Loblaw Companies Limited

Janet Craig - SVP, IR Galen S. Weston - President and Executive Chairman Richard Dufresne - CFO

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

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

I am joined by Galen Weston, President and Executive Chairman and Richard Dufresne, Chief Financial Officer. 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 2015 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 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 for a reconciliation of each of these measures to the most directly comparable GAAP financial measures.

And finally, we do plan on ending the call either at 11.50 AM today due to other conference calls happening today that you will need to be on. I will now turn the call over to Richard.

Thank you Janet and good morning everyone. This morning we announced our financial results for the fourth quarter.

We are pleased with the progress we are making as we continue to execute against our financial plans. We maintain the stable trading environment in the quarter which means our gross margins remain relatively stable.

We delivered strong same store sales performance in both our food and pharmacy businesses. Synergies continued to slow in, efficiencies are progressing, and we are well on our way to de-lever our balance sheet.

As you know the quarter at 13 weeks compared to 12 in 2015 and we have outlined the impact of the 13th week in our news release. We delivered solid same store sales growth in grocery this quarter, a bit shy of inflation but our promo activity was particularly strong in Q4 of 2013 which affects year-over-year comparison.

Core grocery same store sales growth was 3.3% excluding GAAP and the effect of the loss of one tobacco supplier. Over the past several quarters since we been calling out gas separately in our comps, we have not generally seen material difference between our headline same store sales and our same store sales without GAAP.

This quarter with the dramatic decline in gas prices, the spread was material at 50 basis points. At the same time you might recall last quarter that we mentioned having very high same store sales in our wholesale business.

Our large tobacco supplier changed this model to go DSD [ph] cutting out the wholesaler. This had a very positive impact on comps in Q3 as customers could no longer purchase the tobacco that competitors were still able to purchase it at our wholesale price.

In the fourth quarter the suppliers stopped delivering it to us as well which had a negative impact of 40 basis points on same store sales. We will feel this impact for the balance of the year.

Our internal inflations were slightly higher than food CPI of 3.5% driven by Fresh. At Shoppers Drug Mart and front of store same store sales growth of 3.6% was driven by a very strong cough and cold season and strong sales in cosmetics.

In pharmacy, same store sales grew 4.2% driven by strong comp script growth of 6% offset by -- trip deflation of 1.7%. With positive same store sales growth in grocery, pharmacy, and front of store, the top line was strong with sales of 11.4 billion in the quarter up 49% over last year on a consolidated basis.

Turning to our retail segment, revenue was 11.2 billion up over 50% year-over-year with our core grocery business growing 9.3% to 8.1 billion. On a 12 week basis, grocery revenue grew 1.6%.

Shoppers Drug Mart revenue grew over 11% to 3.1 billion in the quarter, excluding the 13th week sales growth was 3.4%. Adjusted gross margin of our retail business in Q4 stood at 26.8% up from 21.9% last year.

Gross margin benefitted from the addition of the Shoppers Drug Mart business as well as synergies. In our food retail business we held adjusted gross margin flat at 21.9%.

Our core gross margin in grocery retail was stable. Gross margin benefitted from synergies however, we booked higher than normal shrink as a result of the completion of our conversions of our corporate stores SAP where stores that were converted early experienced higher shrink than normal.

In our drug retail business, gross margin grew a 110 basis points to 40%. Cost of goods sold in the quarter benefitted from synergies as well as strong growth in same stores – We achieved net efficiencies in our core grocery business this quarter and remained focused on driving cost out of our business.

As we discussed last quarter, we remained focused on improving core SG&A expense and seeking to both better manage volatility and SG&A as well as providing visibility into the drivers. On a 12 week basis our SG&A improved $28 million or 60 basis points relative to last year.

Of the 60 basis points in SG&A benefit, approximately half came from efficiencies in labor and supply chain. The balance of the improvement could be characterized largely as non-recurring adjustments that have positive impact.

For example, we want a property tax appeal in the quarter that benefitted SG&A. We reported $49 million in net synergies this quarter for a total of 101 million since closing of the acquisition which is one quarter ahead of our initial target.

We expect to come close to 200 million in annual net synergies in 2015. The vast majority of synergies achieved to date have been in cost of goods sold.

In 2015 we will benefit from the annualization of the COGS initiative while GNFR starts to kick in as well as the beginning of the ramp up of our food pilot offer in Shoppers Drug Mart. In 2015 as our focus turns to expense synergies and to a lesser extent revenue synergies.

These synergies by their very nature takes longer to achieve. We remain confident about achieving our three year target of 300 million in net synergies.

At BC financials Q4 revenue increased by 27 million or 13.2% driven by higher interest and interchanging income as the result of the growth in our credit charge receivables portfolio. Operating income grew 14% to $49 million.

Our adjusted interest expense for the quarter is 144 million, an increase of $52 million versus last year. Adjusted net earnings totaled 396 million in the quarter versus 160 million last year, an increase of 235 million and finally adjusted basic earnings per share totaled $0.96 versus $0.57 last year, an increase of 68%.

Moving to free cash flow, free cash flow in the fourth quarter was 439 million bringing us to over 935 million for the year. Since the closing of the acquisition of Shoppers Drug Mart last March, we have reduced our adjusted debt by almost 1.1 billion of which 421 million was in the fourth quarter.

Looking to Q1, we expect a slight increase in adjusted debt due to seasonal working capital requirements. That said we remain on track to achieve our targets of $1.7 billion reduction by the end of March next year.

Our capital expenditure this quarter was 400 million or a total of 1.1 billion in 2014. We ended the year below our budget.

Also of note we have modified our CAPEX to the finish to now include intangibles which was 42 million for the quarter and $90 million for the full 2014 year. Turning to outlook, the environment in 2015 continues to be challenging both in grocery, retail, and in pharmacy.

Square footage growth in grocery has moderated and the competition remains intense. In pharmacy, on going out there reform continues to be a factor as governments continue to look for savings to manage healthcare costs and balanced budget.

Our Outlook for 2015 relative to 2014 is based on comparing the full year financials for both Shoppers Drug Mart and Loblaw. As a baseline, revenue in 2014 on a combined basis was 45.1 billion and adjusted EBIT was 2.4.

We expect to deliver positive same-store sales and stable gross margin excluding synergies in our retail segment. We will continue to drive efficiencies across the core grocery business by achieving reductions in areas including supply chains, administrative functions, and IT, while still investing in key areas like e-commerce.

We also expect to achieve cumulative annual net synergies as a result of the acquisition of Shoppers Drug Mart approaching 200 million. Excluding synergies we expect to grow adjusted operating income in our core grocery business and experience a decline in adjusted operating income in our core pharmacy business, as a result of onetime expenses associated with the rollout and training associated with our new pharmacy system, and new patient contact centre initiative, and lost earnings from are divested stores.

On a consolidated basis we expect to grow adjusted net earnings including synergies with our adjusted net earnings per share growth for the year being moderated due to an increased weighted average share count. Our share count will be 412 million in 2015 versus approximately 380 million in 2014.

Looking at D&A, we expect approximately 1.1 billion in adjusted depreciation and amortization for the full year 2015. We expect adjusted interest expense for the full year to be approximately 500 million and 135 million in Q1 of this year.

We expect our adjusted tax rate to remain between 26% and 27% For the full year. We expect to invest about 1.2 billion in capital expenditures in 2015.

A couple of other considerations which are included in our assumptions for our outlook. We expect the reduction in our adjusted operating income of approximately 30 million in 2015 from the divestitures required as part of the consent agreement with the competition bureau to complete the acquisition of Shoppers Drug Mart.

We had benefits through non core operating expense in 2014 of approximately 28 million, and finally before turning the call to Galen I wanted to mention how we intend to reflect Shoppers Drug Mart in our financials this year. We will present our retail segments on a combined basis which includes Loblaw and Shoppers together but we’ll still comment on key metrics for business such as same-store sales, sales and gross margin.

Thank you and I will now turnover the call to Galen.

Thank you Richard and good morning everyone. As you just heard, Loblaw continues to execute against its financial plan.

We are maintaining a stable trading platform, synergies are in line with expectations, efficiencies are on track, and our deleveraging targets is unchanged. I am pleased with our performance.

In addition to delivering our financial plan, Loblaw has shaped its strategy around the idea of helping Canadian’s live life well. As part of that strategy, we continue our relentless focus on delivering the best in food experience.

This includes an unyielding commitment to value in our discount division, the continued expansion of market-leading service and assortment in our market division, and accelerating momentum in multicultural brands like T&T and Fortinos. Our control brand portfolio has also seen a step change in growth as we have expanded President's Choice into more fresh food categories and rolls out over 800 products across the Shoppers Drug Mart network.

As Canada’s leading drug store chain, our strategy also calls on us to deliver the best health and beauty proposition available to Canadians. This includes strong convenience driven growth in our front of store and continued innovations in our beauty departments.

In pharmacy, expanding our scope of practice to improve patient outcomes while at the same time reducing provincial health healthcare cost is another manifestation of this purpose. This is a long-term journey and in 2014 we made significant progress.

An example that we are particularly proud of is our newly opened patient contact centre. Each year in North America, over 125,000 patients lose their lives as a result of taking prescription medications improperly or in some cases not taking it at all.

This lack of adherence is estimated to cost the Canadian healthcare system close to $8 billion annually. The patient contact centre is specifically designed to help overcome the significant issue.

The first of its kind in Canada, our facility has a team of more than 50 pharmacists and 75 pharmacy assistants who conduct follow-up calls across the country. Their focus is on patients who may not be taking their medications as intended including those newly diagnosed and starting prescriptions, those on multiple medications and complex regimes, and those who have missed a refill.

By contacting patients centrally, we are able to free up the time of our local retail pharmacists, time which they can then spend with patients providing an expanding range of valuable and cost-effective services such as flu shots and minor ailments prescribing in those provinces where it is permitted. Delivering on our purpose of helping Canadians live life well represents a powerful sustainable competitive advantage for Loblaw and here too I am pleased with our performance.

The grocery and pharmacy industries remain intensely competitive but, looking forward in 2015 as our outlook discusses we expect adjusted net earnings growth. The momentum in the grocery business continues and we remain focused on a stable trading platform while growing earnings excluding synergies.

And although operating income excluding synergies in Shoppers Drug Mart is expected to decline in 2015 due to the investments we are making in key projects as well as the ongoing pressure of healthcare reforms, the underlying business at Shoppers Drug Mart remains strong. We are making strategic investments to increase the efficiency and effectiveness of our pharmacies and patient care.

Front of Store including beauty is robust and I am enthusiastic about what we have seen to-date in the enhanced convenient food pilots. We’ll be expanding this pilot to a new test market in the spring.

In addition to the food proposition at Shoppers Drug Mart I see other important opportunities for our business including e-commerce, the next stage of our PC plus program and the digitization of custom optimum offers. Longer term opportunities will arise from the insights that we gain from SAP as well as the cost savings that it will surface.

Our franchise stores were the next crucial step in its implementation having successfully completed all of our corporate stores and distribution centers in 2014. In closing, our strategic framework is clear, our entire organization is focused on delivering against it, best in food experience, best in health and beauty, operational excellence and growth.

The strategy is supported by our commitment to stable and consistent trading, realizing synergies and efficiencies in our business, and deleveraging on the balance sheet. Once we are at the appropriate leverage targets, we will start to look more actively at other ways to return capital to shareholders through dividend increases and share repurchases.

Looking forward I am confident that as we build our portfolio of independent complementary businesses along with the balanced capital return strategy, we will accrue long term value for shareholders. Thank you and I’ll now pass the call back to Janet to take some questions

Thanks Galen, Michelle we are ready to take questions.

Thank you. I just had a few questions on the outlook if I could, the goal of positive same-store sales is there an inflation assumption in there or is that exclusive of inflation?

Yes, we generally don't budget inflation so kind of the way to think about it is we are looking for comp store sales growth that would be slightly or be in line or slightly ahead of inflation. But it’s not something we are obsessed over at this point Perry.

We think we are reasonably happy with where the sales are running relative to inflation at the moment.

And does stable gross margin mean similar to 2014 or just that they don’t fluctuate?

They are being similar to 2014.

And the investments that you are making in key areas like e-commerce, do you see those as offsetting the reductions in supply chain, admin, and IT?

No I don't see them offsetting completely but they are making a difference in the speed at which you see the SG&A numbers coming down.

Okay and my last question, I just wondered if you could split the CAPEX out the 1.2 billion amongst infrastructure and stores?

The majority is going in retail or the portion on infrastructure is reducing every year and its continuing to reduce next year.

Any specific numbers Richard

No.

Okay, thank you.

Great, thanks Perry. Next caller please.

Thanks and good morning everyone. Just focusing on the SG&A piece and you are right where you indicated that it was probably somewhere in the range of 30 beats of efficiencies if you will it seems sounds wondering if you just talked about which areas in particular and whether you see this level being sustained or increased in 2015?

Our focus always remains on showcasing that we are reducing our cost and the areas that you should continue to see benefits are in supply chain, in IT, and admin. And we are going to continue to make progress this year.

So our focus is trying to eliminate the noise to show you the benefits that we are making. Fortunately this quarter had noise that went the right way but we will try to continue to show you the benefits of the program

That’s very helpful and just on the shrink side, again you noted that some of the stores had completed SAP earlier are actually seeing higher shrink, just assuming that that is something that you expect to see in 2015 or can you kind of take the learnings from the first batch of stores and adapt it to that, we don't see that falling through?

We won’t get that going forward hopefully. Essentially what that means is that we have some costing issues when we started to convert the first few stores, and therefore when shrink was calculated it gave out some higher numbers.

So what we did at year end is we trued up the shrink part of the stores and that’s what we booked in our gross margins. And if you look at our accounts results since year end, these stores are performing back to normal.

That’s very helpful. Thank you.

Thanks Irene. Next caller please.

Thank you. For both Shoppers and Loblaw, I believe you gave an adjusted EBITDA number for the quarter.

If we wanted to know how that number looks without the extra week, if we just did a prorated, would that be a good way to get at that number or there are other plans?

The only thing I’ll tell you Peter, there is obviously more EBITDA attributed to Loblaw than Shoppers. On the 71 million that you can get by looking at page one of our press release.

Okay, the -- in Shoppers I believe in the fourth quarter you divested 11 stores that you were required to, can you quantify how much impact that had on the EBITDA, Shoppers was at the beginning of the quarter and at the end of the quarter?

In Q4 there was some impact but the way to look at is going forward, the impact of all these stores is 13 million and that's the number you should care about.

Right, can you be a little more definitive on the fourth quarter was it a small number?

Yes.

Okay and lastly Richard, one of the reasons you attributed to the Loblaw’s SG&A decline there is something called changes in fair value of companies franchise investments, can you explain what that is and is that an adjustment or not an adjustment.

This is an adjustment and this is just, we changed the way we accounted for these franchise stores going forward to eliminate impairment. And so therefore this is not any change in the business itself but, it’s improving the way we account for the business going forward.

So the one time number you saw is a onetime event and that's it.

Okay. Thank you.

Thanks Peter. Next caller please.

Yes, just wanted to talk about the comp store sales that look for grocery, obviously a lot of moving parts right now. What’s your comfort level with pass through on FX inflation, I mean we have gone through this obviously in 2014 but we are at it again in 2015?

So, as you know the inflation is generally a positive for the industry. That’s been something that’s contributed to a reasonable amount of robust sales growth for all of us over the course of 2014.

And with the decline in the Canadian dollar, we expect that to continue into 2015. Again I think that’s a positive, that’s helpful.

However, the changes have been pretty significant with the decline in price of oil, the decline in the price of the value of the Canadian dollar, just in the last six months. And so we're watching this very, very carefully to see the extent to which the consumer begins to resist this pass through.

And at this stage we don't see anything that’s causing us concerns. However, it is something we are thinking carefully about.

And is there any insight on center of the story, I mean there has not been a lot of inflation in that area for quite a while, are we starting to see the CPG players announce price increases and try to implement them?

Yeah, so that is where you know we would expect to see a little bit more inflation in the business than we had in 2014. Although that’s the place where you have the most aggressive competition.

You know with the alternative retailers and also the rest of the traditional grocers really fighting hard for share in that space. So it’s not going to -- we are not going to be able to pass it through 100 cents on the dollar that's for sure.

But they might be a little bit more than last year.

Okay and then just gas prices and tobacco drained, so on the gas price side it is very difficult to model accurately how the retail price is going to impact your comp store sale, can you give us anything to hold onto in terms of trying to be able to model that on a more accurate basis?

I would like to be able to model it myself. So Jim, what we’ll do is we’ll tell you each quarter on gas.

And tobacco it is only going to be for a one year. It is like it happened years ago if you remember.

So it is going to take year to lapse or comment on it for the next 12 months and after that you won't hear about it.

I mean it is difficult but on the backward drain, would you expect the same kind of 40 basis point impact on the next three quarters?

I don't know to be really honest with you. We’ll see.

No, I appreciate that and last question just on your CAPEX spend with square footage, can you give us some idea what kind of square footage growth you expect for grocery and for Shoppers?

Shoppers, its mid 2% and for us it’s below 1%.

Great, thank you very much.

Great, thanks Jim. Next caller please.

Hi, thanks for taking my questions. Just on the outlook statement for Shoppers on the operating income.

Is the decline in operating income that you anticipate in 2015 relative to 2014 pre-synergy, is that entirely due to investments and store closures, is drug or pharm store a significant impact?

There was a drug reform in 2014, there is a drug reform in 2015. What I was referring to is our three specific items that are not typically normal in the business and those were the items I was talking about.

Okay, so order of magnitude, could you give us a sense of the impact of drug reform on your numbers in 2015?

It’s not something we typically disclose but suffice to say it’s a big number although we consider it part of the normal course business. And our expectation, we will make every effort to close the gap notwithstanding extreme or unanticipated incremental impacts coming from different governments.

And Vishal, the impact of the three items that I specifically mentioned is around $30 million.

Got it, so with respect to the adherence and to the adherence and the technology investments that I see, so that’s about 20 or 17ish, are those investments going to fade in 2016 and then we stick second benefits thereafter, is that the way to think about it.

Exactly, for the pharmacy systems, okay it's straining and rollout, so that’s around 10 million. Okay, and the patient contact centre is essentially labour, like there is north of 100 people that are now working in that centre.

So which have a pharmacist, so that’s another 10 million and the divestiture it is around 11 million.

Got it.

And Vishal I would just add to that, if you think about the transition that’s taking place in the Shoppers business and to a lesser extent the Loblaw business when it comes to pharmacy, as the regulations compress margins in basic prescription drugs, what we’ve been trying to articulate to you and we talked at length with the provincial government about this is, the opportunity for expanded scope of practice, the good example of which would be pharmacies delivering flu shots across Canada over the course of the last two years. This is an opportunity for the government to download basic healthcare services to pharmacies at a much improved cost to them.

So remember, the government would be typically paying $30 for a GP to administer a flu shot, they’ll be paying Shoppers Drug Mart $9 to administer a flu shot, and with the increased access that the pharmacies have versus the GP is he actually get to drive up the rates of inoculation which also saves the government money. So these are the kinds of programs that the healthcare teams inside Shoppers and Loblaw are working hard to develop.

The patient contact centre is another example of that and the potential savings that we think these kinds of investments represents the government are meaningful. And as we sit in the room with them and negotiate the pace of this relentless healthcare reform, we’re trying to explain and I think we have people listening to us that we need to ramp up one in line with the pace at which we ramped down the other, so that we are not creating undue disruption in the marketplace.

And I think that is a dialogue that has become very much more constructive over the last two years with the provincial government but, they still have physical pressures and I would say the discussions continue to be intense.

Okay, and just the last question on the back of what you said, could you give us order of magnitude, any sort of indication of how large the professional services revenue is for Shoppers, is it still very small in relation to the RX revenue.

Yes, pretty small and growing fast.

Got it, thanks.

Thanks Vishal. Next caller please.

Hey, I just want to clarify a few things on that $30 million impact you mentioned Richard from those three items there, are those as you look out to 2016 I know that’s a little bit further but I assume these are all projects with the exception of the divestitures obviously, the other two projects are items that you expect to get a return from down the road?

Yes.

okay, and then on Ontario, I believe you have a labour contract that’s up for and its starting the negotiations, can you give us a bit of a time frame on what we should expect from those negotiations or at least the timeline of those negotiations?

Yes, absolutely. So those conversations have begun in earnest.

If you’ll recall, these are three big banners specifically in Ontario, the Real Canadian Superstore, Loblaw, and Zehrs. And it’s an important contract both for us and for the UFCW.

And that will likely come to a head in the early part of the summer. And at this stage our conversations are constructive, I think we both clearly outlined our perspectives and our expectations of how to come to terms with the deal.

But these are always again difficult things and we will keep you updated as things move forward. I think our expectation as always is to construct a fair and appropriate deal and keep the idea of the work stoppage as far away from the table as possible.

Thank you.

Great, thanks Mike. Next caller please.

Yeah, thanks. Good morning, just a question on the SAP implementation.

I understand you are focusing on the franchise side now. What’s the timeframe for that to be completed, could you remind us, and for non-franchise and non-corporate stores, what's the timeframe for that?

So the non-franchise corporate stores are done. The franchise stores in the Loblaw business will be completed by the end of the year.

We have started that implementation in earnest and so there is a lot of work to do. The franchise implementation is a little bit different so the corporate, because of the franchise contracts in the unique way that we do business with those independent operators at this stage we feel it’s on track and we’re optimistic about finishing it on time.

On the wholesale side of the business where you deal with affiliate banners or other independent Cedar [ph] franchises, is there any implementation involved there, could you give us some colour on that?

Yes, so our wholesale business that does go on to SAP. The impact on the independent affiliates is inconsequential.

Okay, sounds good. Just with the President's choice and no name brands, you’ve had an opportunity now to put them into Shoppers Drug Mart store, how far along are you in that process of doing that.

I understand you’ve got some pilots going on, more towards the Fresh side and the fuller offering. But, how beneficial has it been for Loblaw’s overall so far and what do you see going forward?

So as I mentioned in my remarks, we have 800 no name and President's Choice SKUs, largely deployed across the small grocery departments and the existing Shoppers Drug Mart network. So it is a big deployment.

President's Choice decadent cookies, baby food, and so on and so forth. And the response from the associate owners and the response from the customers have been very positive.

Given that these are still two businesses with disparate distribution infrastructures and different buying teams on the day to day side of things, there is some friction, some complexity I would say. I am not happy with the consistency of the service level, the end stock positions on the new control brand.

And that is where we will be prioritizing our efforts over the next four or five months. And it will be at that point where we can better measure the true extent of the positive impact.

But suffice to say the indications are looking very good.

Okay and final question, just on the RX business, I noticed of course that Shopper is putting out some decent numbers both in RX and in Front but your own in grocery store business has been relatively flat, can you talk a little bit about the differences and why that is?

Yes, there is a couple of differences but the biggest one probably being that Shoppers took a longer time to waive their co-pay in Ontario. And as they waive back co-pay they saw a real spike in volume because the value proposition Shoppers was offering the market was fundamentally better.

There has been a carry-on of that through 2014 although not quite the same, it is starting to slow. And also the other big drivers particularly in Q4 was the implementation and ramping up of the flu shot program where Shoppers by virtue of its convenience network disproportionately outperformed the Loblaw pharmacy network.

And remember each one of those flu shots represents a prescription so that contributed nicely to volume in Q4. And just then just the third thing which we have now lap in the Loblaw business is, we’ve been doing some success and quiet meaningful pharmacy acquisitions and as we lap that on an annualized basis you’ll start to see a bit more of a normalised growth rate and its beginning to turn more positive.

Thank you.

Thanks David. Next caller please.

Hi, good morning. First question is for the corporate stores that have been moved over SAP for close to a year now, have the benefits from things like inventory control and sales productivity have they been starting to be reflected in the numbers or would it take a few quarters before we would begin to see the benefits.

Yes, so it’s going to take a few quarters. Think about SAP in two stages.

There is implementation and then there is optimization and we are now for those early stores, we’re well into the stage of implementation. But you can’t really start to optimise the system until it's had a full company wide deployment.

So the teams are working with the information that’s coming out of the system and I think as Richard mentioned in our call last quarter, they are being inundated with high quality information that they have never seen before. And that is showing a tremendous amount of promise.

But actually implementing the changes that come from that information, take a bit more time and then show up in the actual performance of the stores itself is taking some more time. But probably the principal benefit that we see now is that we’ve moved through the friction that comes with implementation.

The stores are performing now at the level that they were before we rolled it out. And we have better visibility and so we are starting to put more focus on inventory, more focus on labour productivity, and all the things that you would expect are going to show us some benefits.

Okay, that’s helpful. My next question is just in terms of the improvement in the profitability of the general merchandize business, most of those benefits now behind us or are there more potential for improvements in that segment?

I mean the general merchandize business is now stable in terms of the amount of change that’s been going on with the departments and inventories. So we are reasonably comfortable with the way it’s performing.

Now having said that, we are in the process of expanding substantially the Joe Fresh proposition inside 50 stores across Canada over the course of this year. And we see that resulting in an improvement in sales productivity because apparel is one of the highest sales productivity categories on that right hand side.

And also we expect to see an improvement in those 50 stores and actually the margins because from the margin mix perspective, apparel is also stronger than some of the other categories. So that implementation is going to begin at the end of the first quarter.

It is probably not going to show up in a meaningful way in the P&L of the stores until 2016.

Okay, and my last question is, if you can maybe share with us what your feel on the target stores are when you look at potentially looking at acquiring some of the leases. How many do you think are addressable for you and then how many would you consider acquiring the leases if they have become available?

So, the target impact I think as we talked about last time, probably the one we are focused on most is what's the impact on the overall sales of the network as these stores go through liquidation. We think that’s going to be a negative force and as they close in the back half of the year, we think that’s going to be a positive force.

It will probably disproportionately benefit some of the GM categories and beauty specifically much more so than food. In terms of our potential interest in the target network, this network of stores has been out and on the market for many, many years in one way, shape, or form and we haven’t invested particularly in any meaningful number of stores.

That’s because their network is not particularly complimentary to the Loblaw network. The nature of food restrictions that exist on certain sites as well as also constraints.

So we have a team looking at the assets, we have identified a number of stores that we think would be complimentary but don’t think of it as anything significant or material.

Okay, thank you.

Thanks Chris, next caller please.

Yes, another question on the SAP implementation. I think the expectation was to save 60 basis points during 2016 and I was wondering how that looks at this point.

And also I was wondering in terms of the benefits of SAP, whether -- when or whether you would be willing to quantify what they are likely to be in terms of the positive benefit?

I mean, I know you guys ask this question every quarter. So the 60 basis points it will include the SAP implementation.

Basically the decline in spend is what we have articulated. We are on track there.

It is also a function of improvements in supply chain efficiency, and we are very much on track there. And then another piece of it is the admin headcount reduction which the bulk of it in the P&L from an admin perspective at Loblaw is now done all in anticipation of when we have full deployment of SAP and we start to optimize it.

Then there is going to be another wave of benefits. We haven’t quantified those; they are incremental to the 60 basis points.

We have a very specific business case by line item associated with this SAP implementation. But at this stage we are still not prepared to share it.

And just one question on the synergies which seem to be running a little bit ahead of target, is that because one of the categories is generating -- one of the early categories is generating more synergies or are you getting to further categories of synergies faster than you thought?

Keith essentially -- we are essentially done the COGS piece. If you reminiscence -- and those were discreet in numbers that we had to go after.

So, that essentially is behind us now and now we are going more into the GNFR stuff where we are going to be looking at stuff that in terms of number of opportunities, the size of that number is significant, and the amount of effort also is going to be significant. But we have a plan to go and get those but it will take a little bit more time.

So that is why we are confident that we are going to post 200 million this year but it is not at the same base as we did for the first nine months.

Thank you.

Great, thank you. And Michelle, are there any more callers.

Thanks Michelle, and thanks everyone for joining us today. If you have any questions you can obviously contact us in IR, and have a good day.

Thank you.