Loblaw Companies Limited

Janet Craig - Senior Vice President, Investor Relations Galen Weston - President and Executive Chairman Richard Dufresne - Chief Financial Officer Domenic Pilla - President, Shoppers Drug Mart

Irene Nattel - RBC Capital Markets Michael Van Aelst - TD Securities Jim Duran - Barclays Kenric Tyghe - Raymond James Perry Caicco - CIBC World Markets David Hartley - Credit Suisse Vishal Shreedhar - National Bank Patricia Baker - Scotiabank Chris Li - Bank of America Keith Howlett - Desjardins Securities Peter Sklar - BMO Capital Markets

Thanks, Michelle and good morning. And welcome to Loblaw Companies Limited third quarter 2014 results webcast and conference call.

I am joined this morning by Galen Weston, President and Executive Chairman; Richard Dufresne, Chief Financial Officer; and Domenic Pilla, President, Shoppers Drug Mart. Before we begin today’s call, I want to remind you that the discussion will include forward-looking statements, such as the company’s beliefs and expectations regarding certain aspects of the financial performance in 2014 and future years.

These statements are based on certain assumptions and reflect management’s current expectations and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company’s materials filed with the Canadian securities regulators from time-to-time.

Any forward-looking statements speak only as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise other than as required by law.

Certain non-GAAP measures may be discussed or referred to today. Please refer to our Annual Report and other materials filed with the Canadian Securities regulators from time-to-time for a reconciliation of each of these measures to the most direct comparable GAAP financial measures.

An archive of this conference call will be available on our website. We also have some support materials in the form of the few slides that have been e-mailed to you and posted to our website.

They do not directly support the speaker’s remarks, so you do not need to follow them as we speak. And now, I will turn the call over to Galen.

Good morning, everyone. This morning, we announced our financial and operating performance for the third quarter of 2014.

Our continued progress gives us increased confidence. Our strategic framework is clear and the entire organization is focused on delivering against it, best in food experience, best in health and beauty, operational excellence and growth.

This strategy is supported by our commitment to stable consistent trading realizing synergies and efficiencies in our business as well as de-leveraging the balance sheet. In the third quarter, on a consolidated basis, revenue was up 36%, adjusted EBITDA rose 57% and adjusted operating income rose 74%.

We saw solid contributions from President’s Choice Financial and Choice properties. And we realized $44 million in net synergies generated $216 million in free cash flow and our de-leveraging plan is on track.

In our grocery retail business, we saw improved tonnage trends, traffic and basket growth. In fact, while growing square footage at one quarter the rate of the industry, we maintain tonnage share and market dollar share.

At Shoppers Drug Mart, improving competitiveness and increased stability and predictability in pharmacy resulted in a solid quarter led by strong momentum in script count growth. A stable trading environment is a key driver in our financial plan and we delivered steady consistent sales and margin performance across each of our major divisions this quarter.

We are well-positioned competitively and see compelling customer traction in our major consumer initiatives ranging from PC Plus now available in our discount stores, the continued rollout of our Inspire model stores in the market division, and the sustained success of our expanded scope of practice services at our pharmacies, like flu shots. Our adjusted EBIT growth for the company excluding synergies was flat slightly lower than we would have liked.

Efficiencies, the second driver of our financial plan, continued steady meaningful progress at Loblaw. Supply chain costs continue to come down as do IT expenses.

Administrative expenses also continued to decline. For example, headcounts in the corporate head office is down from 6,100 people 2 years ago to 4,900 today, a reduction of 1,200 positions over 2 years.

Part of surfacing efficiencies is the implementation of SAP. SAP is operating in substantially all of our corporate stores now.

And we are at the inflection point where legacy is being displaced by a new system. This is a critical juncture and needs to be carefully managed.

The third driver is synergies and we are happy with our progress here. We have nearly completed our cost of goods negotiations with national brand vendors and are shifting efforts to other areas identified in our plan.

We remain confident in delivering our target. The final driver of our financial plan is deleveraging and Richard will speak to that in his remarks.

Before closing I do however want to mention that the third quarter also marked the launch of CRAVE MORE, the next phase in the evolution of the President’s Choice brand. Over the last few years, it’s become clear to us that customers are thinking, caring and talking more than ever about food.

They are seeking new exciting flavors. They are passionate about where their food comes from and how it’s made and they obsess over what is healthy and what is not.

In this era President’s Choice has an important role as a pioneer and leader. CRAVE MORE is an invitation for customers to expect more from their food and more from our President’s Choice brand.

This fall, we have extended that invitation through an innovative combination of television, print and digital advertising. As part of that effort we have launched an online community of those who share our curiosity and enthusiasm for food at our website pc.ca.

Qualitative measures show that CRAVE MORE has struck a cord with Canadians and quantitative measures are equally encouraging. The pc.ca website traffic has increased more than three-fold and our latest PC sales campaign charted strong sales lifts, coinciding with our TV and digital launches.

This is an exciting beginning for what we expect to be a sustained campaign. So in closing, I am pleased with our progress and while still intensely competitive the market is stabilizing and our performance continues to improve.

We remain committed to delivering on our strategic and financial plan which we believe will result in superior long-term return. I will now turn the call over to Richard.

Thank you, Galen and good morning everyone. Let me provide you with additional context regarding our quarterly results.

It’s now our second quarter following the closing of the Shoppers acquisition and while still early days we are making steady progress. Our financial plan for the business is aligned with the business priorities that Galen outlined.

To reiterate those, we strive to maintain a stable trading platform, deliver on our efficiencies target, deliver synergies associated with the Shoppers acquisition and finally delever our balance sheet. Our goal is to deliver positive same store sales and earnings growth from our core businesses excluding synergies.

Our food retail business delivered same store sales of 2.6% driven by fresh, improved tonnage and traffic trends. Internal inflation was in line with CPI of 2.8% and resulted from inflation in fresh categories.

We saw positive comps across all our businesses. However, our wholesale business led comp sales with almost double digit comps.

In our drug retail business our front of the store same store sales were 1.6% with growth in both traffic and basket. We added eight beauty boutiques in the quarter and now stand at 361.

In pharmacy, same store sales grew 3.5% with strong script growth of 4.4% and a very slight decline in average script value, pharmacy has outgrown front of the store again this quarter and continues to be strong. Programs like Flu Shots, the focus on seniors and waiving of co-pay for ODB all contributed to improved results.

Top line of the business was strong with sales of $13.6 billion in the quarter, up 35.9% over last year. Adjusted gross margin of our retail businesses stood at 26% in the quarter versus 21.5% last year.

In our food retail business, we held adjusted gross margin flat at 21.5%. We did record some synergies in gross margin in the quarter.

However, we have not been able to pass through all of the food inflation we experienced. In our drug retail business, gross margin grew 80 basis points to 39.1%.

If we look at the financial performance of each of our food and drug retail businesses both delivered flat operating earnings meaning EBIT year-over-year if we exclude synergies. We posted $44 million in net synergies in this quarter for a total of $52 million since closing.

We are confident we will hit the $100 million net synergies by the end of the first quarter of 2015 as announced earlier this year. On efficiencies, we are making progress as we are seeing tangible benefits in support labor, supply chain and admin.

We are however seeing receiving non-recurring costs hit the SG&A line. And we need to increase our vigilance to minimize such costs going forward.

You will see that we booked a restructuring charge this quarter of approximately $46 million. Thanks to cost reduction initiatives that have been ongoing, about 200 jobs eliminated.

This chart is largely comprised of corporate headcount reduction, executive departures as well as some realignments and re-positioning of roles. For example, we are consolidating Loblaw’s payroll in our shared service center in Winnipeg.

Our interest expense for the quarter adjusted for items not linked to our indebtedness stood at $169 million, an increase of $63 million versus last year. Adjusted net earnings totaled $371 million in the quarter, which was $205 million last year, an increase of $166 million.

And finally adjusted earnings per share stood at $0.90 versus $0.73 last year, an increase of 23.3%. Free cash flow was $216 million bringing us close to $600 million year-to-date.

We repaid $350 million of debt in the quarter while our Choice property added to its debt slightly. Therefore we have reduced consolidated indebtedness by about $300 million.

So, since closing of the acquisition in March, we have reduced our debt by $650 million and remain on track on our deleveraging plan. Our capital expenditures this quarter totaled $300 million and $630 million year-to-date.

Our capital expenditures tend to be back end loaded, but we believe there is a possibility that they will come in lower than planned. The largest portion of our CapEx is spent on retail stores.

However, a good portion continues to be spent on infrastructure and this portion is falling and should continue to fall next year. I have spoken previously about the opportunity to reduce CapEx as well as deliver a better return on capital in the business.

As we move to 2016 and beyond, we believe there are opportunities to bring the number down as we look at both businesses together. Further we are aligning the methodology by which we look at allocation of capital in both our food and drug retail business and we have added a number of additional metrics to assess the returns of our projects.

Before closing, I wanted to touch on two more items. All of you have seen the announcement last week on changes to interchange fees that are charged to retailers for credit card transaction.

As a retailer than owns a bank we both pay interchange fees at the retailer level and profit from them in the bank. The reduction in interchange fees will clearly improve profitability in our retail businesses.

Lower interchange doesn’t affect this bank. But we are waiting for the retailers to come out to be able to asses the impact.

In any event, we do not believe this is a material for the company. On SAP, I am pleased to say that we made tremendous progress on the roll out this year.

We now have 440 stores converted in all of our DCs. More importantly we have been able to do so without negatively impacting our financial performance and our customer experience at store level.

The next phase of the SAP implementation is I think the key try engaged with the new system. We are currently running our legacy and SAP system in parallel, but with SAP in the majority of our corporate network store and all of our DC changed management becomes a focus.

Our teams must now embrace the SAP and all of the benefit and in flight it will provide. This is ongoing and we need to help our colleagues move through the transition.

So this concludes my comments and I will now open the call for question-thank you.

Thanks, good morning. I am working if you can talk just for a minute on EIBT and efficiencies excluding synergies.

We have had some nice top line performance from both the systems and drug segments and yet that failed to translate to operating leverage to improved EBIT, so just kind of wondering what’s going on there and what needs to happen in order for underlying earnings to improve?

Yes. Irene, fair question, so let’s start with kind of the basic idea of what we call stable trading, so stable trading means consistent sales performance, it means consistent margin performance then it means consistent market share performance.

The trick – the key to delivering against that is actually not over reacting to any particular circumstance. And if you look at Q3 this year versus Q3 last year, our view was that we need to maintain the level of competitiveness that we delivered in Q3 and therefore we decided that we would run at largely the same margin.

The sales performance was positive and we were able to make up that right investment through incremental margin dollars and so net-net we felt it was the right thing to do and is largely a good story. The area that we are focused on is really efficiencies and making sure that we are actually delivering on the SG&A leverage and on the admin leverage.

And here I would say we were reasonably happy in the quarter with a 30 basis point improvement. What we didn’t like was the fact that there were some other costs one-time costs, transaction costs and so on and so forth that obscured that number.

And so yes, the efficiency program is working, but what we have to make sure is that it actually does drop to the bottom line. And the examples I will give you are the implementation management office which is responsible for delivering the synergies that’s a cost that we have carried in the Loblaw P&L but would negatively impact that retail EBIT leverage on sales.

And then we also had a one-time payment to the Lee family associated with the T&T transaction that was part of the deal we struck with them five years ago. So those are the kind of things that are there.

But it doesn’t change the fact that ultimately we need to see the numbers show up in the bottom line and that is something that the organization is very focused on.

That’s very helpful Galen. Can I also ask the degree to which running the systems in parallel and the fact that you now have all 440 stores running in parallel might be a factor as well and when do we get to that inflection point where we start to see some of those costs are to diminish?

Yes. So I mean the system will run in parallel for in our mind at least through the end of 2015.

And so there is what I describe as friction associated with that and costs that are embedded in the business to run those two systems that we are not really going to be able to get at until we decommission one. But it’s still largely operating consistently with our plan.

And to Richard’s point this kind of inflection point that exits today is one where it’s sort of a mental model. For the most part people have kind of been looking at the legacy systems because that’s where they are comfortable.

Now the volume of sales is such that in order to understand what’s going on in the business, they actually have to focus with an additional intensity on the SAP system. And I can describe that right now for a lot of folks as drinking from a fire hose, the level of granularity associated with the data that comes through the SAP system is very good, very helpful, ultimately it’s going to deliver we think some significant benefits.

But it is a mind shift to start to figure out how to manage the business that way. So I would say we feel good about where we are, but it is – it does need to be carefully managed as we move forward.

That’s great. Thank you very much.

Thanks Irene. Next caller.

Alright. Thank you.

I just wanted to start up with a follow-up on Irene’s question regarding some of these duplicate or some of these one-time costs that are in your SG&A lines, the – when I look at the SG&A growth excluding EBITDA it was up almost 3% at Loblaw and at 4% at Shoppers. And how much of this growth – how much of the – was the one-time items that you discussed a factor in seeing growth of SG&A at that level.

Michael, I guess, there is – I won’t give you the details of how much it was, but I think the point that we are trying to make here is that we are seeing the benefits, like if you look at labor at admin and IT, we are seeing those benefits trickle in, but there is one-time items that are coming and so we need to improve our vigilance to make sure that these costs don’t hit us going forward. So, that’s where we are at.

What’s the timeframe you think before you feel you have control of those one-off costs?

I would say the whole organization is focused on it now. We need to make sure as an organization when there are specific items that occur we need to make sure that we weigh the pros and cons of making a decision and making sure it doesn’t hit our SG&A on a one-time basis.

And I will add to that. I mean, we still have a few quarters of potential restructurings and things that are going to lead to one-time charges.

And what we are going to try and do for you guys is really illustrate to the best of our ability what the underlying trend is. So, we will have to get back to you on that, but I think the takeaway is that we acknowledge that if it doesn’t drop to the bottom line, it’s not going to give you a lot of confidence.

We feel good about the actions that are taking place, but we have to make sure it shows up there for you.

And on the Shoppers side, there is SG&A growth driven by new stores, so that continue to happen and we are divesting some stores, so there is noise associated with that also.

Okay, thank you. And then on the gross margin side, on the food business, as you mentioned it didn’t recover from the depressed levels in Q3.

How much of that is related to just not being able to pass on the higher cost of things like meats that have been running up and where are you in that process of trying to pass that on?

Yes, so that’s certainly a part of what’s happening here. There is some price increases that we are able to push through to the consumer, but it’s consistent with what we said in Q3, which is that we are not able to pass it all along.

And given the competitiveness of the environment, we would expect that basic structure to continue moving forward. It really depends on how the inflation story unfolds in 2015, but we don’t expect that they change.

I mean, people are passing through increases, but we are also all trying to stay as competitive as possible.

Right. So, the SG&A in terms of where you could have been, sorry, the gross margin as relative to where I guess you could have been if you had rebounded a little bit from Q3 like last year, like you did in Q4 last year, actually you had a good Q4 relative to Q3.

Is there other things in there in there in that gross margin that we shouldn’t expect to continue like higher cost rolling out from the loyalty program or anything like that?

No, I don’t think so. I mean I think the judgment when you go into a valley like we did in Q3 is you try and flip the top of that valley and in doing so resulting in a deterioration in your competitive position.

And again, we felt that was pulling the – that will be pulling the lever too hard the other way and that we should maintain our position. And I think we were right in that judgment, because the rest of the market was pretty aggressive in Q3 and we were able to keep pace with them.

So, we are just going to keep managing the business that way. And we maybe a little behind in certain quarters, we maybe a little ahead in certain quarters, but we are not going to pull these levers to hit to land it on a dime at the end of each period.

Alright, thank you.

Thanks Mike. Next caller please.

Thank you. Just looking at the food business, you indicated that traffic was up slightly.

Can you just give us some idea of what you attribute to that, was that industry wide and so nothing specific to your business or something you guys have been doing holistically that’s getting you to a better place?

Yes. I mean, I think we would like to attribute that to the actions that we are taking in terms of our customer offer.

So, some good examples I touched on the investment that we made in the Inspire stores. I mean, we see a very meaningful increase in traffic whenever we renovate one of those stores, the launch and the acceleration of PC Plus, that’s driving incremental trips into our stores that we have talked about before we think is a really positive sign around the effectiveness of PC Plus.

Imagine, what we think we are doing is we are taking a trip that was otherwise going to another store and that loyalty is bringing them back into our stores or in fact that we are putting these personalized fliers out once a week that it’s driving that incremental trip, because customers want to come in and get that added value. So, those are the examples of the kinds of things we are doing that we would like to believe are increasing customer traffic versus the competition.

And on drug reform drain, I mean, we saw a dramatic easing of that drain. Can you give us some idea sort of what your crystal ball is telling you in terms of what that trend might look like over the next year?

Hi, it’s Domenic Pilla. It’s not so much a crystal ball, I think it’s – there has been quite a bit of communication by the Council of Federation and ratification by several provinces of that protocol.

And so our current estimate would be that the Council of Federation recommendation will prevail at least through 2015 and hopefully all the way through 2016. That does generate additional deflation.

However, it is visible and predictable. And the other benefit is that it is common across all provinces.

And that’s our current view.

And what’s the patented drug expiry moving into generics outlook for the balance of this year and into 2015?

It’s more modest than it would have been over the last 18 months, but still there will continue to be a patent expiry and deflation on top line related to substitution of generics to brand products, but it will be more modest than we would have experienced in the last 18 months.

Okay, thank you.

Thanks, Jim. Next caller please.

Thank you. Good morning.

Just with respect to the PC Plus program and the launch in hard discount, could you give us some color as to how much of the lift in members was driven by the hard discount launch versus unconventional and just other colors to specific initiatives that may have driven that membership lift as strong as it was in this quarter?

Yes. I mean, I don’t know the specific numbers, but let’s say that the substantial portion of the increase that we are reporting in Q3 was driven by the expansion of the program into no frills.

And we have been really pleased with the level of adoption. I mean, it was – became the single number one requested item in the customer call center, where no frills customer is saying when can we get PC Plus into our stores.

I think the things I remember about PC Plus is the unique economic design of the program allows us to bring PC Plus to no frills and manage the cost in a way that we think is consistent with the economic model of hard discount. And so we don’t believe, never say never here, but we don’t believe that other folks are able to do that because of the base program that they offer and we think this represents a meaningful sustainable competitive advantage and the opportunity for us to deliver meaningful incremental value to those shoppers.

So, we are optimistic about the impact it’s going to have on that business.

Alright. Thank you, Galen.

If I could just switch gears to Shoppers for a minute, the front store performance in the quarter, how much of that reflected disruption from either pilot store initiatives or repositioning of the square footage in grocery and the like versus perhaps just a particularly competitive environment? And how would you characterize the theme sort of thinking our performance relative to expectations in the front store in the quarter?

Yes. So, it would have been – there would have been no impact from any of the work we are doing on piloting additional food at this stage.

The pilot is quite modest and not material to the front store results. In terms of the performance, we had actually a very good performance in terms of we continue to grow share in every category we are participating, leading by beauty and cosmetics as well as food overall in our system, not just in the pilot stores, but overall in our system.

And really the front store comp is more driven by some market events, much slower cough and cold season, and delayed in fact cough and cold season and we are not really seeing that really pickup in the fourth quarter. And then a very small and calm allergy season, where we would have expected some increase.

So, this is not a performance issue, not a share relative to expectations. We continue to grow share.

We are actually very pleased with our front store results.

Great, thank you.

Thanks, Kenric. Next caller please.

Yes, thanks. I was wondering what the outlook is on getting SG&A costs out of the business in 2015, you took some headcount out in Q3, so maybe you can start there how much savings will that generate and will go to the bottom line and how much more should we expect over the next year?

Yes. I mean, I think what we would rather do, Perry, I think to give you a sense of the outlook for 2015 when we come into Q4.

I mean, I think there is really two forces at play. There is the store component of SG&A and you know well that there is lots of inflationary pressure there, particularly when it comes to wages.

We have a big labor negotiation coming up in Ontario next year that we are focused on. And the challenge for the retail organizations is to absorb any increases on that front and to do it in a way that delivers against a stable trading model that we have outlined for you.

And where we are really focused on accelerating those efficiencies is actually in the head office, the IT, the supply chain, the head office, admin and that work continues. The momentum is satisfactory.

Although it will be lumpy, it’s lumpy because of restructuring charges that go with headcount reduction, lumpy because of other decisions that we might make. So, we are feeling good about it, but we have to manage it carefully.

And as Richard said, we have an obligation to demonstrate to you that this is actually flowing to the bottom line, so, more on that moving forward.

And then I know it’s quite early to talk about 2015, but maybe you can help us by maybe framing some of the sort of external factors we should be considering and perhaps some of the more important initiatives that you might be pursuing to help us begin to figure out what 2015 might look like?

Yes. Well, I think I tried to do that.

So, on the negative side, what we are focused hard on is this labor deal in Ontario, we also have British Columbia. And then on the opportunity side, it really is in the areas that I described continuing to drive down the cost on the IT side, continuing to leverage what has been three years of really terrific momentum on the supply chain side.

And then of course there will be some opportunity as the Shoppers Drug Mart business and the Loblaw business start to figure out more efficient ways of working together and that’s an area of focus for us as well.

And if I could ask one more question, you have talked quite a lot in the past about improving execution and I think today you used the term stable trading, which I am assuming is fairly similar? How would you rate yourself today on those kinds of items and what sort of indicators should we look for as investors or as consumers to judge whether or not you are making progress?

Yes. I mean, I think the usual store conditions in stock are overall competitiveness on the shelf, our overall competitiveness in our fliers, when we are investing new capital and you go into a store do you see a compelling upgrade in the consumer offer or is it just an exercise in paint and paper.

We are seeing steady improvements in NPS. We saw it again in Q3.

So, these are the kinds of things that we watch for. And it’s about not just delivering it on a theoretical basis or on a one day a week basis, but delivering on that promise day-in and day-out.

And again, I think we have seen a big improvement in our consistency and we have also seen big step up in our capital investment and the impact that, that’s actually having on the customer experience. And so we are starting to build some momentum around those programs.

And you should expect to see more of that. If you think about Shoppers for example, one of the big areas of opportunity in 2015 is their version of a personalized Optimum program, load to card personalized offers, that’s something that we launched in Q3 and continues in Q4 and we are going to ramp it up in a meaningful way in 2015.

And that’s all about being as efficient as possible in terms of the promotional investments that you are making so that you are giving customer value, things that they value. And so we have got that with PC Plus today and are really pleased with the results and if that migrates in its own way to Shoppers, we are expecting some good results there too.

Okay. Thank you.

Thanks, Perry. Next caller please.

Thank you very much. I think it’s great your market share is folding in or perhaps even increasing when you consider your square footage growth versus that of the industry, what I am curious about is as we move forward I can see all the initiatives you are pursuing that will allow you to improve your blocking and tackling in the business etcetera.

What is the event or initiative that will see Loblaw is on the food side really engage the consumer and perhaps meaningfully grow market share?

Yes. So I think again to come back to this idea of stable trading.

We are a big business. We have a lot of market share and the cost to grow market share at a disproportionately significant rate really in our judgment may not be worth the squeeze.

And so our view is that we are going to continue to invest in our assets. We are going to continue to deliver leadership across each of the businesses whether it’s market, whether it’s Shoppers, whether it’s our discount division.

But we really don’t expect that to translate into a meaningful acceleration or pulling away from the rest of the path. Holding share given a lower investment in new square footage there in the market is a good result.

And what we have tried to express in terms of the investments just for this business is that we should be generating a lot of cash. We should be able to put enough into the business to maintain our competitive position to maintain our market position.

And then we have to determine what to do with that cash right now it’s going to paying down debt ultimately to buying back shares. And then beyond that we will ultimately have to see.

So that’s the way to think about the business not in terms of a step change in market share performance.

Okay. And that’s – is that a timeframe over the next three to five years and then you relook at that idea of market share gains either through new initiatives like taking the loyalty program a step further click and collect, how do you think about that?

Yes. I mean look all of these things are important and all of these things will help us seek out incremental sales whether it’s the enhancement proposition at Shopper, whether it’s click and collect, whether it’s our vision of bringing health and wellness and food together.

All these things are really important. They are sources of differentiation.

They are sources of increased customer loyalty. The point that I am making is that on a business that is $45 billion worth of sales, it’s very – in one country it’s very hard to imagine if you can – any one of those initiatives is going to deliver incremental chunk in $2 billion, $3 billion, $4 billion range over the course of just a couple of years.

I have articulated in the number of circumstances kind of my view of how the market is going to unfold. I think there is a reasonable expectation of intense competition with rational kind of stability for the next three years.

Anyone who is predicting the market structure beyond that I think would be taking a big risk, never say never. And our position is that we will respond to whatever competitive forces come against us, but we don’t see a lot of evidence at this point, but it’s going to deteriorate particularly badly and we don’t see an opportunity for us to significantly outstrip our competitors over the next couple of years either.

That’s helpful. Thank you.

And the last question if I may maybe talk a little bit about risk with SAP previous iterations of management would suggest period of maximum risk, those kind of descriptors, how do you look at risk now with SAP given that you are looking to shed the legacy system and move on to the new system with your people?

Hi, David. Let me take a stab at this one.

I think I will characterize it with a comment that one of our senior management told me over the last few days if you look at the store rollout right now, they have become boring, okay, because it’s actually going essentially without a glitch now. Usually, when we were converting stores like people are getting calls at 3 AM in the morning to fix stuff.

Right now, the store rollouts are going very well and we are coming at the end of our corporate rollout. Where we are at right now is as Galen mentioned is now people are forced to get to use the new system.

And compare the new with the old one is that there is immense amount of data that becomes available and people are not used to look at that data. So, now they need to get into the new tools, go dig in the data to find out and search the questions they have about the business.

And that will take time like I can tell you I am working with my finance team and with the operators to deal with these issues and that’s a journey that we are essentially embarking on. And that will take time, but the good news is it is that the system is working.

So, now we just need to get all our teams aligned with the benefit that the system provides and that will help us to make better decision going forward.

Thank you.

Thanks, David. Next caller please.

Hi, thanks for taking my questions. Just a few quick ones here.

Where are the synergies recorded in SC or L and how would you make the decision on where to put the synergies?

So, Vishal, the synergies are booked where they originate. As you can imagine, most of them have been in the cost of goods sold and we have harmonized the cost of goods sold between both businesses.

So, the one who get it’s cost down gets the benefit. So, there is no decision as to where it’s being put.

It just happens to go where it needs to be. So, that’s why we are not talking about where it’s going, because it’s somewhat irrelevant like we are one business now and we are looking at the absolute number and that’s what counts.

Okay. But the businesses were each flat before synergies, right?

Yes.

Okay. In terms of the opportunity associated with SAP, just on the cost side or rather IT, is that still 1.2% sales?

Yes, that’s still the target we are aiming for, but on IT, what I can tell you is costs are going down. We are monitoring that very carefully.

They have been going down this year. They are going down again next year.

So, that will continue. We need to get to the metric that we have talked about and we are well in our way.

Okay. So, that 1.2% of sales, you could probably hit that quicker than they originally anticipated?

I don’t know when we are going to hit it, but it’s going down.

Okay. In terms of the collective agreement costs, I think there was a charge of $7 million in the quarter.

How long should we expect those to continue? At some point in the future, do they stop or?

I think we will just – we will get back to you on it. I think it’s one more quarter, so through Q4 and then we are largely through that by down period, but we will get back to you to make sure that, that’s correct.

Okay. So, potentially starting 2015, those collective agreement charges may stop potentially?

Yes. I mean, we are at the very tail end of it just moving through the last wave of stores.

And so it’s just a question of whether it’s in Q4 or Q1 and we will confirm it.

Okay. And just two more quick ones here, drug store was flat at Loblaw and up about 3.7% at SC.

I know there is some square footage delta there, but I was just wondering, what’s your view on what’s causing the delta?

Yes. It’s Domenic Pilla.

So, there is a delta, but what we have done is we are aligning the team and are working very hard to get best practices shared, some talent sharing and we are actually seeing some momentum on the Loblaw side and in areas like expanded practice and customer communication and so on. So, I am expecting that gap to narrow in the future.

Okay. And the last one, there was a slight decline in corporate square footage and a slight increase in franchise square footage growth I am looking at quarter-over-quarter.

Just wondering what the reason was for that and if we should expect that trend to continue?

Yes, I mean, look we believe in a balanced portfolio and that balanced portfolio includes a number of corporate stores and franchise stores. Right now, my guess is that this was driven by a steady rate of conversion of Provigo corporate stores in Quebec to Provigo franchise stores.

We have been doing that steadily for the last 3 years and we are really pleased with the results. So, we will continue that until the small Provigo stores are basically all franchised.

Okay, that’s it for me. Thanks a lot.

Thanks, Vishal. Next caller please.

Yes. Thank you very much for taking my questions.

I actually have three. The first one is just a clarification.

When I look at the quarter it was pretty much an in line quarter and it was pretty nice that there no real surprises. This has already been addressed, but I would like to give you an opportunity for you to talk about it a little bit more.

And then one thing that was a surprise to me was the Shoppers Drug Mart front store comp at 1.6, Domenic you did talk with a slow cough and flu season, when I looked at these numbers, I just wondered if there wasn’t any other dynamic in here that you were doing something different to the business and maybe managing the margin differently than you might have done in the past?

No, it’s for sure these are much more market related events than we would have done. But I will tell you that we are very pleased and why I said the team has had good performance is the focus we have made on personalization that Galen already alluded to.

And we are going to continue to see that, that allows us to really respond to customer needs in a way that’s more efficient and cost us less to deliver those values. So we are very pleased about the performance there and in terms of the actual comp relative to the market share gain we are again we are seeing the momentum to come back in some of those markets, macro in fact.

And so I wouldn’t read anything into that.

Okay, that’s very helpful. And then secondly Richard I think it wasn’t you – yourself in your commentary you talked about the comps and the fact that the wholesale division had double digit comps, that’s not a number that you have called out much before, would there be anyway that you would tell us what the two years that trend would be or what that business looked like last year so you have the sense of what it’s being compared to?

It’s a prelude, because it’s – and I actually said close to double digit, I didn’t say double digit…

Okay sorry. I missed a couple of words, okay.

So no there is a – that business has been doing very strongly on certain categories such as tobacco and there is a change in the way one of our supplier is going to deal with that business. That could change that trend dramatically going forward.

So if it does happen, we will have to call it out. So it’s a prelude to that.

It changes dramatically in a negative or a positive trend?

Negative.

Okay. That’s what I thought.

And then Richard again for you, you talked about this before and I know it’s something that you are working very hard on and that’s the return on invested capital trends over time and certainly CapEx, when in 2015 do you think you will be – you will give us a sense of what the CapEx plan will be for ’15?

Probably going to be able to talk to you about that when we announce our Q4 numbers next year.

Okay, super. Thanks a lot.

Thanks Patricia. Next caller please.

Hi, good morning. First question is just given that everyone is investing to enhance their fresh offering, with the successes that you guys are having in terms of increasing your fresh penetration, do you get a sense that is it because the overall demand from consumers is increasing or is it mostly because you are getting shared expense of your competitors?

Well, listen I think as always in these circumstances, it’s probably a bit of both. And then there is also a third force out there which is the inflation which as you know is coming – has been running through most of the year predominantly in fresh.

So that’s naturally going to drive the fresh penetration up. But what we are seeing is consumers making a very distinctive choice to buy fresh food and the way we evaluate it is we have now in our Inspire stores as the easiest to see example we have upgraded our investment in convenience prepared foods.

The quality is higher, the price is a little bit higher but what we are seeing is consumers making that choice because they are beginning to see it less against what they might spend in a grocery isle or the frozen isle and more versus what they might spend if they went out to restaurants instead and in that sense they are seeing real value. And the other example I would like to use is the juice bars.

We have rolled 50 juice bars out across the country and customers of a certain kind. And it’s a broad based number, it’s not just the people with high and high disposable incomes are making a choice to spend $7 or $8 on a liter of orange juice because it’s fresh than say $2.49 is what they might spend on 2 liter Tropicana from the refrigerator.

So, these are the kinds of positive trends that are driving our enthusiasm for those fresh stores. And I am sure that our competitors are seeing some similar benefits.

I mean, you have to ultimately be the judge of who is putting the best proposition in front of the customers. We have our view, but you are going to have to be the ones who determine if we are winning or not.

Okay, that’s helpful. And perhaps, Richard, given your CapEx is coming below your full year target for this year, can you just update us what do you expect the CapEx to be for the full year for this year?

No, it’s too early. I am seeing a trend where we are probably going to be a bit lower than planned, but I need to wait and see, because our CapEx are very much back-end loaded.

So, a lot of stuff is happening as we speak. So, I will comment on that when we publish our year end numbers.

Okay. And then just in terms of your debt reduction target, am I correct to assume now it’s down to about just over $1 billion of debt you pay down before you consider buying back shares?

I guess, we paid down $650 million so far. And as I have mentioned, our target is to pay down some $1.7 billion.

So, we have Q4 of next year and the first quarter of 2016 to get to our target and our plan remains on track.

Okay, great. Thank you.

Thanks, Chris. Next caller please.

Yes. I wonder if you could just divide up in a rough way the $44 million of synergies between gross margin and SG&A lines?

No, Keith, we won’t split it, but I think it’s fair to say that most of it is in COGS, so gross margin.

And then just on the SAP, the target at 1.2% of spending on IT by 2016, does that sort of number also apply to Shoppers Drug Mart or they are lower number?

This number is on Loblaw’s. We are looking – we are going to look at Shoppers on a consolidated basis as we move forward, but right now, that number is specifically related to Loblaw’s.

Okay. And just finally on the competitive environment, there has been obviously a lot of worry in the UK about the very small hard discounters like Aldi and Lidl.

Do you see any white space in Canada for that sort of concept I think investors are asking the question?

Yes. So, I mean, you know that we have been working on a concept that we call the box.

We have three box stores now and it really is designed to answer that question. And question one is, is there a white space in that area that the customer will respond positively too in Canada?

We think so, but we are not sure. And then the second question is do we have a proposition, can we develop a proposition that is accretive to our business and strategically complementary?

So, we are working our way through that. And there is quite a number of views at the table as I am sure they are around the investor tables that you participate in.

And we will just have to keep you posted.

Great, thank you.

Thanks. We have time for two final questions or two final callers.

Thanks. Question on the pharmacy business, as you know the Council of Federation has reduced the generic drug price to 18% of brand, I believe it’s on a further eight generics and the effective date is April 1.

So, I am just wondering how you are going to handle that from an accounting perspective? Have you taken the retroactive adjustment or will you be taking a retroactive adjustment?

Well, so you are right that the Council of Federation has made some announcements as I have said on earlier question that we are supporting that view as to how generics will deflate going forward and certain molecules are going to 18%, some have already happened in 2014, some happened all the way back in 2013. And from an accounting standpoint, I will let Richard answer it.

I mean we take the price as it happens and the market gets adopted by the provinces our reimbursed price.

So, there is no retroactive adjustment. We take it when it comes in.

Yes. Just kind of a funny thing, if you look at the Council’s press release, it’s retroactive to April 1?

Well, I will have to re-look at it – it’s the event on April 1, 2014 happened molecules were being reflected in our results and there is further a deflation on April 1, 2015. So I have to re-read it, I am not familiar with that attractivity provision.

Okay. And just lastly I just had a question about the guidance paragraph in the press release.

So this is something you have been saying I believe for a number of quarters now that 2014 adjusted operating performance excluding synergies is expected to be or the trends are expected to be in line with 2013, so I am not just sure what that mean, does that mean you are expecting the same level of operating profits, excluding synergies or do you expect the trajectory of 2013 to continue through 2014?

The trajectory.

Okay. Thanks.

Great. Thanks Peter.

And one final, I think we have time for one final caller.

Thank you. Two smaller ones I guess.

First of all the synergies of that $44 million, how much was – of that is retroactive, based on projects – or procurement their contracts being retroactive back at the beginning of the closing of the...

Mike they are mostly all the rates, so they are all recurring. So there is no lumpiness to it.

Okay. That $44 million if you added that all in the quarter that gets you over your $100 million run rate already, right or if you…

I guess so.

Okay. And then on the financial services, can you explain the trends there, profit was down a touch, I think you had a fewer weeks but what’s happening and what should we be thinking about when we are looking at the growth prospects of the financial services at this stage?

Yes. Good question Michael, I guess because we realigned the way we account for that division, like we benefited for it – from it in Q2 and we are paying for it in Q3.

Fortunately, the financial services business is a business that keeps on growing. So despite the fact that we had less time in Q3 than in Q2 we delivered flat earnings essentially.

So you should expect the trend that we have been experiencing year-to-date to continue.

Alright. Thank you.

Thanks Mike.

Thanks Michelle and thanks everyone for joining us today. And please don’t hesitate to contact us if you need anything.

Take care. Bye.