of CAD0.12 three years ago to CAD1.58 or CAD0.52 after you back out with the impact of the Crombie transaction. That's a 333% increase in EPS in just three years.

And most importantly, we've built our brands and improved our customer service over that period. And I'm going to do this a bit differently today and I hope to give you a bit more color on the business.

Today, I want to talk about seven topics: our performance this quarter, what we're seeing in the market, our EBITDA margin for Law, Farm Boy, our store renovation program and our ownership position in Crombie. I'll leave it to Mike to take you through some of the details of our quarter, the results of Project Sunrise, the Crombie Oak Street transaction, and an update on our capital spending and share repurchases.

Let's start with our performance this quarter. Sales were up in all regions across all banners despite a more competitive and promotional marketplace than we have seen in some time.

Same-store sales were 2% with both customer account and basket size up. Internal food inflation was approximately 2.4% and our same-store sales were 2%, implying relatively flat tonnage.

We also have several different data points that we used to look at market share at more granular levels. Based on these additional data points, we believe our market share held relatively steady during the quarter.

We are working hard to thrill our customers with stronger execution and through our strategic initiatives. As you can see from our margins, we are not chasing empty calories sales.

Gross margin rate was up 90 basis points from our second quarter last year. Category resets continue to expand our margin as anticipated.

We have not at this point done what some of our competitors have done when they say they tried to improve the trending of their food sales with margin investments. We are working hard to earn our sales growth through better execution.

However, we do intend to protect and grow our market share going forward. Perhaps, I'll just take a - make a few comments about the state of the market and what we're seeing and watching out for.

We are monitoring consumer spending and promotional activity closely. Although we had positive tonnage in the last month of Q2, we have seen a slight softening in sales at the end of the quarter and into the beginning of Q3.

We think that part of this could be due to the relative health of the Canadian economy, and we are closely watching key indicators like employment and the recent communications of our Canadian banks. We also saw early inclement weather that can be good for some retail but not so much for grocery.

We continue to be very proud of our margin performance, but we think we could have been a little quicker responding to a more promotional marketplace. And so, as I said, we'll be making sure we protect our sales going forward while, at the same time, being smart about it.

Just to be clear, we're only talking about a little fine tuning here. Second, our EBITDA margin.

This is our most closely watched number. Quarter-after-quarter, we continue to chew into the EBITDA margin gap between us and our two major competitors.

We are extremely focused on an overarching goal to close the food EBITDA margin gap with them. We're going to finish the job.

We don't believe there's any reason for us not to be able to do it so long as we continue to execute and set a strong strategy. I do say food retail gap as there are certain structural differences between the three companies.

The most important difference is that we have a smaller pharmacy business which historically has had a higher EBITDA margin than grocery. On an apples-to-apples basis, our fee IFRS '16 EBITDA is up 50 basis points over Q2 last year when you remove the impact of the Crombie REIT transaction.

That's a big move. Our approach to closing our food EBITDA margin gap is two-pronged.

We are focused on improving our cost base and SG&A is pretty well there. With COGS, we had to start with category resets to get us on an even playing field and now we need to be more efficient with our categories.

Sunrise was the first step and we have made great strides but we still have way more upside. We're also focused on our sales productivity.

We have great people and great assets and great locations across the country, and we will now optimize them. Third, I wanted to talk about Voilà, our game-changing e-commerce solution.

While most players in the industry are focused on inefficient store pick models to fulfill their online orders, we are building automated warehouses powered by Ocado’s world-leading grocery technology. We'll be able to provide customers with convenient short delivery windows beginning early in the morning and running until late in the evening.

The system is more flexible than you might think. Customers can place orders at night for the next morning or morning for later that same day.

This is the only e-commerce model that at scale will eventually allow us to profitably deliver an expanded assortment of groceries to over 75% of the Canadian population with only four CFCs. While our focus is on home delivery, we can also do click and collect source out of the CFCs if that's what customers want in certain areas.

Although, I must add our data and experience tell us that when given the choice customers overwhelmingly prefer delivery to home. The flexibility of the hub and spoke network model where each CFC is the hub and smaller cross-dock facilities are the spokes allows us to get closer to the customer and we have plans to build on this best-in-class Ocado infrastructure.

We will build even more flexibility over time to meet customers’ needs. There is a reason that many of the best grocers in the world including Kroger in the U.S., Casino in France, ICA in Sweden, Kohl's in Australia, Marks & Spencer and Morrisons in the U.K.

and AEON in Japan are partners with Ocado. The reason being is that Ocado is the most advanced and advanced and continually innovative small-cube e-commerce solution in the world.

Frankly, any Plan B is just not nearly as good. When we study what Canadians are looking for in an online grocery offer, it's quite simple: excellent fresh product at competitive prices, no substitutions, delivered to their door exactly when they want it.

Voilà will deliver on exactly that. At scale, Voilà will offer an expansive selection of up to 39,000 products, which is way more than any other grocery e-commerce business in Canada and 15,000 more than your average grocery store, including high-quality fresh produce at prices comparable to our bricks-and-mortar Sobeys or IGA stores.

An online grocery home delivery experience like Voilà does not exist in Canada. We're going to grow the market.

Voilà is on track to test and soft launch in the GTA in late spring. We are so confident in the Voilà solution that we have already started building our second CFC in Montreal with our partner, Crombie REIT.

This CFC will serve major cities in Quebec and the Ottawa area and is expected to open in 2021. Fourth, Farm Boy which, along with Voilà, is a weapon for winning share in urban markets in Ontario where we are underpenetrated.

Farm Boy has been part of the Empire family for just about a year now and continues to deliver on its industry-leading operational and customer metrics. It is outperforming all of our expectations.

The phenomenal team at Farm Boy is making progress against its plan to double the size of the business in the next five years. The Farm Boy store count will grow in a mix of urban and suburban communities, with diverse store sizes and formats to fit the needs of local customers.

We opened a new Farm Boy last week in Burlington and have announced plans to open another six stores in 2020 and two in 2021. Most of these new stores will be in the GTA, five in Downtown Toronto, one in Newmarket, and one in St.

Catharines, and one in Ottawa. The stores will range in size from a 12,000 square foot urban footprint to a 38,000 square foot signature store.

This will bring Farm Boy’s total announced store count to 37 stores. And this is just the beginning.

Farm Boy is in different stages of development on more than 25 new stores in Ontario, a mixture of greenfield conversion and mixed developments. We intend to blanket the GTA and take market share from incumbents.

In a market where we have always had low market share, Farm Boy’s aggressive plan for growth is being well-supported by Empire’s infrastructure and capabilities in real estate sourcing and logistics. Fifth, our store renovation program.

We have an ambitious store renovation program that ensures we deploy capital to most of our bricks and mortar stores over the next seven years. We are investing capital at solid returns to revitalize our stores, both discount and conventional.

Our renovations will range from our refresh to a full reset of the store. But at a minimum you will see enhancements to décor, facades and modifications to our key departments to better support our strategy.

So far in this fiscal year we have touched 28 of our conventional stores, and we just finished refreshing all of our FreshCo stores in Ontario to the FreshCo 2.0 model. We will ramp full service renovations up as the result of our renovations are very strong.

And finally something we don't talk about often, our ownership position in Crombie. Crombie is our largest landlord.

We currently own 41.5% of Crombie. And we are pleased with this level of ownership.

We are working even closer with Crombie REIT’s management than we have in the past to optimize the value of our partnership. Crombie REIT leads mixed use development opportunities, provides capital to facilitate our strong renovation and has had a history of sale leaseback of properties, allowing Empire to effectively reallocate our capital to higher growth opportunities in other parts of our business.

A great example of our partnership mutually benefiting Crombie REIT and Empire is our Davie Street store in the heart of Vancouver. Crombie REIT took ownership of our Davie Street store, closed it and developed a mixed use property for Crombie REIT.

At the end of fiscal 2020, we will be opening a brand new 44,000 square foot store on the property, which features up to 330 residential rental units that will increase traffic to our stores. We are pleased with the momentum in our business.

It is a testament to the growing strength of our team. I want to wish you all a great Christmas and holiday season.

And if you want to eat really well over the holidays, shop for food at one of our great banners. And with that, over to Mike.

Thank you, Michael. Good afternoon, everyone.

Project Sunrise is on track, and we continue to estimate incremental savings of about CAD 250 million in fiscal 2020 as we progress through its final year. Incremental benefits continue to be earned at a rate of approximately a quarter every quarter of fiscal 2020, split roughly 80% to gross margin and 20% to SG&A.

Category resets were completed in our stores at the end of October, and the incremental benefits will continue to show in our margin line for the rest of fiscal 2020. The increasing margin of 90 basis points this quarter directly reflects those category reset initiatives in addition to the positive effect of Farm Boy.

Adjusted selling and administrative expenses as a percent of sales was 20.9% this quarter. If you exclude the impact of IFRS 16 and the inclusion of Farm Boy’s higher labor costs model, SG&A as a percent of sales was essentially flat.

Sunrise savings of approximately 25 basis points positively impacted the rate, largely through indirect sourcing cost reductions and continued store improvements. This was partly offset by lower impairment reversals than the prior year.

Our discount expansion in the West continues as we convert underperforming Safeway and Sobeys stores to FreshCo. This has a temporary impact on sales and gross margin dollars as the stores are closed for conversion for several months.

The first wave of FreshCo stores in the West have been now reopen for a full quarter and we're so far pleased with customers reactions and the traffic we're seeing. Two years ago when we first announced the discount expansion in the West, we noted that it would be slightly dilutive to earnings in the first few years.

This quarter the impact was approximately CAD 0.01 of dilution on earnings per share and we continue to believe at this point that the dilution impacts as we build out the strategy will be relatively immaterial. Equity earnings increased year-over-year principally due to the sale of a 15 property portfolio by Crombie REIT that contributed an additional CAD 15.1 million to equity earnings plus CAD 6.9 million in deferred gain recognition.

In total, this positively impacted our share of Crombie’s earnings by approximately CAD 0.06 per share after tax which we would consider to be an unusual effect but is not expected to recur. The effective income tax rate for the quarter was 26% and we continue to estimate that excluding the impact of any unusual transactions for differential tax rates on property sales, the effective tax rate for fiscal 2020 will be between 26% and 28%.

Our cash flow generation continues to be strong. Year-to-date, our free cash flow of CAD 253 million reflects the improvements in our operations and has enabled us to reinvest back into the business in a disciplined manner.

One example of that reinvestment is the great success we've had retrofitting our stores with LED lighting which will be in more than 300 stores by the end of fiscal 2020. Of course, this is better for the planet.

It's also more efficient for our stores and significantly improves our customer's experience in the store. We continue to estimate that our fiscal 2020 capital spend will be approximately CAD 600 million.

Additional benefits of our improved cash flow are the ability to repurchase shares and repay debt. And in the second quarter, we repurchased approximately 930,000 shares for CAD 33.1 million, and we remain committed to our CAD 100 million target for fiscal 2020.

In addition to that, we also repaid CAD 250 million of our credit facilities. We're now halfway through fiscal 2020.

The team has worked hard to earn this CAD0.32 quarter, and there is a lot of excitement building as we get closer to completing Project Sunrise, launching our e-commerce Voilà platform and continue to expand FreshCo in the West and our Farm Boy banner in Ontario. With that, have a great holiday season and I'll hand the call back to Katie for questions.

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

So, I just want to ask on the topline same-store sales and your measurement of inflation both slowed modestly from Q1. Though, I think CPI was relatively consistent.

Michael, you talked about the step-up you saw from some of your competitors and that you didn't necessarily follow right away. Was this shift in the competitive environment sort of the driver of that deceleration in the topline or modest deceleration.

And could you just talk about that dynamic a little bit more, please?

Yes I'll elaborate a little bit more and then I'll ask Mike to talk about CPI and inflation. Look, I won't overstate it but we're watching the economy and market very carefully.

We're watching whether there's been some deceleration in the economy particularly in Alberta. We're also seeing whether we need to be more promotional in this market even as we are more efficient in driving for margins.

We continue to be focused on growing our margins through improved category performance. But the topline, certainly, also matters particularly going forward when we expect the need to increase productivity in our stores.

And then, maybe I'll just touch on a few other things, just some stuff we expected first of all. We talked about the number of stores we are closing the West to convert to FreshCo.

And as we execute with more velocity on that program, we have more square footage out of the market temporarily and our store performance has also affected us - as the stores ramp down, which also affect our comps. These are expected impacts and the right thing for us to do.

In addition, we’re also having some strong comps that we are now lapping in our discount business, and also in Saskatchewan where one of our competitors was on strike last year. I think we’re talking that really pushing through to close that EBITDA margin, get the margin right.

And I think we were and with the promotional market, we kept pushing for margin maybe a little bit too much, but that's certainly fine-tuning and something that we can - it can adjust over time. But that's what we are seeing and kind of an - sort of end of - sort of starting in October and up till now, that's the kind of thing we're seeing in the market.

So, we're seeing some - we're seeing a little bit of difference, but I don't want to overstate it, Mark, and maybe Mike, if there is anything you want to say about inflation or if you want to add any.

I don't think so I think that's right. Inflation at 2.4% is - it’s always below the CPI food purchased from stores just because those indices look at a fraction of the skews that we carry.

We had I think, a relatively modest decline from the last period. And as Michael said, we've been very focused, very consistent for the last three years.

Margins are important to us and - but equally, we need to be competitive in the market and we’ll ensure that we are.

And I know, obviously improving that topline momentum is a focus especially into the next fiscal year. And I guess I'd be interested to hear how much you think that will come from sort of more structural shifts in your business like rolling out FreshCo and sort of being through that noise around conversions.

And then obviously the introduction of Voilà into Ontario and how much of it you think will need to come from better execution either on promotions, in-store assortments, et cetera?

Yes, it's Michael here. I think that's a great question going forward.

I mean, as I said in my - I don't know if you know, Mark, but I prepared a script beforehand. So there were prepared remarks.

So I talked about the fact that you can get fake kind of false readings on sales if you want. You can promote, you can hit your margin, you can look a little better in tonnage.

Tried to resist that over the last number of years because that gets you in trouble and it's not really sustainable over the long-term. I do think that we could have been a little bit more promotional in the back half of the quarter going into this quarter.

But the real prize, like you just pointed out, is to be better at what you do, be better at executing while the customer builds your brand and in every transaction that we have - to throw the customer. I think it's clear that in Project Sunrise 2.0 that the customer is going to be even more in the forefront than it was in the last three years.

But our plan is to build market share through very organized strategic initiatives, not just trying to buy the customer for a little while. There will be deep initiatives that we undertake to be able to build up our market share.

And as you also pointed out, I think that the moves we're making on FreshCo, on Farm Boy and especially on Voilà are going to allow us to take market share as we move forward. A lot of the initiatives that we have been planning now for - some of them almost three years are going to be starting to bear fruit.

And as we move into our next three-year planning period, that is - we invested early on that, which I'm glad we did, and that's going to be - that's going to put a little wind in our sales. So the things we're worried about on it, but that's strategic and that's long-term.

We also run for quarters. We remain a little concerned about the economy and what we're seeing cross-country, but mostly in Alberta.

And what we're - and how we're going to - respond to a more promotional marketplace than we've seen and certainly since I've joined the company. Is that helpful?

Okay yes, yeah very helpful. And I guess, just since you brought it up, do you have a timeline in terms of Sunrise 2.0 and when you'll be able to share some of those additional details?

Yes our hope is that this spring, probably May but we haven't committed to that, we're going to figure out the best way to communicate. We're just finishing up the plan right now and we'll finish it up in the New Year.

And then we'll communicate it to you our owners, in probably May. But it could be late April or June.

We'll just figure out the timing and when we want to do that.

This is actually Renato Basanta on the line for Karen. Benson's on the line for Karen, actually good afternoon.

Was just wondering if you could flush out some of your comments about the competitive environment specifically if you can speak to where you might be seeing a step-up maybe from a geography and or a format perspective, that would be helpful?

We're seeing it across the country. Obviously there is different competitors and different regions but we're seeing it everywhere.

And then just on SG&A, can you help us think about the underlying growth rate. Obviously, some noise with IFRS Farm Boy the restructuring cost reversals.

But what sort of the right rate we should - growth rate we should be thinking about going forward when you sort of normalize for all of those factors?

I think looking forward outside of those factors which we provided quite a bit of color on in our press release. We're going to see some positive benefit as we get through the back half of the year lessening an impact, of course, as we annualize prior reductions.

So, we'll see some positive impacts still from Sunrise. Our store labor does increase as our sales improves, but we do get some benefit obviously because there's some fixed and some variable elements in there.

As Michael said though, most of the work that we had to do on SG&A is pretty well there. It’s close.

So, I think we - as a company, we are going to continue to be very cost conscious, and we're going to find ways to pare our SG&A down, but we are pretty close to a steady state run rate on one SG&A if you factor out those one-offs and accounting items, I guess, that we highlighted in our press release.

And then last one from me, was just wondering if you could provide a little bit of a preview on Sunrise 2.0. Obviously, you're working through the plan, but if you could give us some color maybe directionally on the potential size of the program and then maybe just some teasers on what the focus will be with respect to sales productivity and gross margins, that would be helpful?

Thank you.

I like you, nice try. But I will because you were so nice I will say that as Mike just said earlier, we think we're in - we’re always watching our SG&A and I think, anybody knows Mike Vels and he is watching all the time and which is good.

And we feel like we’re in the region that where it’s right. I think you can expect a far more going at to cost of goods sold, and especially in the early years of the plan.

And where there's still so much room to improve that. And also, going after sales productivity in our store where we think there's some real opportunities.

But I think, that takes a tiny bit more time, so that you'll see us going hard at cost of goods sold in the new plan while improving our sales per square feet across the country. And we've got the room to do that.

As I said, there's absolutely no reason we're not going to close that EBITDA margin gap as far as we can to our competitors. We knew we couldn't do it the first three years, but we're going to - we're going to finish the job.

Just on - on the category resets. So now that you're pretty much done and you put them all in as of the end of October.

I think you said when you look back at them now, how would you rank them on a scale of say 1 to 10 as to - and what kind of things do you think you can circle back to in Sunrise 2.0 to take out additional COGS?

Sure. On a scale of 1 to 10, I’m going to need Pierre to give you that score.

The thing is, he was accountable for it, and I don’t want to create any ill feeling here. But I think we’ve said pretty consistently that we’re comfortable with it.

In terms of the next phase and as Michael said, what can we do next, he will provide some color in a second. But we did this very quickly, if you think about it, and in the midst of a very major reorganization of the company.

And even without knowing our a company but knowing those facts, you'd think there's got to be a lot more upside when you fine tune that category management. And as our analytics get better and as our merchandises get better, so that's really what we're referring to when we say there's still some tailwinds that we intend to recapture in those areas.

But maybe for some color here, why don't you give us the score and tell us what you think?

Probably the best initiative that company executed over, I would say, many, many years. Big benefit is, I think, our assortment is never been updated and irrelevant rather than like it is now from coast to coast.

More simpler to manage for our team, much simpler to shop for our customer. We give more space to more efficient SKUs.

So I think the productivity on shelf is much better. We revisit that.

We cleaned up, I would say, the data and everything. So there is a lot of benefit internally for us that we will leverage because the team will spend more time to drive sales over time and probably more were less complex to deal with for our supplier partners.

So there’s of soft benefit over and above all the hard benefit we generated through that initiative. So very proud of our team.

So pretty tough with my team, but on this one, not giving 10 on 10 won't be fair.

Yes. I wasn't trying to say whether you did a good job at it.

I was just trying to get a sense as to how much was left to improve upon in the second round as you go back and do what Mike said in terms of going back and trying to optimize or perfect the initiative.

Customer trend always changing. So we have robust data.

We’re revisiting our data on a regular basis. So I think the next - going forward, it will be tweaks in every categories with suppliers.

So we just need to adjust our assortment based on customer trends.

Yes. The COGS improvement I'm talking about will likely - very little that will come from the supplier partners.

A lot of that is going to come from our own processes and disciplines and taking costs out and being far more efficient which I've seen done before. And we have plenty of room to be able to do that.

And then on the cut backs, you said CAD 600 million for fiscal 2020. With the CFC, the Voilà spending next year or fiscal 2021 and the intention to start renovating your stores maybe more aggressively, do we see that number go higher beyond 2020?

So we are going to provide explicit guidance on that as we start to close out our year and look at the next one as we've made a habit of doing it over the last couple of years. So I don't want to lead into that.

But to specifically answer your question, Michael, yes, But just specifically answer your question, Michael, yes, it will be higher but not excessively higher. As Michael and I have said very consistently, we believe that we do need to reinvest in the company, but we need to do it in a disciplined way, and we're going to balance that with our cash flow generation.

So yes, you can see it. I think it's just logical to conclude that it will be higher.

But I wouldn't be looking for a major change in our approach or a very significant variation in our investment program.

Just back to the competitive environment and management's desire to stimulate sales amid that environment. So is it simple enough to think that when management says, we want to stimulate our sales line maybe a little bit more, is it just simple to say - simple enough to say that means gross margin investment?

Or are there merchandising tactics that a management can employ to protect that? Maybe some color on that?

Yes. I mean, first, it's Michael.

First of all, I'm not going to answer that because I think I've said enough on that. We have competitors.

Secondly, I think you should also hear from us that we like having a good gross margin and not moving that around, flipping around like we did. We worked three years to improve our gross margin, our EBITDA margin.

We're not going to just flip everything on its head. At the same time, obviously competitors across the country have been seeking sales, and we've been maybe a little slower to react to that which I'm okay with.

But we can continue to look for ways to execute across the country to whole market share like we have over the last couple of years. So this is - I mean we're talking fine-tuning here, like I said.

This is a fine dance in merchandising in any retail, especially grocery in terms of balancing sales and margin, and doing it in a smart way and making it really attractive for our customers, which is really the smartest thing we can do. But seeking empty calories sales is a short-term investment that does not pay off in the long term.

So we're going to do things the right way.

And maybe - and maybe you already alluded to this, but the - you noticed that the consumer backdrop is getting a little bit tougher. Maybe you can just give us your context on - is this very incremental at this stage?

Or are you seeing a meaningful change quarter-to-quarter?

So in a short of period time it's so difficult to read. And unfortunately nobody around this table, I don't think, is trained as an economist, but we did see some changes.

I don’t want to overemphasize them but we did see some changes across country, but especially in Alberta. We watch with interest and listen to the large banks and what they had to say in terms of consumer sentiment.

And I think like everyone else out there we are watching it and concerned. But there's nothing to panic about right now, but we're concerned.

And maybe just changing topics here a little bit. You mentioned that your Ocado partners are getting a lot of interest in their e-commerce solution.

Wondering if there's such a thing as too much interest and if you perceive that Ocado - the Ocado support teams maybe stretched a bit thin? And if you can, in fact, achieve your goals, given that they have so much more to do?

Yes. I don't think they're stretched too thin because it's all in an order.

One of the reasons that we moved to tie up exclusivity in Canada. One was because we're one of the best e-commerce solution.

We don’t want to competitors to have it but we also knew if we moved fast we would be higher, and we knew everyone around the globe was looking at the solution. And I think - at that time Monoprix was the only one who would announce before we did.

And it was only a couple of months before us, so we were in negotiations and we felt that the way that Ocado was organizing themselves which I think is very good would be that if we were too late to the game that it would put us off by a couple of years because they would have different partners across the globe but they're very well organized. And so, I don't have that, obviously we don't have that feeling.

Good afternoon, everyone. Not to beat this horse to death but just really on the consumer behavior piece, obviously there is something going on out there.

And you mentioned your robust data and analytics capabilities when you scrub sort of the customer purchasing behavior. Are you seeing the kind of signs that we sometimes they seem like trade down or you're seeing an uptick in private label kind of are you seeing anything else here that points to shifting consumer buying patterns, sort of independent that we’re buying a little bit more on promotion and are they buying more in promotion.

What are you experiencing?

Yes. I mean, it's such a short period of time that this is all occurring and that it's tough to see across the country.

There's too many other things going on, like we had bad weather, and we had some things that we were doing and we're coming up. We were doing in terms of closing stores and so much other action.

So, like on a - that's a great question. But I think we're going to see a little bit more time to see if any of that is playing out.

We didn't see any big move away from - we don't see any move away from full service into discount or anything like that. Pierre, are you seeing any indicators on more of a category level or a private label?

No. Not at this time.

And as we said, we saw that in every format, every region, so it's everywhere. So, there's nothing specific to some customer segments.

So, we're still looking at it then. But it's too early.

Like Michael said, we need a longer period of time to conclude around that.

And then, I also want to come back to something that you said around closing the margin gap. So, on a pre-IFRS basis, up about 50 basis points to 4.8%, on reported basis closer to 6.8%, like how far - if in fact we focus on that 4.8%, it would suggest that there's still a nice chunk that we can look forward to.

Would you agree with that commentary?

Certainly would. I think you've got it first adjust and we've done the math and we'll share it with you.

We got adjust for some structural things like pharmacy, a little bit on the real estate, a little bit on the fuel. But there's a - as far as we've come, we’ve come a long way.

There's still a huge prize out there, so I would totally agree with you.

And it’s your determination, Michael, to actually get at that price.

Yes. I'm not going to commit today whether we're going to get all the three years or more of it or right-on because we're still doing the work on that, but always knew it was a six-year job to be able to close that food retail gap.

I think we’ve performed better. I think our team has been better than I could even have imagined at this point.

So I'm more confident, and we're structured right. I mean, we couldn’t have done any of this if we were still a regional company.

That's only been just over a year we've been a national company. So now having all this structure in place, the people in place, the initiatives in place - and by the way, we don't wait to announce.

We’re already under way on a few things here. I think we've got a lot of running start into the new strategy and close the gap.

I've always said that we have a long - that we had a long way to go. But on the positive side, we have the most upside of anyone, and we intend to outperform the market.

And I think people forget how much room we - thanks for reminding, everyone. We have a longer - we have ways to go to be able to close that, and the upside is very, very large.

One final one, if I will - if I may. So you talk about excitement and thrilling the customer.

And again, you've got an awful lot on the go, and this is clearly a journey, but wondering if you could just talk about some of the initiatives that you may already have rolled out and what we should be looking for.

You saw a couple of things that we announced with the Caper cards stuff which is good things to the customer. But I think over the last few years we spent most of our time to organize ourselves internally and structurally.

It's behind us, most of it, now. And we will put our focus on the stores, the customers.

We have great asset across the country, a lot of square footage. So the team is working now together on the plan to be - to focus on that.

So I think that's where the fund is in the retail. And the team is very excited to bring new things, and hence the food offering.

We have a great partner with us in this company now. We made very good strategic acquisition that we'll leverage.

So there's a lot of good initiative in place now.

I think the other thing I'm really proud of is when I first joined I would have said to this group that I didn't think that we differentiated our banners. Well, that our brands didn't have that brand promise that I really like, and that we didn't differentiate between the banners.

And also I think that they worked at marketing with merchandising and ops are doing that you're starting to see if you walk to our stores today, the Christmas season, and you look at some of the ways that we're differentiating our banners and really bringing those to life, and a lot of things we're doing around our banners and appealing to our customers. We're not all the way there yet, but we've made big inroads especially over the last 6 to 12 months.

As you talk about your e-commerce business, you talked in the context of having 4 fulfillment centers. So do you have any - can you give us a time line of when you think you would be building number 3 and number 4?

No. We’re going to open up Toronto.

All our attention is on opening up Toronto and getting - and we’re moving to direct Montreal. We're going to open soon.

The opportunity here, we're going to have such a strategic opportunity and such a weapon in Voilà that we're going to have to huddle after we open up Toronto, see how it’s going and then decide on the timing. We've got a pretty full plate.

We have a lot of opportunities as well in the store renovations. I was talking about I’m very excited about the returns of store innovations in a short period of time.

So, we'll have to look at that and see what the timing is like. But that will give us a big head start in two of the major markets, and then we got at least two to go, right?

Yes, but Michael, are you committed to number 3 and 4 with your agreement with Ocado?

No. We're not - we’re committed to - we're not committed to anything other than having exclusive rights in Canada and to grow at a certain pace.

And we're not - I mean we're growing - we're growing much faster than the pace and fact that we talked to Ocado about growing that. So, there's no issue in that, but; there's no hurry nor - but the thing that's bothering me and why we think about it a lot is if you've got the greatest weapon and it takes two years to get it up and put it in the market, that's a bit of a delay and also to be able to exploit it to - exploit it through its folks and make all fulfillment and all the other things we want to do to be able to own the whole market e-commerce.

So, those are all the things we’re balancing, but my hope would be to get the other CFCs open in a timely manner, but we’re not committed. We would tell you if we were and I want to have all of our attention on this GTA opening.

It is really important to our company.

On another topic, with the FreshCo rollout out West, I'm sure you have some. You do consumer market research, and I'm just wondering what you're seeing in terms of development of the brand.

Did you know that there was no brand identity for FreshCo really out West? And so, I'm just wondering how you're doing when you undertake your market research and other measures?

Yes we're doing - we're probably doing more market research than I’ve ever seen in terms of opening up a banner, and we're doing really well on that and - but you're right. You have to consider.

This is a new banner to this market. So we make - we have to make a big splash when we open, and we've got to continue that for a while.

Our competitors do not enjoy it when we open and we reopen because they've had six months or whatever it is in some of the locations to be able to take some market share which we then take back. They resist; we fight.

We get it back and but considering there is a new banner in this market, which we knew. I think that the work by, first of all the FreshCo team led by Mike Venton and the work by Sandra and new marketing team working together has been superb.

So we look at this very, very closely, as you can imagine, in terms of the customer data and the sales data for just opening and where we are, and albeit early days, very, very pleased. Just want to get more open.

But you did see some of that. As I said before, you see in some of our same-store sales and our sales numbers that we had some closed doors, and that will all work its way through the system as we are opening and closing and doing things like that.

But there is some granular level of effect to our comps as we do that. We were off inventory and closed down stores.

Yes okay.

Thanks.

And then, just lastly, can you comment how your internal inflation was trending as you exited the quarter and as you got into the third fiscal quarter?

It’s pretty consistent through the quarter a little bit of a - probably a fall off towards the end, but really not sufficiently material - to take note of.

Just one question left from me. Just wondering, what is your outlook on transportation cost for next year I remember last week mentioned shipping rates are going up because of IMO 2020.

I'm not sure if that would impact you guys, the same way with that impact to other retailers?

I think the best way to answer it is that at this point, we don't see that as being a material impact on our company in the next 12 months or so. We may be wrong - I may be wrong on that, but it's not - that's not a cost pressure that we have in the front end of our radar here.

And I have a couple of two questions or two topics for you, Michael of your seven. So, the first one is Farm Boy, and I don't remember if it was you or it was Mike who said that you're at various stages of development or negotiation was I think, was it 25 properties for - locations for Farm Boy.

And I'm just curious whether if you look back to a year ago just after you closed on the deal being at that level of transactions for Farm Boy. Is that further ahead than you thought you'd be at this time?

That's a difficult one to answer because yeah it would be easy to say that we - yes we're further ahead than we thought we would be. But part of our thinking and part of J-L and Jeff’s thinking when we combined our two companies was that we could take their rate of expansion that they had in their plans and accelerate them by using the power and the capability and scale of our real estate group and our access to properties.

So really what we're seeing is the successful execution of that belief for that hope. And so I think - well I know the - where we are is accelerated from what the Farm Boy plan without Sobeys but is meeting our expectations about what we thought the two companies could do together.

Okay, that makes a lot of sense, Mike. And then maybe that's a good segue way to my second question.

Michael, you included Crombie as one of your seven topics for discussion on the call and sort of talked about Crombie more than you have on other calls. You opened by saying that you currently have a 41.5% position and you're happy with that.

So assuming what you're saying there is that that's - for the foreseeable future, there will be no sell down in Crombie and that's an appropriate level for you to own. And I'm just wondering if you could expand a little bit further on some of the - you talked about working with Crombie differently.

So can you talk about - just give us a little more information about how that makes Empire stronger as a grocery operator going forward?

Yes. I mean, I'll say a few things and I'm going to extend it over to Mike but I mean, I come from a background where the real estate department work so well with the REIT at a previous company I was with it was really a great relationship.

And so, when I came over and - Donnie Clow and I, and then when Mike joined Mike and Glenn and some of the others over there and now Clinton who’s over there. There's just such a great opportunity to work together cooperatively for the best, obviously for the fiduciary duty of each of the different entities.

And I would say that and Donnie would probably say the same that the relationship between our REIT and our real estate group has been phenomenal just phenomenal is working like untold in a way that it’s never worth together before and it’s - it reminds me a lot of like previous experience when I was working so well. And that’s just creates so much opportunity, I think we kind of been so busy turning around our results here at Empire.

We forget sometimes the power of that REIT and we don’t talk about it a lot and that we're very pleased with their performance. We're very pleased with the developments, we really like how it returns capital loss and that we can have better location for our stores and they like us in many ways too, so its symbiotic relationship and you think well that’s always great.

I would say that the way it’s working and I would give a lot of credit to our real estate group and to Mike and to the people over there. This is a big upside for us and we're very pleased with the ownership and very pleased with what is going over there.

Mike, do you have anything I mean, you spent a lot of time as well on that.

I'm maybe responsible for ensuring that it works. So I tap in and just say it's going great.

But on a more serious note, the two companies exist for their respective shareholders, clearly. So as Crombie has a strategy, so do we.

But we're heavily linked because of the grocery property factor. And they are a - there’s a just a long list of opportunities and collaboration that you would - if you were managing it properly, you'd expect to see.

So most of the work is clarifying expectations, installing process, being transparent with each other strategies and where we could take one on one and make it equal three. So it’s that’s a - I think that's just smart business.

And ensuring that we have the right people properly incentivized and motivated to get that done really was how Michael and I added and how we made sure that it was as good as it could be.

Okay. I really appreciate that.

And I like the notion that you're working on making one plus one equals three, Mike.

I never heard Mike say that before. I was excited.

Now it’s 42%.

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 e-mail. We look forward to having you join us for our third quarter fiscal 2020 conference call on March 12.

Happy Holidays.