Loblaw Companies Limited

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

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

Thank you, and good morning. Welcome to the Loblaw Companies Limited third quarter 2015 results 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 discussions will include forward-looking statements, such as the company's beliefs and expectations regarding certain aspects of the operating and 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 the 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 financial 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 each of these measures to the most comparable GAAP financial measure.

I will now turn the call over to Richard.

Thank you, Sophia, and good morning, everyone. We continued to deliver against our financial plan in the third quarter, and are pleased with our progress.

We delivered positive same-store sales and stable gross margin. Synergies continued to contribute meaningfully to our earnings.

In the quarter we grew adjusted basic earnings per share 10% compared to last year. During the third quarter we met our deleveraging target.

Adjusted net debt decreased by 527 million in Q3 resulting in accumulative debt reduction of approximately 1.9 billion since the closing of the acquisition. Now that this target has been met we will begin using our excess free cash flow to repurchase shares.

Share repurchases will begin in the fourth quarter using our normal course issuer bid. Turning to our retail results; Total food retail same-store sales grew by 3.1% in the quarter, excluding gas and tobacco.

Both our market and discount divisions contributed positively to this solid performance. Our internal food inflation was higher than the CPI rate of 3.8%.

Inflation continues to be fueled by produce, meat and grocery. Same-store sales growth in drug retail remains strong at 4.9%.

Front store same-store sales grew by 6.2% compared to 1.6% the year ago. Strong performance in all categories supported this results and food was a key driver.

Pharmacy same-store sales grew 3.5% driven by strong prescription count growth. Strong prescription count growth was partially offset by deflation in the average scrip value due to the continued impact of drug reform in generic penetration.

Prescription count increased by 4.4% on a same-store basis. With positive same-store sales growth in both food and drug retail, total revenue in our retail segment was $13.7 billion up 2.5% year-over-year.

As reported total retail adjusted gross margin was 26% flat compared to the third quarter of 2014. This includes the impact of the previously announced changes to our franchise fee arrangements, which reduced both food retail sales and gross profit by approximately 43 million with the offsetting decreased SG&A.

Excluding the impact of the changes to the franchise fee arrangements adjusted retail gross margin was up 30 basis points. Food retail adjusted gross margins when you exclude the positive impact of franchise consolidation was up compared to the third quarter of 2014.

The drug retail adjusted gross profit margin was lower than the third quarter of 2014 due to pressures from healthcare reform partially offset by higher gross margin in front of store. Turning now to expenses.

Excluding the impact of the changes of the franchise fee arrangements total retail SG&A increased by 30 basis points to 19.1%. SG&A was negatively affected by impact of foreign exchange related to U.S.

dollar payables and labor settlement costs associated with our new labor agreement signed last summer. Also as we consolidate new franchisees SG&A dollars and rates will increased but will be offset by higher gross profit.

Surfacing efficiencies continues to be a priority in our financial plan, realized efficiencies positively impacted SG&A this quarter however we were offset by these other negative factors. I’m pleased to report that we delivered $76 million in net synergies during the third quarter compared to $44 million in the third quarter of 2014.

Since the close of the acquisition of Shoppers Drug Mart, the company has realized $222 million an annualized synergies net of related costs. With our focused turning to GNFR initiative and the increasing costs to achieve these efficiencies the incremental impact of efficiencies will be lower in the fourth quarter.

We continue to expect to achieve annualize net synergies of 300 million in the third year following the close of the acquisition. Our adjusted net interest expense decline by 17 million to 152 million in the quarter reflecting a declining level of indebtedness.

We expect interest expense for the fourth quarter to be around $133 million. Adjusted net earnings available to common shareholders was 408 million and adjusted basic net earnings per common share increased by 10% compared to the third quarter of 2014 to $0.99 a share.

We also continue to make progress on our previously announced restructuring plan related to the closure of 52 underperforming retail stores. These closures will reduce annual sales by about 300 million and result in a positive impact to EBIT of approximately 35 million.

The restructuring and other related costs associated with the plan are now expected to total approximately 140 million and 131 million has been booked so far in 2015. In the fourth quarter, we expect to incur a non-recurring charge of approximately $60 million in SG&A associated with labor buydown [ph] commitment within our existing labor contract.

Over the past five years, the company has been transitioning stores to more cost effective and efficient operating terms under our collective agreements. This will result in lower future SG&A expenses of approximately $10 million in 2016.

The company is committed to complete these labor buydowns in Q4 of 2015. Before I turn the call over to Galen, I would like to add some further colors to our fourth quarter.

In Q4, we expect increased headwind associated with healthcare reform, incremental investments in key project and the cycling of this year’s strong synergy performance. We remain confident in our strategy business performance and financial plan going forward.

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

Thanks Richard and good morning everyone. Loblaw continued to execute against its financial plan during the third quarter.

We maintain a stable trading platform, synergies were in line with expectations and we continue to make progress on efficiency. And as Richard indicated we’ve now reached the deleveraging target that we establish following the acquisition of Shoppers Drug Mart.

Our business remains focused on the strategic framework that has supported of our progress over the past 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.

In the quarter, same store sales in our food retail business. As Richard said were up 3.1%, traffic was flat and we saw tonnage growth in line with the market.

Our market division continues its successful rollout of our enhanced fresh food and service programs. The discount division benefited from continued strong momentum in a superstore banner.

Our Shoppers Drug Mart front store same-store sales growth were up 6.2% led by food and beauty. Pharmacy same-store sales of 3.5% benefited from strong growth and prescription count partially offset by continued deflation.

It’s important to note that regulatory changes in Ontario and Quebec began to negatively impact our drug retail margins in the third quarter and we expect fourth quarter results to reflect a full quarter to be changing. We continue to gain momentum in our e-commerce platform, our joefresh.ca site remain our fastest growing distribution channel for apparel; click and collect, an online service that lets customer shop for groceries anywhere, anytime and pick them up at their convenience has proven to be very popular.

Our pilot is now expanded beyond the Toronto area and by year-end it will be available in 40 stores and our Shoppers Drug Mart, beautyBOUTIQUE.ca website now makes our prestige beauty offer available for Canadian anywhere they live. Ensuring customers have broad access to our key product offerings online remains a key investment priority for the company.

And I must take a moment to say a few words about our new President Choice world elite MasterCard. From my perspective, this is the most exciting financial product we ever introduced, a premium card where you earn 3% on groceries, 3% at Shoppers Drug Mart, $0.03 a liter on gas at all Esso stations across the country, 3% on travel through the President’s Choice travel service and 1% on everything else.

But here is the really incredible thing about this premium card, you get all that and you pay no fee. Our outlook for the fourth quarter remains challenging due to the accelerated impact of healthcare reform as mentioned earlier.

However, looking ahead, we’ll continue to deliver against our plan and build our portfolio of strong complementary, but independent businesses and create long-term value. As part of that journey having achieved our debt reduction target ahead of schedule, we are now well positioned to pursue a more active capital return strategy for shareholders.

Thank you. I’ll now open the call for questions.

In the outlook section of your write-up you talked about incremental investment projects having a negative impact, Galen you mentioned that in your commentary, that’s new language in the outlook section. So I am just wondering what these projects are, is this click and collect in your food pilot program, in the shopper stores are these new programs?

Good morning, Peter. This is Richard.

Yes, click and collect is one and so that’s what we mean. Let me further tell you the story for what we want to say in our outlook, okay, clearly the key driving factor for Q4 is going to be incremental healthcare reforms.

Actually when you look at our shopper’s performance in Q3 and when we look at the shopper’s performance we exclude synergy, it's a performance excluding synergy. So the shopper’s performance in Q3 year-over-year is actually down, largely driven by healthcare reform and in Q4 the impact of healthcare reform will be even more significant.

So that is the key driving factor of our outlook on Q4.

And just switching topic, I am just wondering if you can talk about the inflation outlook for your grocery business, as you get into 2016 you’ll be lapping the significant depreciation of the Canadian dollars as well as increase in protein prices. So I was just wondering how you see inflation playing out in terms of proteins, fresh and center of store grocery.

So two things have been happening I think as you know in 2015, we continue to have strong inflation in fresh. Although it has been moderating over the course of the year, so it's really the second year of strong fresh food inflation.

And then we’ve also started to see as you point out because of the U.S. dollar, an increase in inflation in the grocery that at the store.

So it is reasonable to assume that in 2016 we’re going to start to see an increasing contraction that inflation benefit that’s been affecting the industry. Having said that, it's really, really hard to predict inflation.

So we’re trying to be conservative in our own planning, you probably want to be conservative in your own modeling. But we didn’t expect quite the level of inflation that we have right now to sustain all the way through the year.

So it's hard to say for sure what’s going to happen in ’16.

Thanks and good morning everyone. I was wondering if we can just talk a little bit about the pace of efficiency gain at Loblaw on the food side, would you categorize them as in line with plan, a little behind plan, because there seems to be softened deceleration from Q2, Q3.

So I’ll start and then I’ll pass it over to Richard. So we feel good about the absolute performance of our efficiency project.

So we are delivering the number where we feel that’s good and this has been the case in previous quarters as well, is seeing those numbers flow through into the actual SG&A leverage of the business. In Q3, there is an underlying improvement in SG&A that we’re reasonably satisfied with, although we wish it would be a bit better, but there is quite a lot of noise in the numbers that are obscuring what's really going on.

Yes, Irene the effects on the labor seldom cost like -- those were significant dollar announced. So they overshadow the benefits on efficiency, so that's how we look at it, but we remain committed on extracting more and more efficiencies and our plan contemplates more of them going forward.

Okay that’s very helpful and just looking onto -- coming back to the whole shoppers question, presumably the headwinds of healthcare reforms that's going to hit Q4 will carry over into 2016, correct?

So, let me, let me just expand on that one, okay? Essentially the two factors affecting us really is that, the connect [ph] portion which kicked in, in September but it was [indiscernible] in April, so there were some dollars than Q3 that were booked in Q3 but effectively related to past period, so that affected Q3 and the Ontario one is just kicking in as Q4 gets going.

So, in Q4 we'll have full Quebec and full Ontario hitting off, so that's why the dollar impact will be more significant in Q4 that is more than Q3, but to answer your question fully, yes the impact of that will be -- will be continued in 2016 and that will be part of our budget as we add some in our budget in 2015.

Understood, and then just again, that looking at shoppers in terms of the investments that you're making in the current year which are further moderating the results, where are you with those investments and do we get it pretty much behind us in 2015? How should we be thinking about the cadence that's moved from Q4 and into next year?

So, the two buckets of investments that we talked at the beginning of the year had to do with the adherence center, okay? Though that's done, so that the center is up and running and people are there, so that's done.

The other one was associated with training with delta. Delta has been deferred a bit, so some of those funds were spent in '15, but there'll be some spillover in '16.

Okay, that’s every helpful, and just one final question if I may, in terms of your same-store sales at Loblaw's relative to the inflation rate, there was a gap of, let’s call it, somewhere in excess of 70 basis points, so I'm wondering if you could provide a little bit of color there.

So, and I think the headline on this is that we're comfortable with our sales performance. We look very closely at market share, we look very closely at tonnage, we look very closely at traffic and all of those metrics have us performing inside that stable trading range against which -- we measure our internal performance.

So, that's good. I think the tricky part and we talked about this in a number of different quarters is that we don’t think that the -- what we call sort of the street map, subtracting same-store sales growth from CPI is really an effective way to determine the underlying performance or tonnage of the business and that -- one of the principle reasons for that is mix distortions that happen as people trade into either higher sizes on item or higher priced goods and we're seeing a pretty meaningful shift going on right now in some of those areas.

So, the long and short of it is we feel pretty good about our sales performance, they could better, yes, I think it can always be better, we've got some great performance in some markets, which we feel really good about and others were it's a little bit softer. What I feel most positive about is the business's ability to react when we start to drift outside of that comfort zone and we saw some of that in Q3 and we also saw the business react to come back into the zone.

So, long and short of it is, we feel fine.

When we look at the sales performance in the quarter both adjusted for inflation and not adjusted for inflation, what are the key mix shifts that are influencing those numbers?

So, fresh obviously is a shift, we're investing significantly in things like HMR, we see dramatically higher growth in our health food departments, our natural value departments and these are all basically the same item trading at a higher price point so, it's not priced based inflation but it's actually mix shift based inflation.

Are you experiencing any changes in your Alberta business and do you think there'll be any impact in Q4?

So, we are seeing indications on increasingly deteriorating economic environment, we see that specifically in euro accounts, where you had big -- sort of shutting down of big projects and increased layoffs. We also see some indications now, I think beginning to turn to our financial services product.

Nothing dramatic at this point, but it's starting to turn. I think I mentioned last time that the good news of this for our business is that the vast majority of our sales is in an opening price point retail format, the leading format in that market.

And so, we actually think it, it may benefit us, certainly performance in province today is very good.

And then as we -- just turning to the SG&A side of the business. The investments -- the incremental investments that you’re making on key projects including e-commerce.

I wonder if you could frame for us the size of the investments. And what your expected rate of return is on those types of investments?

Yes. So I’ll start, so we’re not going to give you sort of the details on the size of the investments.

Suffice to say our objective is to make those investments and to deliver SG&A leverage that shows up in our P&L. I think the way to think about it is that the size of the efficiencies may not entirely fall to the bottom-line, because of these incremental investments.

One of the reasons that we’re talking about in Q3 is because after having run a successful pilot with click and collect, we are now starting to move into that next stage and to ramp up the program. It doesn’t cost an enormous amount of capital to run click and collect, but as you build volume up to scale, you are actually taking on an expense costs to P&L costs, that is fundamentally negative.

And when we look at the return model, suffice to say we think it is a cost of doing business in food retail today, but we also have a line of site, to what we think is a satisfactory return and reasonable profitability.

Thank you. Most of the questions have been touched on, but just on follow-ups on them.

First of all on the last one on the click and collect. If some of your competitors were to get into home delivery in a bigger way.

Is that something you would follow or will you stick with click and collect and just keep pushing the lowers of that?

Well, I think it would be imprudent of me to say never to any options out there that in this world of e-commerce. But at this point, our conviction around click and collect is growing, the customer response and the nature of the way that consumers are looking for convenience in most of Canada suggest that this is a superior customer service proposition and home delivery.

But there will be others with the different view and they can make their investments choices as they see fit.

All right and on the returning capital to shareholders, it is simply about returning the free cash flow we see generated going forward or is there any thought of being able to increase debt again even though you just lowered it below your target?

No, there is no plan to increased debt, clearly. So and free cash flow obviously it’s after CapEx.

So when I refer to excess free cash flow, I mean free cash flow minus dividends. So free cash flow minus dividend were used to pay down debt over the last -- little while and now free cash flow minus dividend will go to dividend increase and share buyback.

Okay, thank you, that’s what I thought. And then on the loyalty programs, have you guys gone through the -- finished the process of considering how you may integrate those programs.

Is there anything you can update us on there?

Yes. So I’d say we have finished the process of determining what the past forward is, but we’re not disclosing at this point Michael.

Hi, good morning. First, I just have a follow-up question to the healthcare reform headwinds again.

Just want to be clear, the incremental headwinds you expect, you’re referencing primarily to the expense into reduction in Quebec and as well as some of the fee reduction in Ontario?

Yes. Plus we had some stuff there was budgeted.

So that is also there but yes those are the two most important factors.

And with the removal of the professional allowance rate for generic drugs in Quebec, would it be a positive or negative for shoppers?

Yes. I think it’s just looking at Richard, I think it’s a neutral, is the way to think about it.

It moves overtime, but net-to-net it’s a neutral, not something to be overly concerned about.

Okay, that’s great. And my other question is, I understand the company is recently changed some of the pricing practices with the suppliers.

I wonder to extent you can, can you go through what were some of the major changes and what’s being done to minimize the potential impact on the company’s margins?

Yes. So this is part of a process that we have undertaken really since we acquired Shoppers Drug Mart, which is to simplify the ways that we do the business across the board, we want to reduce volatility, we want to improved visibility, we want to reduce the amount of complexity that we engaging when we’re negotiating with vendors both on annual contract and then on sort of short-term sort of promotional support.

So this is really just a communication to the vendors that we are continuing on that path, that it is part of a more collaborative business building approach with some and I think they understand the approach, I think they feel supportive of the approach and it’s going to be hard work to get through some of this stuff as you change the nature of contracts, the type of conversation that you have with the vendor community. But at this point, we don’t see any -- in fact we see upside just from a point of efficiency point of view and we don’t see any risk to margins as a result of this at all.

Yes just want to circle back on a few things; so first of all, the Quebec rebate situation. So really the Quebec government has positioned rebates from generic manufacturers as an opportunity for pharmacists to offset the negative impact of the changes they are making on dispensing fee revenue.

Are you saying that you don’t expect that even if the rebate fillings remove, that they will have any positive effect on the hit that you're going to be taking from drug reform in Quebec?

Yes, that’s essentially what we’re saying. Remember that the structure of the market in Quebec is different to what it is here in Ontario.

Those pharmacists are entirely independent and benefits that accrue event don’t necessary accrue it their wholesale sort of partner which is essentially what we are and so that’s the way to think about it.

And on your Ontario business is there any opportunity to renegotiate your cost agreements with your suppliers to reflect the change in the marketplace?

Well so as far as our comps negotiations are concerned, as part of our synergy initiative when we brought Shoppers and Loblaw together, we have been very pleased with the results that worked across the board, it include the drug business. Is there opportunity to move further as a result of the regulatory changes, I wouldn’t say a whole lot, but we are very focused on mitigating the impact of incremental drug reform and when Richard mentioned that we budget visible drug reform and then we go about looking for ways to offset it that’s what we do, that our job and we’ve been reasonably effective at doing that, it's the unbudgeted drug reform that comes unexpectedly in addition to what we are expecting that it’s harder for us to address in the momentum that it lands and that is a meaningful part of what’s happening in Q4.

Thanks, it's exactly where I was trying to trend to, is that now that you do know directionally what the Ontario and Quebec changes are going to be, do you see an opportunity in 2016 to offset as we move into the year?

Yes, we do, I mean the way -- I think the way to think about these external impacts, regulatory impacts, the strategic investments impact is that we want to be able to cover those and still deliver right know performance. I think what we’re flagging here is that there is a meaningful impact in Q4 as far as the direction of the results and it's a govern on our ability to drive earnings growth in subsequent years it doesn’t stop us from doing it, but it governs the quantum that we’re able to put forward.

Yes, we have time now to plan it so that when we hit 2016 we can putin planstomitigate it and that’s what we’re working towards right now.

Just on the EBITDA results that you posted as consolidated, the synergy numbers were stronger than expected, but the EBITDA growth in dollars didn’t fully reflect the synergy and I know you highlighted some puts and takes there, but I was just hoping I could get a little bit more of a discreet bridge on what kind of what the help was, obviously you know synergies, we know the sales growth, the shoppers comp was really strong in the front store. But what were the offsetting factors, I would have thought the EBITDA growth would have been a bit stronger looking at your sales growth?

Vishal, think of this as, obviously FX and labor settlement cost like our one-time events that effected EBITDA. But let's go back to what I said earlier regarding [indiscernible] shoppers performance, like I am assuming that most of you were probably assuming that shopper’s earnings would be positive year-over-year in Q3.

We told you that it was negative. So just think about the spread between a negative number and a positive number, add that to our EBITDA and we probably get them to zone over the street was.

What was the FX and labor impact?

We didn’t say the number, but it's like combine there was -- it was in double digits in terms of millions of dollars.

Is this FX and labor impact, is it going to be recurring for couple of quarters or?

No labor won’t because it was a one-time cost associated with the new labor agreement in the Loblaw stores that we signed this summer. But FX is essentially revaluation of payable which is the picture you take of your payable at the end of the quarter compared to last year and then you book the difference in your income statement.

So if the Canadian dollar continues to deteriorate you could see more of that, but you won’t see labor or settlement cost going forward.

Understood, with respect to 2016, there is a lot of moving parts and a lot of health initiatives at Loblaw been working out for several years that seems to be culminating in 2016 and it looks like many of them are favorable. So I know it's early, but I was just hoping you can get us broad brush strokes is what in your view is going to define 2016, you’ve already talked about capital return which is nice, but are there any major other items we should look it towards?

2016 is going to be more of the same, right? We will continue to push forward both of our retail businesses.

Synergies continue to be a key contributor to our earnings albeit at a lesser rate than what we've experienced in the first two years. And as you said yourself, return of capital will be a new theme that you'll hear about us in say in '15.

And the efficiency that you capture from SAP and the headcount potential there, is that going to be offset by investment or should we think of that as additive?

So, I think you got it right, as we move from this implementation of SAP, we're not going to announce that we've completed it right now because we can't officially say that, but we're very-very close to completing all of the stores and so we really are moving into that optimization phase and this optimization mean, running the business more effectively on the new system and it means realizing the benefits. So, I think you can take some comfort from the fact that benefits are now being budgeted into the divisional P&Ls in the food business and we expect that to be one of the meaningful drivers of growth in the business.

And I go back to the principle strength, our objective is to grow the business from an earnings perspective in absolute terms, but we do have some of these investments that are going to moderate the extent to which we can drive that number forward. And we're talking more about '16 in the Q4.

And just lastly, I just want to make sure I understood this. With respect to shoppers I understand that Q4 is going to get hit with drug reform and -- that wasn't planned at the beginning of the year, but with respect to 2016 [ph], as Shoppers EBIT growth pre-synergy is the point you're trying to communicate is that there are initiatives underway to offset drug reform in the Shoppers business, is that a fair characterization?

Yes.

Just wondering if you determined your broad capital planned for 2016?

Yes, we did, like -- as was mentioned earlier in the year and for 2016 our retail CapEx is expected to be around 1.2 billion and for 2016 our retail CapEx should be about 1 billion. So, that's the number.

And then in terms of the dividend policy -- as you've been integrating shoppers, there've been a number of dividend increases. Will the board choose one specific quarter going forward to make dividend adjustment decisions?

Yes, Keith, actually we plan to make these announcements when we our AGM essentially and our dividend policy as we've discussed is that we plan to increase our dividend every year and our target is to get to a payout ratio of around 25% over the next few years.

And I just wanted to ask about the drug reform, is the retroactive element of the Quebec change fully absorbed in Q3 or does some of it get absorbed in Q4?

It's been fully absorbed in Q3.

And then in -- just in terms of the Ontario drug reform, I know they said they want just -- I think they wanted to say 200 million but, I wasn't sure -- have they announced which specific measures affect your business?

Like I said, it's the ones that kicked in early October and so essentially all of it.

So, it's that you experience none of it, or very little of it I guess?

In Q3 yes, exactly, because our quarter finished on October 10th, so we have 10 days of Ontario drug reform in Q3 and the balance is going to be all in Q4.

And then just finally on Alberta and Western Canada, there have been a little -- there've been some signs that Loblaw once introduced conventional stores in Western Canada, I guess in British Columbia with their city market and I understand perhaps in Calgary in the first part of 2016 and they have been a few of your independent grossers, so I'm just wondering on a big picture point of view what's the strategy of Loblaw is on the conventional business in Western Canada.

So, we're a multi-format retail business, we believe that we can compete more effectively in markets when we're able to deploy multiple formats. And you saw spring No Frills to Western Canada over the last six or seven years, now you’re beginning to see a spring, the market division, the full service market concept and you're seeing it comes through exactly as just as you describe, in some cases it's our franchise model which is [indiscernible] and in other case it's the Loblaw business in the corporate stores although led by the Inspire concept.

So, yes, we're going to do that, we're continuing to do it, and what I'd just remind you is that not -- only a small portion of that business is coming from net new real estate, the largest portion of both the No Frills entry into the market and so your independent grocer entry into the market, it’s a conversion of a banner that we’ve had there for many years called extra foods, which we’re actually phasing out and replacing with two concepts that are more current to our strategy going forward. And in both cases, we’re really encourage by the results in No Frills and in [indiscernible].

Thanks. Just a little clarity around the SAP deployment and I mean exactly where are you in terms of the store conversions, et cetera?

Yes. So we will be for all intents and purposes finish by the end of the year.

I think the date, don’t quote me on it, I think its November 27th or something we were hope we might be able to declare it as a part of this call, but we’re not quite able to do that. And we’ve been converting stores I think as we mentioned to you at the right of 30 a week and it’s going very well.

Okay, great, thanks. And you talk about some of the challenges here.

Well not changes but some of the investments and costs related to the investments. I mean when do you see those investments cost tailing off and you start actually seeing more benefit from other initiatives such as the synergies another initiatives around efficiencies start to show up meaningfully.

Is that mid-way through 2016 as you lap a full year of it or could you give us some kind of color on the cadence of how you see things turn to hit the bottom-line a bit more?

I mean look, I think our objective is to deliver benefits in every quarter. I think Q4 is an example of certain circumstances, we believe in part outside of our control plus some incremental noise that is creating fog on that front.

So don’t be unduly put off by our conversation about the investments, so go back to the same principal point. We will see bottom-line increases in earnings with that incremental investment that is our plan.

I’m just flagging with everybody that those investments, strategic investments and drug reform their meaningful impacts and so they just moderate the extent to which we can deliver growth and that’s the way to think about it.

Okay, that’s fair. And just last question I think you called out margin initiatives at shoppers during the quarter.

But we saw really strong growth on the front store. Could you give us an idea of what those margin investments are, is that a function of mix with more food or were there other initiatives there that maybe you can speak to what comprised that growth in the front store?

So the exclusive negative impact on margin and the shoppers business is drug reform.

Right.

And what driving the growth, it’s all across the board to be fair in our front of store business at shoppers. But the two standouts are food and beauty, and beauty I think is benefiting from the close of Target and also we think we run a very good proposition around beauty and Shoppers Drug Mart.

Food is a function of converting the assortment that’s part of the bring together the knowledge around food between Shoppers and Loblaw. And the overwhelming factor is the addition of our corporate label programs No Name and President’s Choice for the full line-up in those stores, in the dry grocery departments.

So this is not being driven at this point by our fresh pilot, its being driven by the core assortment in those convince isles the stores. And we made the conversion at the beginning of the year.

But it has taken us through to the third quarter to get the product in stock to be able to understand the volume that the customers is interested in these stores or in these products. And so it’s now running the way we expected it to run and it’s delivering very, very strong results.

And just as a final follow-up on that. When do you think you’ve optimized those conversions perhaps you have now and when have you optimized in terms of the offering in each and every store from that perspective, fresh side?

Yes. So I’d say we’re pretty there now and you’re never done, you’re always evolving, tweaking trying to improve, but the substantial body of the work is complete across the country and the results are indicating that that works been good.

Great. Thank you.

Well, thank you. Just a point of clarification, in the press release it says that the drug pharmacy gross margin was negatively impacted by healthcare reforms and the increasing in usage of generic molecules.

I get the part of healthcare reforms, but it’s the second part about the increase in the usage of generic molecules. Does that mean the average profitability of generic [ph] molecules is less than branded, so that’s why it’s also having the negative impact on margins?

I guess the generic [indiscernible] where the more use of generic associated tech, both revenue and margin for that [indiscernible].

So even on the revenues it is also being deflationary?

Exactly because penetration of generic is going up.

And I guess a follow-up just on Walmart then, as noted that trailing with 7/11 I think of your locations in GPA [ph] for stock pick up is running longer term, how does the Shoppers network fit in with the overall click and collect strategy over the longer term?

Well, we’re starting with pick up from our existing full service supermarket, but I think it's fair to say that those points of convenience about the Shoppers Drug Mart network represents a meaningful opportunity for us if it work.

Great. Thank you and thanks everyone for joining us today.

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