Loblaw Companies Limited

Sophia Bisoukis - IR Galen Weston - Executive Chairman and President Richard Dufresne - CFO

Irene Nattel - RBC Perry Caicco – CIBC Jim Durran – Barclays Patricia Baker - Scotiabank Michael Van Aelst - TD Securities Peter Sklar - BMO Capital Markets Vishal Shreedhar - National Bank David Hartley - Credit Suisse Chris Lee of Bank - America Keith Howlett - Desjardins Securities

Thanks, Michelle, and good morning. Welcome to the Loblaw Companies Limited second quarter 2015 results conference call.

I am joined today 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 discussions 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 what is 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 reconciliation of these measures to the most recent directly comparable GAAP financial measures.

I will now turn the call over to Richard.

Thank you, Sophia, and good morning, everyone. In Q2 we continued to deliver against our financial plan, and we are pleased with the progress we’re making.

We maintained a stable trading environment with positive same-store sales and a stable gross margin. We delivered efficiencies in our food retail SG&A of about 20 basis points, synergies are on track and deleveraging should be completed this year.

As we continue to advance our strategy it becomes more difficult and less relevant to distinguish our allocated expenses and investments between Shoppers Drug Mart and the rest of our business. We’ve noticed that we’re reporting our financial results on a total retail basis.

That said, we will continue to provide color and key metrics such as same-store sales for both the food and drug retail businesses going forward. Today we announced our restructuring plan related to the closure of 52 of the companies retail stores across a range of our banners and formats.

In the year following the acquisition of the Shoppers Drug Mart we completed a financial review across our network of more than 2,300 stores and had made a decision to close 52 underperforming stores. The closures include the previously Joe Fresh locations plus grocery stores in both our market and discount division, drug stores and several gas bars.

The store closures will all be completed before the end of the first quarter of 2016. The restructuring charges associated with these closures are expected to total approximately $120 million of which $45 million was reported in Q2 with the majority of the remaining amount in Q3.

The total cash cost is estimated at $93 million which will be incurred in the next few quarters. The affected stores represent approximately $300 million in annual revenue, but will generate an improvement of $35 million to $40 million in annual operating income.

On a net basis Choice Properties will not be impacted. Turning to our retail results.

Total sold retail same-store sales grew by 4.2% in the quarter excluding gas and tobacco. Both our market and discount divisions had solid comp growth.

Our internal inflation was higher than food CPI of 3.9%. Inflation continues to be driven by meat and produce with rates moderating as we lap high inflation period.

Inflation in grocery continued in Q2. Positive trend for same-store sales and drug retail continued with total comp sales of 3.8%.

Pharmacy same-store sales grew 3.9% with moderating deflation in average script value and market share growth. Prescription count increased by 4.3%.

Front of store same-store sales grew 3.7% led by growth in OTC, health and beauty, food, confection with higher traffic. With positive same-store sales growth in both food and in drug retail total revenue in our retail segment was $10.3 billion up 2.2% year-over-year.

As reported our total retail gross margin was 26.4% up 10 basis points from last year. excluding the impact of changes in our franchise fee arrangements total retail gross margin improved by 40 basis points.

As a reminder changes from restructuring certain franchise fee arrangements in 2015 resulted in reduction in both revenue and SG&A with no impact on earnings. After excluding the negative impact from this change, food retail adjusted gross margin increased by 20 basis points as higher retail margin lower transportation cost and synergies were partially offset by higher shrink.

In our drug retail business gross margin grew 90 basis points driven by synergies. Turning to expenses, as reported our total retail SG&A rate was 18.5%, 30 basis points better than last year, but flat after excluding the impact of the change in franchise fee arrangements.

In food retail, we achieved 20 basis points of efficiencies across supply chain, admin and IT. Excluding the impact of the change in franchise fee arrangement, food retail SG&A improved by 30 basis points driven by efficiencies and other factors.

I am pleased to report that we delivered $53 million in net synergies in the second quarter. To-date we’re focused primarily on cost of goods sold win.

In the second half of 2015 GNFR and a focus on investments in revenue initiatives will set us up for success in achieving our 2016 synergies target. Our adjusted interest expense was $131 million in the second quarter and our full year guidance on interest has declined to approximately $560 million as rates and our level of indebtedness decreases.

Adjusted net earnings attributable to shareholder increased 17.8% to $350 million and adjusted basic net earnings per share increased by $0.11 to $0.85 in the second quarter. We generated free cash flow of $589 million in the quarter.

CapEx this quarter were $221 million a decrease of $18 million compared to the same quarter last year. Since the close of the acquisition of Shoppers Drug Mart, we have reduced our adjusted debt by $1.35 billion.

With the progress achieved to-date we are in a position to achieve our deleveraging target in 2015. Looking to the second half of 2015, we do not expect growth in earnings to be at the same level as in the first half of the year.

Expected headwinds from both known and unknown healthcare reform, increase labor cost and cycling of last year’s strong synergy performance will reduce year-over-year growth in earnings in the second half. We continue to remain confident in our strategy, business performance and financial plan.

Thank you. I will now turn over the call to Galen.

Thank you, Richard and good morning everyone. As you just heard, Loblaw has posted strong results for the second quarter of 2015.

We continue to execute well against our financial plan, we are maintaining a stable trading platform, synergies are in line with expectations, efficiency are on track and our deleveraging target will be achieved in 2015. Same-store sales growth in our food retail division remain strong amid intense competition and we remain pleased with our tonnage performance reflecting growth in both traffic and baskets.

In drug retail, same-store sales performance was also strong driven both by pharmacy and front of store. Script growth more than offset the effect of deflation in pharmacy and we continue to see strength in OTC, health and beauty, food and confection.

Against the backdrop of prevention healthcare budget cuts our pharmacy business will continue to face pressures. We are working as collaboratively as possible with governments to identify innovative services that can both reduce cost and improve patient outcomes.

Our business remains focused on the strategic framework that has supported our progress over the last year providing the best in food experience, best in health and beauty, operational excellence and growth. In doing so, we continue to deliver on our purpose to help Canadians live life well.

For example, through our PC Plus loyalty app over 9 million Canadians now have access to the nutritional value of their personal grocery baskets. They can get dieting stars, nutritional rankings on more than 50,000 products and track the nutritional history of their food purchases overtime.

We begin by helping educate customers about healthier products and ultimately will reward them for making healthier choices. Customers are the heart of our strategic framework.

In the second quarter we launched My Optimum a fully digital one-to-one customer centric version of the optimum loyalty program. As of today over 700,000 optimum members have been registered for the digital optimum account that enables them to load and redeem personalized digital offers directly on their optimum card.

As we continue to invest significantly to serve our customers with the best possible products, services and stores, we also actively monitor our underperforming assets and made the difficult decision to close the 52 stores that Richard mentioned. I am pleased to note that despite these closures we will still grow our network in the year.

Looking forward, I am confident that as we build our portfolio of strong complementary but independent businesses along with a balanced capital return strategy we will continue to accrue long term value for shareholders.

Michelle, you can begin with the questions.

Thanks and good morning everyone. If you could just focus for a moment on the synergies, in your outlook you said that synergies this year will “slightly exceed your prior target or the target of 200 million” and you are at 198 million, 2 million less run rate this point in time, so is this some – is this a tiny issue in terms of the slightly exceed or do you now see opportunities just to upsize the entire synergies target perhaps?

Hi Irene, there is math I believe here because if you look at the amount of synergies we booked last year in Q2 and Q3, in Q3 and Q4 sorry, those amounts were significant so while we are expecting to continue to add to the synergy bucket the dollar, the incremental dollar will become lower going forward. So, we are not thinking of increasing the size of the opportunity but it's probably going, happening a little bit faster than we thought.

Okay. That's great, thank you.

And just on the underperforming store closures, very interesting, is this sort of the reflection of an increasing focus on returns and returns on capital within the organization and should we be thinking or is this something that you really focused on, on a go forward basis?

Yes, I think that's fair, I think it's a fair reflection. We have always thought that we are pretty disciplined in terms of the way we invested capital certainly when you have a big debt load like we do and your growth is not as significant as perhaps it has been in previous periods in the company's history, really getting better at managing capital efficiency making sure that you don't have the inefficient assets in the business.

it's something that Richard and I are endeavoring to do and this is certainly the reason that the number of stores that we are closing in this particular restructuring is as it is. But, it's worth keeping in mind, I mean, we would part of the normal course close somewhere between 10 and 15 stores every year, so yes, it's an increase in the normal course but it's not radically different.

And it doesn't signal any kind of change from a strategic perspective in any of our businesses. We continue to plan to invest and grow in our network.

That's great and if I could just ask one final question please, you noted that there was strong same-store sales growth across both the discount and market division, can you talk a little bit about consumer behavior and whether you are continuing to see flowing of traffic or shift from discount to market?

No I mean, both businesses are performing at a fairly similar level. Both businesses are generating traffic at a similar level.

So we are watching carefully to see if there is a shift towards discount that might take place as a result of this deteriorating economic circumstance in Canada, but as I have mentioned before there is this additional force out there which is the lifestyle change, the people are attributing to food buying more fresh, very interested in higher quality product. We are seeing meat, beef prices at all time highs at the moment, we are not able to pass through the full extent of the inflation that we are seeing on the cost side but actually tonnage is continuing to grow and that we think is because people are choosing to trade up when they have a little bit of money and they are choosing to buy a stake.

So it's not – things are not unfolding in the typical way at the moment. That's not to say they won't but we will let you know if we see a meaningful change.

That's great. Thank you.

Thanks. Can we get just a little more data on the store closures perhaps the mix between drug stores and food stores and square footage that might be coming out and perhaps even the geographical split?

So that you are asking for a lot of information there Perry. And there are a number of reasons that we haven't disclosed that.

One of the most significant being that we have not yet communicated to the stores that would be affected and that is actually going to happen over a period of next couple of quarters. So we really don't feel comfortable giving you a lot of detail and I think the message that we try to communicate is this includes drug stores, it includes food stores, it includes Joe Fresh stores and it includes some of the stores from our emerging business division and it's pretty well distributed across the country.

I was going to say from a square footage impact perspective it's somewhere in the range of 1% if you average over the course of the two years and so we will still grow that square footage in our network through 2015.

Okay. Just over the same-store sales, if we take out inflation what was the performance on basket size traffic and tonnage and maybe you can talk a little bit about where we are at in terms of tonnage market share?

Yes, so we look at, we watch that carefully. And you guys do a calculation CPI versus same-store sales growth to determine tonnage, we were a little bit behind in previous quarters.

We are a little bit ahead in this quarter. But in terms of the fable trading bands that we consider operating in, we are running exactly on track of where we would expect we don't get too fast, we are up in one quarter or down in one quarter we think about it over time and on balance we are seeing ourselves in a tonnage share for the flattish area from over the last three or four quarters and that's exactly where we would like to be.

And how does that mesh with what appears to be a shift from center store goods to fresh goods?

Yes, I mean it's facts, I mean it may, we may be doing a little bit better from a total tonnage perspective then otherwise because of that shift we are seeing strong performance in some categories that aren't actually picked up in the [Nelson] market share measurement that we use. But it is important to note from our release that we are beginning to see inflation in grocery and that's driven by this continuing deterioration in the value of the Canadian dollar and overtime that pushes cost pressure from the big US CPG companies.

We are finding that we can pass through some of it, we are not able to pass through all of it but that does help offset the slowdown in inflation that we are seeing in fresh.

And just one last question, you have been aggressively renovating dimensional storage I am just wondering what the next steps are in that program and what have you learned and adjusted along the way?

Yes, we continue to feel very good about our inspire programs specifically on Ontario although we are also pretty pleased with the way it's performing in Quebec. Probably the big highlight we don't usually talk about the regional performance, but we have done a number of conversions to egg in western Canada and they are really performing well as well.

The thing what do we watch, we watch that we don't spend too much capital in those inspire stores and we continue to get more efficient with that program as we move it forward.

Okay. That's good from you.

Thank you.

Thank you. Going back to your guidance instead of the outlook, as you noted very strong first half and you had caution about second half in terms of another number of moving parts but despite of some slight earning deeds and the slight synergies coming in stronger than expected, the guidance for the full year really hasn't changed much so can you help us understand what is causing more caution or you have seen unfold that cause you to feel more concerned about second half than you might have originally?

Hi Jim, as I mentioned in my remarks I guess, when we did our budget at the beginning of the year we were budgeting some drug reform that was mostly affecting the second half of the year and as the year progress, we started to hear that there will be more. We are not able to quantify it yet like we’re yet to hear of what's going to be on top of what we had budgeted.

We also had budgeted some labor cost increase associated with the labor negotiations that happened in June, so that was also budgeted but also like just for your math if you look at growth in our earnings is largely driven by synergies and you can look at the impact of synergies in Q3 and Q4, the incremental dollars are going to be less than what we have been experiencing since the last five quarters. So therefore, if you factor all of that together that's how we can safely say that our growth in earnings in the second half is going to be lower than the first half.

And is there anything on drug reform that you can share with us in terms of what you see unfolding in Ontario and Quebec?

Right now we don't have the details. We have rough number but like even for severance I am not putting that on paper anywhere because we are not sure.

So we need to hear the details to understand exactly what it is. But it's going to probably begin in Q3 and it's probably going to be fully felt in Q4.

And by the way our outlook discussions are on a 52 week equivalent basis by the way.

Duly noted. Last question just on store closures, Joe Fresh was mentioned is this Canada only or is this Canada and US like what's the mix there?

Yes, I mean it's consistent with what we mentioned previously which was store closures specifically in the US, there is a couple in that list that we would reach into Canada but it's not a material change to the Joe Fresh apparel network in this country.

So is that to be seen then as a potential pulling out of the US for Joe Fresh?

No.

Okay. Thank you.

I appreciate that.

Good morning. Thank you for taking my question.

Just want to come back to discussion you had with Parry and I think with you Galen gave a reference on the square footage being around 1% I guess from my perspective anyway what I really care about is the square footage that’s coming out of the food market in Canada so is that 1% the entire 52 stores and what would food look like?

Like I said, you can imagine Patricia like our bigger square footage are in food so the bulk of that would be in square footage, I would say would be in full.

Okay. Excellent.

Then coming sticking with food but moving to a different banner, when you look at you have had I am not talking about your fresh food cash but just the performance of the food items and putting the PC private label into shoppers and switching up that part of the store has that been sort of the accretive to comps quarter-over-quarter?

It has marginally although it is showing in shoppers from a store, although it is showing tremendous promise and we are still in that transition period, we are coming to the end of that transition period and the best way I can describe it is first you have to migrate a simply food brand product to a president choice branded product you have to get it into the stores then you have to determine what the sales trajectories likely to be and then you have to order for that sale trajectory and then you have to start to promote. What's been happening to us through the first part of this year is that when we bring the president choice and no name branded product into these categories it tends to perform significantly better than we anticipated and so we are burning out of cost rate quickly and then we have to go through what is quite a long order cycle to get that product in the right way.

So it is focus of our. We think it's going to be a very nice part of incremental sales momentum for the food business at shoppers helpful to margin as well.

Most importantly we are getting such a positive response from our customers. They are delighted that access to the stuff in shoppers now.

That's useful Galen. Now I’m assuming from what you have talked about and you used the word promise that sometimes at fiscal 2015 you will have a better sense of that balance and the ordering and keeping the availability on the shelf is that fair?

Yes, I would say we are on our way now. It has been a little internal source of frustration for us for the last number of months so there is quite a bit of focus and we feel a lot better now.

Okay and thirdly if I may, there is discussion around center of store you indicated that you are getting some inflation there where are we really with the CPG companies, have they really taken the pricing that you would have expected associated with the dollar I think that's to come sometime in the back half?

Well, remember lot of this stuff gets negotiated, cost of goods get negotiated at the beginning of the year, we obviously have into your cost increase. We focus very, very hard on what's sort of real cost inflation versus straight up US dollar it's not up to us as retailers to help cover the dollar deflation for the US CPG companies.

So these are tough conversations but where there are credible reasons to take cost increases we are certainly open to that and that is starting to happen and it's showing up. I think the most important point here is that if nowhere near the kind of inflation that we have been seeing on the fresh food side and we are not able to pass through the full amount.

So it's helpful in a way inflation is for retail but not as much as one might think.

Okay. Thank you so much for that.

I will pass it onto someone else now.

Thank you. I just wanted to touch on the loyalty card, the PC plus program and getting up to almost 10 million members that's pretty incredible in such a short period of time you almost were shoppers, so can you talk a little bit about the impact it's having I guess on the basket and traffic and maybe on your ability to redirect more of your budget towards one to one promotions rather than flier promotions?

Yes, so we are building the muscles quickly. I think one of the consequences of the program growing so fast is that it's got a bigger impact on the way that we try and run the business and I would say we are not yet experts at it but we are seeing really encouraging numbers, the numbers that you would expect coming from a loyalty program we are seeing a higher level of loyalty and increase in the number of shopping trips from the people who are highly engaged in the program.

We are seeing disproportionately high adaption rates on the customized coupons. This is something that it's very attractive as we marketed to the vendors who help support the value of the coupons.

So we are very, very optimistic about the role that this customized program is going to play in increasing the amount of promotional stand through loyalties. So it's different for our merchants and I think they probably not as confident at the moment as they will be in coming months in migrating dollars from straight up flier into the loyalty program but we are seeing really strong signs of success.

By the way incredibly helpful for us that we now have Shoppers Drug Mart in the family because they have a much higher level of convictions around the ultimate impact and they are actually already seeing it with the launch of my words on optimum. Then they are seeing coupon redemption rates through the digital format of 50% higher than what they would have been seeing on the printed versions and that's really very much in line with expectations.

Okay great and separately on the synergies to get from almost $200 million level to the $300 million by the end of year is it can you talk about the big buckets remaining to get there?

Like I said we mentioned Michael like Jennifer is like in full stride now so that's going to be a bucket that's going to generate growth we are starting to invest in our stores like there is program on [Indiscernible] obviously there is our food offering in shoppers that we are working on. So those are the initiatives that will help us get to that number but where we are today I think we can say with confidence that we should hit our target of 200 million by 2016.

Is there anything more related to head office restructuring or supply chain or anything like that?

I guess we are definitely looking at our organizational structure and that's also part of it.

Alright. Thank you.

Thank you. I just wanted to talk about shoppers for a minute.

In you disclosure for the quarter on shoppers you said that obviously the comps were strong both the pharmacy and the front end you indicated that the gross margin was up 90 basis points but you also indicated you [Indiscernible] synergies that the operating income was down year-over-year so there seem to be some things brewing on the SG&A line maybe there is certain initiatives that you are investing in that bit a drag at this point. I am just wondering if my thinking is correct on that and so you could elaborate what's going on in the SG&A?

We have been talking since the beginning of the year of our budgets for shoppers that earnings would be down year-over-year as we mentioned and in SG&A for sure like some of our adherence program are in there, there is some expenses associated with delta but I think as Galen mentioned in his remarks it's clear that when you look at SG&A for shoppers it's a bit different than ours, it's closely linked to the growth in scripts so that's the relationship when you are growing the scripts at the rate of that they are growing that we need to monitor and so therefore that on a revenue basis and in terms of rates it affects SG&A so that's what’s happening on the shopper side.

And so when started you gave the first explanation you gave I didn't understand what you were talking about?

I was talking about in our budget, when we were talking about some of the reasons why shoppers would be down this year there was the adherence program expense that we launched I guess late last year and we also talked about the rollout of delta which is our new pharmacy system which is just beginning so those are additional expenses that are in our figures that are now falling into the bottom line.

Okay. And just one other area I wanted to touch on in your financial services you mentioned that I guess in terms of credit card you are spending more on loyalty and as well you are spending more on customer acquisition costs, so it seems to be investing more into obtaining and retaining credit card holders I am just wondering what that reflects are you trying to be more aggressive in your credit card business in terms of customers retention or is that more competitive?

The story on financial services largely driven by price of gas that happened last year essentially our growth in receivables have been slowing. People have been pumping the same amount of gas in their cars but it has been causing less of the amount of receivables has slowed and so therefore the net interest margin that you apply on that amount of receivables in dollars is falling less dollars and also the interchange, as the interchange fee drop as kicked in, in April and so that's also affecting the top line and therefore I guess when you look the revenue falling and the loyalty expense that's affecting the results.

So the bank is working hard at actions to try to mitigate these impacts and we will see they’ll fair over the next few quarters.

Right. Okay thank you.

Hi, thanks for taking my question. Just in terms of the deleveraging you noted it will be done in 2015 does that mean we should expect share repurchases in 2015 as well and if so how should we model that?

Vishal, we’ll first finish our deleveraging and then we will get back to you.

Okay and just looking forward to past 2015 as 2% to 3% kind of the way we should think about the NCID program long term?

Same answer Vishal. Let us finish deleveraging and we will get back to on that one.

Okay. And just moving on into pharmacy and you commented that there was a few unexpected changes related to drug reform that you didn't anticipate when you were making your budget, given that these drug reforms are unpredictable at times from these government how do you decide when you make these investments such as in the patient contact center or your adherence initiatives and how do you model that to make sure that you are going to achieve your targeted return on capital assumptions?

We do model like on any initiative like building a new store so that the adherence center with the same type of modeling. In terms of drug reforms there is known drug reforms that we are able to budget year in and year out and that's the one we budgeted but the Ontario and Quebec drug reform or healthcare reform we have been knowing when we did our budget so there were developments happen during the year and so therefore we could plan for them.

So but that didn’t change our outlook.

Okay. In terms of, just taking a step back, in terms of drug reform is it becoming unpredictable or is it relatively predictable as you go on from year year to year just in terms of how you invest given that these changes can come seemingly from unpredicted angles?

Yes, I mean look, you can imagine we spend an extraordinary amount of time trying to anticipate, trying to forecast where we had a lot of success over the last 24 months as an industry is working with the preventable healthcare ministries to emphasis how important and how helpful to all of us some predictability will be. And there is a distinction so when we say drug reform actually the transparency and the visibility and the consistency around drug reform really has been there and there has been no surprise.

What happened in Quebec and Ontario in the last number of months has been more focused on healthcare reforms so relating to payment for services and that sort of things as opposed to specifically around branded and generic drug. So we are embarking on the same kind of conversations with the government on predictability transparency and so on and so forth and I think that message is landing.

I think they understand but they also have their own budgets to meet and not surprisingly these two healthcare reform changes surfaced just around budget time as they are working to balance the books and they came after the industry and they have done it in a number of other places too. So we do our best.

As Richard pointed out we are not changing our outlook. We are not revising our budget internally as a result of these things it's our job to mitigate them and we are doing what we can do that.

Thanks for that color. And just a quick one here.

in terms of shoppers results, the front store and pharmacy are on the sale side seemed very strong I am wondering if there is any transient items that drove those in the quarter or if it's just ongoing base business strength?

Yes, I mean it's the little bit of both I would say we benefited from the target closures probably little bit more than we expected. We did a very good analogy season and we had a pretty good sound screen season and those are three pretty meaningful drivers when it comes to front of store performance in that business.

Okay. Thanks a lot.

Yes, hi thanks a lot. Just quickly on the – you are investing a lot right now and I guess those investments run through your cost lines SG&A was up 2% I believe in the quarter, I mean what is the cadence of these investments as we round into 2016 and how should we see that being financed or cost through your SG&A or even your gross margins, are we going to see some material improvements ahead of all these reform and another foreseen events or should we expect kind of similar rate of growth in these costs as we move into ’16?

So maybe you can, so you are asking that question specifically with regards to the Shoppers Drug Mart business, because in total our SG&A is in pretty good shape and our SG&A improvement is pretty significant in our judgment on the food side of the business, so maybe you could just clarify?

Well, I actually was for the entire business I mean, in your pharmacy business as you’re investing into some new systems, some new programs, etcetera and yes, I do see the efficiencies and so on, I am just wondering when do these investments start dropping off such that your rate of growth even improves better, your efficiencies improve better, as we move into 2016?

So David, I guess the best way to answer this question is look at our total CapEx that we allocate to the business, so you’ve heard us like we announced that we spent about 1.2 billion this year, we are working on a number of products here but we have an objective to bring that number down from where it is now. And that’s how we ensure along with being very ruthless in terms of return on capital on all these projects that will generate the return for investors.

So it’s as simple as that. So we will make sure that dollars we allocate to each of the businesses will be in areas where the probability of hitting our estimated return is as high as possible.

So are we talking of the denominator following but not necessarily the numerator rising or is it a combination of both?

It’s going to be a combination of both because obviously what hits the income statement is ultimately deprecation and what is then the biggest impact on our depreciation over the last few years has been our IT because IT depreciates over a much shorter time period versus our long term asset such as stores, and since we are coming to the end of our SAP deployment and we said to the market that our IT expenses are actually going to be dropping, so you should see an improvement in GNA over the next few years so that will fall to the bottom line.

Okay, so your cash flow return on investment should see even better improvements would it not?

Yes.

Okay, excellent. That’s it from me.

One other question, just on, assuming your retail initiatives and grocery land, the box and click and collect I notice that you’ve expanded the click and collect pie a little bit, and one of your competitors has entered into the fray, could you maybe talk about your latest thinking on that lay the success and challenges with these initiatives and where you see it going?

Yes. We certainly feel that click and collect is our favorite e-commerce sort of strategy or proposition for the Canadian consumer, and we have been expanding, yes, in a measured way, which is an indication that we feel pretty good about the early pilot and will continue to move forward as long as we feel the path that that offers meeting customer needs and we are able to deliver at a very increasing volume.

I think the fact that Wal-Mart announced a similar mechanism for delivering fresh through e-commerce to consumers, that’s a good thing. I think the more people who are doing Click and Collect who have – retail assets the better and so we welcome it, obviously we think our proposition is a little stronger, but e-commerce is going to be an important part of the way that retailers do business in grocery and in drug over the coming years and we are well positioned.

Just as a follow up on that, I might say that you mention that it’s a good thing we’ve seen the experience in the UK and elsewhere still early days there really as well where profit margins are under the microscope if not down, from such an initiative, which may include non-click and collect grocery delivered business, but I wouldn’t mind your commentary on that and how you see that effecting profit margins in the industry and do you have to win by market share gains or is this a win-win all the way around?

Well, I think David, we will have to chat about that one offline that’s a much longer conversation. I think, the UK is not a useful competitor in this case, and it’s so early to tell exactly what the impact of this business is going to have on our margins, but to suffice to say we have a path forward that we think makes sense for the business if we didn’t we wouldn’t be making those investments.

Fair enough, thanks. I look for the conversation.

Thanks.

Oh hi, good morning. Obviously the weaker Canadian dollars is top of mind again and can you just maybe remind us what percentage of your cost of goods sold is exposed to the US dollar either directly through imports or through the US CPC companies?

Yes, we will have to get back to you with some numbers on that. Maybe a little bit of extra color you find helpful is, the US dollar impact travels most quickly in the produce business because you price product or you cost product almost on a daily basis.

What’s happening right now is you would expect as we are shifting and that would be 80% sourced from the US, so highly, highly exposed to the US dollar. Right now we are in the Canadian growing season so we’ve shifted a huge amount huge amount of purchases out of US dollar into Canadian dollar and that is having a pretty material impact on the inflation rates so it's bringing the inflation rate down.

So through the balance of the summer we are going to continue to see that pressure. Then when we flip back into US purchases, we really don't know what the impact is going to be but it's reasonable to suggest that it might pop up again.

Okay. That's helpful and just on in terms of SAP implementation [Indiscernible] roughly about 300 to 350 of the franchise stores to do before you complete is that correct?

We are over 700, I think we are over 720 stores now for NSAP, so we are well on our way to be completed by year end.

Okay. And just maybe Galen, if you can provide I know it's pretty early but the food pilot launch you had on the shoppers I think in Virginia a few months ago is there any data points or any insights you can share with us of how that's going so far?

Look I think it's going as expected. So we are seeing some really, really terrific results, on the top line we are seeing some very interesting and in some cases very promising results in terms of the margin and the real task that stands before in terms of enabling more extensive rollout is making sure that we can operate them such that we can appropriately manage cost.

So managing that level of fresh product in pharmacy format getting shrink at the right level, these are all things that need to be worked on carefully before we accelerate that platform.

Okay that's great and my last question is in your original 2015 outlook back in February I think you threw a number that for shoppers the operating cost is going to be down roughly $30 million because of the initiatives and store closures are you still kind of checking in line with that number so far to date?

Yes.

Okay. Okay.

That sounds good. Thanks.

Yes. So I want to speak about your conventional food store strategy and western Canada where I think you opened a lot of store in Vancouver and a number of egg stores in the Perris can you speak us to what your plan or outlook there is?

Yes, I think our plan and outlook is positive. So we will continue to invest in that market.

Remember we already have a pretty substantial network there that used to go by the name of extra food over the last five or six years we have been converting one portion of that network to [Indiscernible] that's been a really big success for us and now we are in the process of converting the remainder of that network where appropriate to the egg banner and where we see opportunities for appropriate located sites then we are building new stores there too. So there is population growth there and you would expect us to pursue that with the retail network.

Then just in terms of Alberta which I guess is the first experience of pain in the Canadian economy what do you see there, do you think your discounts stores would be gaining share or is it –

Yes, look I think you asked the question or somebody on the call last quarter we don't see a major consumer shift taking place in Alberta at this stage. We expect it but there is nothing showing up in any measure that we see inside our business there just yet.

If you are going to ask me to speculate in context of a more meaningful consumer downturn there I think our business is actually disproportionately better positioned because we have such a high penetration of discount there.

I wonder if you just speak on the healthcare reforms that you referenced there is expensing issue in Quebec and professional allowance issue are there other issues that are essentially going to affect your business?

Yes, as Richard said there is still a lot of fog in there at the moment. I know the problems are working the way through the specifics, the pharmacies organization there is working hard and we are staying close to it to make sure that we understand the impact to our business with as much clarity as possible.

I think the thing to take away from this is we are not adjusting our outlook for the business beyond our budget based on what's happened in the last few months. So, we see a way to mitigate we believe at this point.

And on the Ontario side is there anything of concern particularly there?

No. Same answer.

Thank you.

Great. Thank you Michelle and thank you everyone for joining us today.

If do you have any further questions please do not hesitate to contact our investor relations team. Michelle?