Operator: Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Loblaw Companies Limited First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

[Operator Instructions] Thank you. I would now like to turn the call over to Roy MacDonald, Vice President of Investor Relations. You may begin your conference.

Roy MacDonald: Good morning. Thank you very much, Mariama, and good morning, everybody on the line.

Welcome to Loblaw Companies Limited first quarter 2019 results call. This morning, I am joined this morning by Galen Weston, our Executive Chairman, Sarah Davis our President; and Darren Myers, our Chief Financial Officer. Before we begin today's call, I want to remind you that today's discussion will include forward-looking statements, such as the Company's beliefs and expectations regarding certain aspects of its financial performance in 2019 and future years. These statements are based on assumptions and reflect management's current expectations and are subject to 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 financial materials filed with the Canadian regulators.

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. Also, certain not financial GAAP measures may be discussed or referred to today. Please refer to our Annual Report and to 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 with that, I'll now turn the call over to Darren.

Darren Myers: Thank you, Roy, and good morning, everyone. I am pleased to report we delivered strong financial and operational results in the first quarter. Looking at continuing operations, revenue grew by 3.1%, adjusted EBITDA normalized for IFRS 16 increased by 3.4% and normalized adjusted earnings per share increased by 3.7%. Before I go through the details, let me provide an overview of the first quarter impact of IFRS 16. Implementation of the new standard resulted in a year-over-year decrease in rent expense of $282 million, an increase in depreciation and amortization of $207 million, and net interest expense and other financing charges of $82 million for a reduction in net earnings available to common shareholders of $6 million or $0.02 per share on a fully diluted earnings per share basis.

On the balance sheet, we recorded a right-of-use asset of $7.6 billion and a lease liability of $9.2 billion. Turning back to our results. We continue to deliver on our financial plan in the quarter. Our same-store sales grew 2% in Food Retail and 2.2% in Drug Retail. Our Food Retail sales were negatively impacted by 60 basis points, primarily from the healthcare reform impacts of – on our in-store pharmacies, as well as some softness in general merchandize.

The timing of Easter negatively impacted our same-store sales by approximately 20 basis points in the quarter. Food retail continues to deliver favorable mix. We drove an increase in average basket and had relatively flat traffic in our stores. Our CPI equivalent internal inflation metrics came in slightly lower than CPI of 3.3%. In Drug Retail, same-store sales were 3.1% with continued growth across our categories.

Positive Pharmacy same-store sales growth of 1.2% was driven by strong prescription growth of 2.6%, which more than offset the negative impact of drug reform. The timing of Easter had a negative impact on Drug Retail same-store sales of 30 basis points. Total Retail gross margin was 29.6%. Excluding the consolidation of franchises, retail gross margin declined by 30 basis points, driven by the negative impact of healthcare reform. Food Retail gross margin was flat in the quarter.

Retail SG&A, as a percentage of sales was 20.2% and included $282 million reduction related to IFRS 16. Including this reduction and the impact of franchise consolidation, retail SG&A improved year-over-year by 30 basis points. Our SG&A performance benefited from certain one-time items in 2018 and our focus on process and efficiency initiatives while we continued to invest in the business. At PC Financial, revenue grew by 15.7% driven by growth in our credit card portfolio and higher year-over-year sales of The Mobile Shop. Adjusted EBITDA declined $6 million compared to last year, as revenue growth was offset by the termination of our daily banking services and increased investments in the business.

In the quarter, fully diluted earnings per share were $0.78. On a comparable basis to last year, excluding the $0.02 per share negative impact from IFRS 16 and a $0.04 per share from the incremental depreciation due to the spin-out of Choice, the quarter's fully diluted earnings per share were $0.84, an increase of approximately 3.7%. IFRS net earnings available to shareholders from continuing operations decreased $14 million year-over-year, primarily due to the IFRS 16 and the incremental depreciation associated with the Choice spin-out. Free cash flow from continuing operations was $419 million this quarter. The first quarter included the positive impact of accelerated payments made in the fourth quarter of 2018 as we transitioned our Shoppers back office to SAP.

Please note, the free cash flow definition was updated to normalized for the impact from the implementation of IFRS 16. In the quarter, we repurchased 3.7 million common shares at a total cost of $235 million. Today, we are pleased to announce a 6.8% increase in our quarterly dividend. This marks our eighth consecutive annual increase in the dividend rate on our common shares. Reflecting on our first quarter of 2019, we are pleased with our financial performance.

We continue to deliver process and efficiency gains supported by a culture of operational excellence. These savings are offsetting cost pressures and are enabling us to accelerate investments in our growth areas for the future. I will now turn the call over to Sarah to provide additional color.

Sarah Davis: Thank you, Darren and good morning everyone. We executed well against our stable trading framework in the first quarter and continued to deliver gains from our process and efficiencies initiatives.

We have seen an incredible shift in our ability to use the data and across our organization to provide consumer offers, make better promotional decisions and more efficiently manage our supply chain networks. We are really starting to get some traction. In the quarter, we further refined our data and analytics center of excellence and welcomed a new leader for the tea, We now have over 400 colleagues and counting working in data and analytics-related roles. Across our stores, brands and services via in-person or digitally, our focus is centered on our customer. As we mentioned last quarter, 2019 is about making further investments in data and technology to drive customer adoption and improve customer satisfaction.

At PC Express, customers are tell us that they want faster turnaround on their orders. We deployed a new technology to track our efficiency and ensure service times of less than five minutes. We are rolling out two hours click-and-collect windows in more stores every week. And we’re testing our ability to offer customers a one-hour cut-off on pick up orders. That means that customers can add a last minute item to their baskets and as little as an hour before they swing by their stores to pick up their groceries on the way home.

The quick turnaround time with PC Express is just one way we are helping solve meals for Canadians. We believe the combination of our assets including our trusted brand, our data on personal preferences, our store locations, and our omni-channel presence places us in a unique position to help Canadians with this every day challenge in many ways. We sell some of the country’s favorite brands with President's Choice the number one brand in the country, we also have noname and Farmers Market rounding out the top-five brands in Canada. In fact, just today, PC was named the most trusted packaged food brand in Canada. Over the past few months, you may have noticed another one of our brands in your local store around PC Express called Summer Shack.

We now have 20 meals that offer home cooked options and under 30 minutes. Heat and Eat favorites like pad Thai and butter chicken. We will also be introducing a meal kit into 92 Loblaw’s and their stores in Ontario following the May long weekend. We are inspired by the challenge of helping our customer solve meals for their families in a convenient way with solutions that bring home style restaurant quality innovation inspired by our Head Chefs. At Shoppers, we continue to focus on bringing new value to our customers and new customers into our network.

Recently, we realigned our beauty team to combine cross-functional expertise. Already we are seeing this group hone in on key priorities and improve how we execute across our omni-channel beauties. In the quarter, the team began to launch new educational how to tutorials on-trend looks that are resonating with the younger generation. We also added seven next-generation beauty boutiques in the quarter. This format includes smaller displays focused around the Indi breed beauty trend and is helping us gain access to brands not currently at Shoppers Drug Mart.

In Q1, we delivered consistent performance in our businesses. We continued to deliver value to our customers, while also continuing to generate operational efficiencies that allow us to fund our investments for an exciting future. I will now turn the call over to Galen.

Galen Weston: Thank you, Sarah. In Q1 our focus was on execution.

During a challenging quarter, the team delivered sales and tonnage in line with our stable trading range coupled with gross margin and operating leverage that are on strategy and driving strong bottom-line results. On the back of that performance, we remain confident about accelerating our investments in innovation throughout the rest of the year. These investments continue to show positive results, successfully unlocking value in both our core business and across our growth initiatives. What excites us most is how these investments combined with our increasing experience and growing pool of talent are helping us uncover and explore new opportunities. Take for example, the pilot of our Loblaw Media Business.

By leveraging the technology in our loyalty platform we are allowing our customers to see more relevant ads when they surf the web. Another example, is the combination of our growing range of ready to heat and ready to eat meals now available through our increasingly popular one hour delivery and pickup services. With the removing clutter from the ads our customers see online we are helping to solve their last minute meal needs at 4 PM on a Wednesday, we are now able to stand up and scale these customer-centered ideas more quickly and with less cost than ever before. Not all of these new ideas will create significant new businesses for us, but as we become increasingly agile and even more customer-centric, we believe that some of them will. And when we combine these promising avenues for growth with the stability of our core business and the benefits we are realizing through process and efficiencies, we cannot help to be excited about our future.

I’d now like to open the call to questions.

Operator: [Operator Instructions] Your first question comes from Irene Nattel with RBC Capital Markets. Your line is open.
Irene Nattel : Thanks, and good morning everyone. I would like if you could just spend a minute talking about the owned brands, private-label brands, because I think last year, the focus really was the rollout of PC Optimum, but it sounds us though, for this year, you are kind of getting back to base mix with released your focus on President’s Choice, noname and Farmers Market.

Is that fair?

Sarah Davis: I think our brands have always been part of our strategy. But it’s fair to say we didn’t talk about our control brands very much last year as we’ve talked a lot about our Digital Retail strategy. So we are happy with the performance of all our brands. PC is number one, noname is number two and Farmers Market sort of moves around between number four and five. And so, and Life brand is actually in the top 10 as well.

So we are excited by that. And I would say our new brand that I mentioned Summer Shack is a new one that’s coming out as well. And we would like to – we do have a plan to increase our penetration of control brands across our network. You can see it in some of our categories such as frozen food and veg where we - you can see the control brand playing a pretty important role in some of those categories. Irene Nattel : That’s great.

It also is worth switching stores for. Just on the subject of sort of all of the data analytics, I think it was on the Q3 call, Sarah, you were talking about sort of the improvements that you’ve made in promotional effectiveness, the enhanced ability really to drive consumer behavior and also value-added promotions. I was wondering if you could just sort of update us on sort of how that’s continuing to evolve and maybe what – how that benefited Q1?

Sarah Davis: Yes, so I would say, we have been focused on using the vast amount of data that we have in order to have more effective promotions. So this could be through loyalty having more direct promotions to personalize to customers. And some, maybe a good example would be in the way that we’ve been doing our spend stretches where traditionally we would have given every customer the same spend stretch.

Whether you spend $20 in our store on produce, or you spend $50 in our store on a weekly basis on produce, we would give everybody a $30 spend stretch meaning that if you spend $30, you would be able to get some additional points. So for the person who spent $50, it was just free money. They were spending in any ways and for the person who spent $20, it might be too big a stretch for them to go from $20 to $30. So we really are fine tuning it to say the person who is spending $20, maybe we’ll stretch him to $25. The person who is spending $50, maybe we will stretch them to $60 and that type of work.

So lots of work on that. It does mean that in certain circumstances that we are walking away from tonnage that isn’t as productive as we would – as traditionally we would have gone after that tonnage and more focused on productive tonnage which we would have seen in Q1. So definitely, where you see it in our Q1 results would be in our flat food margins and that would be where you see it.
Irene Nattel : That’s great. Thank you.

And then, just finally, if I may. So, sounds us that general merchandize continued to be a drag this quarter. How long before that noise is out of the numbers?

Sarah Davis: Yes, I mean, I hope to be able to say that in Q2. So I would say, what we did see in Q1, so if you remember in Q4, we highlighted that the right-hand side, which is not just GM, but it would be a big portion of it, but it’s also the impact of drug reform in our grocery store, pharmacies would also be part of that impact. And it was a 100 basis point impact in Q4.

In Q1, it was a 60 basis point impact with the majority of the impact being after the drug store reform. So we are starting to see improvements in both in the performance of both our general merchandize and our apparel. So I hope I don’t have to talk about it as a reason in Q2.
Irene Nattel : That’s great. Thank you.

Operator: Your next question comes from Mark Petrie with CIBC. Your line is open.
Mark Petrie : Hey, good morning. You showed some good progress on SG&A leverage. Sarah, you called out a few areas where the organization is benefiting, but also that is an area where you want to continue to invest.

So, are those investments sort of being funded by those benefits and other efficiencies allow for modest leverage? Or how should we sort of think about how you want to balance that in 2019?

Sarah Davis: Yes, so, I think it does, that’s true. That’s so we are basically investing in technology to improve our efficiencies and so that is – so we are trying to offset the efficiency investments with the efficiencies and we would continue to see that in 2019 and 2020 and I don’t know, Darren if you want to add some color?

Darren Myers: Yes, Mark, I’d just say it’s well entrenched in the company the company the understanding that in order to invest in the business, we have to drive further and further process efficiencies. So, as we've talked about in the past, we are excited by the process efficiency roadmap we see. It’s across six major streams and we are seeing great progress on there and we are continuing to invest in the business. So, it was a great quarter from an SG&A point of view.

Some of that one-time from last year and a big part of it will be the success we are having with process efficiencies.
Mark Petrie : And could you help quantify sort of the benefit of the one-time from last year. I guess mostly the PC Optimum launch?

Darren Myers: That and a little bit of FX, maybe it’s, call it, half-half between the one-time and the progress that we are making.
Mark Petrie : Yes, okay. And On Loblaw Media, obviously, that’s a sort of recently launched, but at a high level, how material do you think that it can beef your business? How does it ramps? And when it comes to you sort of your relationships with these consumer brands, is this incremental or do you feel like this is incremental or does it sort of replace some of the ways those brands sort of spend and promote with you today?

Sarah Davis: So it’s still early days.

We just launched the pilot of this advertising service and we are mostly, so far the ones that we’ve done have been focused on our own brands. So President’s Choice has been the one that we’ve been targeting. But we have had a lot of interest from the CPG companies who have been able to do this in other parts of the world. So they are very excited by this opportunity. We think it could be a big opportunity, but it’s too early to tell.

In terms of whether it’s incremental or not, we do see it as incremental spend. It’s different spend that a CPG company would be spending, it’s their advertising as opposed to their product cost. So it is different. So we do see it as potentially being incremental.
Mark Petrie : Okay, thanks.

And then, just last if I could. I just wanted to ask a question on financial services. I understand it’s a relatively small part of the business. But you are trying to grow the credit card and you have greater control with those third-party involvement in the banking offer. So, going forward, how much importance do you place on the financial services offer? Is it really a sort of a strategic lever to sort of more deeply embed yourselves with your customers? Or is it a business where you see superior financial returns versus other opportunities?

Sarah Davis: I’ll do the strategic piece and then maybe Darren can add on the financial.

So, I would say, yes, we actually think that President’s Choice financial is an integral part of our strategic plan which is why we could have it in our strategic growth area, I’ll call Payments and Rewards. So, we have actually combined the teams of the loyalty team and the PC Financial teams. We think that there is a nice synergy between those two teams. We are planning to come out with a new payment product that will be later piloted this year, but primarily next year and so we do it as part of our strategy. Our most loyal customers are our PC Financial Mastercard customers.

So there is a nice link there. And in terms of the financials, I can turn it over to Darren.

Darren Myers: Yes, Mark, I would just add to what Sarah said I mean, it’s a great business financially, but really it comes to the integrated value that Payments and Rewards can bring to us. That’s really where the value is going to come from in the future.
Mark Petrie : Okay, thanks a lot.

Operator: Your next question comes from Patricia Baker with Scotiabank. Your line is open.
Patricia Baker : Good morning everyone. I have two questions. Just the first one, can you just talk about the dynamic behind the relatively flat traffic, because we've seen over the course of the last several quarters traffic, I think has been up I just want to know if you can address what you think is happening there with traffic?

Sarah Davis: Yes, I would say from a traffic perspective, it would have been impacted a little bit by the Easter shift as our comp sales were as well.

But it wasn’t – I wouldn’t say it was enough to worry us. We were comfortable with our improved mix and our increased average basket. So, we’ve got a higher basket in the quarter as well. And traffic was pretty flat and we had the Easter mix. So, nothing material there, I don’t think.

Patricia Baker : Okay. Thank you very much, Sarah. And then my next question gets, going back to the process efficiencies in addition to permitting you to have a lower SG&A and improve there, but also you talk about the strategy to drive a more efficient business model also will be used to provide funding for investment in growth areas and you have called out your future growth areas as the Digital Payment and Rewards and then, of course, Connected Healthcare. I am just wondering from an investment perspective if you could provide us with maybe the magnitude or the relative order of magnitude of the investments in those three areas? And then, secondarily, what should we be think about the pacing of investment in these areas? And when we're going to see material growth to come from these three areas? Some of it in 2019, but a lot of it further down the road? Just provide a little bit more detail on that that would be great.

Sarah Davis: Okay.

I’ll start this one too. So, I would say, certainly our – the plan that we’ve talked about is that we are finding process and efficiencies in our business in order to fund our future growth. And still deliver on our financial models that we’ve highlighted. So that would – that’s our ultimate goal to be able to deliver on that. I would say, some of the investments we are making are more defensive than they are offensive when you consider Digital Retail.

That we see as a more of a defensive strategy, but we hope it also drives additional customers to our stores. When it comes to Payments and Rewards and to Connected Health, we see them. Well, certainly, Payments and Rewards, we do see as partially defensive, partially offensive which we think we should get incremental earnings from that. And in terms of Connected Health, we really do see that as the opportunity for an offensive play. But on Connected Health it’s also the one that’s further from being realized whereas we feel that we are quite – we got quite along way – along in our investments in certainly Digital Retail as well as Payments and Rewards.

So that’s sort of the overall strategy and then maybe on the – some of the specifics, as much as Darren is willing to share about the specific investments.

Darren Myers: Hi, Patricia, and I know you and your colleagues on the call would love for me to give you how much we are investing in all these areas. But we are not going to do that. I think what I would say to frame it is, we understand that we have to drive the process efficiencies to fund it. We are committed to the long-term our financial framework.

I would say, if any color I would give you is that this year based on the success we’ve seen we have amped up and are amping up our investments. So, we are committed to this financial framework over the long-term. But this is still going to be a year of investing and we think we will start to see the benefits of these investments next year and beyond.
Patricia Baker : Okay. If I could just squeeze one more fact out of you or Sarah.

So, you've been on the digital investment route for quite a while now. Where are you on that journey? And would you think that you are 50% through, 60% through?

Sarah Davis: Well, I think that’s a good one, because I would say, certainly in 2018, it really was all about doing the rollouts. We are close to 700 and we really haven’t been adding very many more. In 2019, it really is about improving the execution. So not much incremental in terms of rollout, but we would be spending some money on technology like the technology we’ve put in stores to make sure that we can track how long it takes us from the time somebody shows up at our store to the point that we put the groceries into their car.

So we are tracking that very carefully. So the new technology in some of those areas. But it is fair to say that based on what we are seeing now, the big investments in digital has been made.
Patricia Baker : Okay. Thank you.

Operator: Your next question comes from Michael Van Aelst with TD Securities. Your line is open.
Michael Van Aelst : Yes. So, when you talk about your smart tonnage initiatives, I think this, you first started mentioning it early last year. So, can you just give us kind of a timeline of how you – when you roll that out to the segments and when we should see, I guess, the lapping of the first year of impact and then, I just do a math of that, the year-over-year impact is more modest on tonnage?

Sarah Davis: Yes, I think the first time I did mentioned it was probably on this call last year.

So – and we would have started the rollout. So, Shoppers, as you know has been involved and had the beta with their Optimum program for many years. And so it really was bringing some of the best practices from Shoppers into the food businesses and we really started in earnest with the market division last year where they really would have gone category-by-category. And they would have tried a few things and decided what worked and what didn’t work. So, I would say, you never are 100% done.

But they have evolved through the year, Q3, Q4 would have been certainly in that area they would have felt like they were really starting to understand it. So, I would say, and then Discount was also joined in. They were focused on a few other initiatives, but they have also joined in this initiatives as well. So, I would say, probably the back half of this year is when you are really starting to see some of that. And I would say that we are comfortable with our tonnage and it’s within our tolerance range.

We set a tolerance range within – that we said we are going to live within. But we are keeping an eye on it. We certainly want to make sure that we don’t lose tonnage every quarter and that we are comfortable with our position. But it is part of our strategy. So we did intentionally pull back on some unproductive tonnage.

Michael Van Aelst : Just on that, as you get through this and let’s say into next year, once you are kind of clear of all these like the major rollout of this program and to Discount end-market. Are you really comfortable in letting tonnage stay flat when your competitors continue to report 1% plus?

Sarah Davis: I would say, it would be tonnage market share that we are focused on. So our market share was in our – within the industry. So if we maintain flat to slightly positive tonnage market share without adding significant new real estate, I think we are comfortable with that.
Michael Van Aelst : Okay.

And then, the IFRS 16 back it was, I think a couple of pennies higher than the neutral or so that was somewhat implied when you guys first talked about it. So, is that $0.02 a quarter impact mostly on depreciation? Is that kind of a good runrate for the year? Or do you see that easing up at some point?

Darren Myers: Mike, yes, it’s difficult to predict it every quarter right now in the first year of limitations, probably a little difficult. So probably, it's a good proxy to have in your head and we will just keep updating giving you the transparency of the non-cash accounting change. But I think for the time being, the $0.02 a quarter is a reasonable place to go with.
Michael Van Aelst : Okay.

So, you had provided I think 406 adjusted originally for the spinout of choice and then as kind of a 2018 comparable, but then you have higher depreciation, that kind of was discovered post the spinout and then on top of the IFRS. So, would you hazard to guess, as to what a comparable 2018 EPS would be for all those kind of just look at the top-line numbers and the EPS and they are looking to where the people are forecasting the growth?

Darren Myers: Probably, don't want to get into that on the call here, but I think for your purposes and for others, I mean, it’s a $0.06 impact of those two things this quarter and probably reasonable to use those runrate when you normalize that out. I mean, that’s how you should look at everybody’s numbers. It's probably the best I can do today. Michael Van Aelst : All right.

Thanks, Darren.

Darren Myers: Okay. Thanks, Mike.

Operator: Your next question comes from Jim Durran with Barclays. Your line is open.

Jim Durran : Good morning. Galen at the top of the call just talked about the challenging quarter, outside of drug reform and Easter shift. Like, are there any other dynamics in the marketplace that are making life more difficult in the industry?

Sarah Davis: I would say, those are big factors. So we’ve sort of highlighted that we were lapping drug reform for one more quarter based on what was announced for last year. So, and then, we would say, we have a little bit of minimum wage still coming through, that’s impacting us.

But those would be, and then of course, just the ongoing competitive industry, those would be the items in the quarter. Jim Durran : And so, as we look at Q2 now, I think a quarter or two ago, there might have been some limitations, still might be some drug reform incrementality versus last year into Q2 just based on timing and the number of changes introduced . Is that still the case in your mind?

Darren Myers: I think you should think about as normal levels of drug reform now. There is a little bit of timing in everything, we are back to normalish levels. Jim Durran : But we are all obviously very focused on the weakening of retail sales in Canada.

Any changes in consumer spending habits, increased promo focus shift to private label, conventional to Discount?

Sarah Davis: I wouldn’t say so. I wouldn’t say that we are noticing anything significant. There is a shift from market to Discount that’s been going on for quite – a few number of years and it is where the real estate growth is going as well. So, many of the retailers are moving to more discount formats. So that trend is continuing.

But other than that, I wouldn’t say anything. There is a bit of a – we are happy to have a bit of a switchover to control brand items. I don’t know if that’s consumer-driven or whether it was our great marketing. So, I am not sure. There has been a move over to more control label items as well.

Jim Durran : And then, any change in write-off rate on the credit card business?

Darren Myers: No. There is some noise with IFRS 9, but no real changes in the fundamental write-off rates.
Jim Durran : We love IFRS. That’s all my questions today. Thank you.

Darren Myers: Thanks, Jim.

Operator: Your next question comes from the line of Peter Sklar with BMO Capital Markets. Your line is open.
Peter Sklar : You've talked at length now for a number of quarters about your processing and efficiency initiatives and Darren, you've talked about six verticals, but there is still little bit of opaque. Could you maybe call it one or two examples of things you specifically done? And how that's been reflected in savings for the company?

Sarah Davis: Well, I could start, I mean, there is six – I think that Darren has talked about the six core areas which would be the largest expenses in our business.

So, it would be all encompassing across the business in the areas. I can highlight a few that we’ve been rolling out. So, certainly, self-checkouts, I’ve talked about that a lot. We started that rollout. We’ve had it in the food business for a number of years, but we started the rollout in Shoppers in 2016.

We are continuing to roll them out. It’s actually been picked up quite well and we have had increased the penetration. So we were doing two things, rolling more out and increasing the penetration of the use in the stores that have done. And I would say, on the food side of the business, we’ve increased – we changed the technology to make it a little bit more customer-friendly. And we’ve also increased some of the penetration and increased the amount of the self checkouts across our business there.

Another one that we talked about was the fast foods app where basically it’s a shrink initiative where customers can go on to fast foods and they can see food that coming up to being co-dated and they can get good deals on it going to the store and buy the item before for a reduced prices that would be another one. So lots of many, many different initiatives across. So they are just a couple of them that we could highlight.
Peter Sklar : And so, Sarah, when - like there must be hundreds of initiatives that you are doing under the six verticals. So when you – like, with respect to these two initiatives, like the processes that you’ve put in place, you've actually measuring, like, do you have some measure of what the savings and the returns are?

Sarah Davis: Yes, so we probably have 400 initiatives, 20,000 lines of projects that we are actually tracking.

So it is as we said, it’s like a very large project for the company and yes, we are basically ranking which projects are going to do based on the returns. Another good example is the electronic self-label. So we see that one worked out to be better than we expected and that’s basically changing the label from being paper labels to being electronic. It reduces the amount of labor in the stores focused on sort of a non-value add job in the sense of putting up labels, separating them all, and so, we’ve been able to put some of those in. We’ve highlighted a few in Q1 and that we are starting a bigger rollout in that one as well.

So, yes, lots of initiatives, lots of tracking

Galen Weston: And the initiatives are both capital nature and non-capital. So some are just process improvements, but each one is being tracked and where there is capital investments, the IRRs reviewed and they are very healthy IRRs. We are quite pleased with where we are at. Peter Sklar : And who in the company is the steward of all these initiatives? Is that you, Darren, or like…?

Sarah Davis: I would say, it’s a combination. I would say, ultimately, I am and then, Darren, of course would be part of it.

But every management board member owns a different initiative. So, all of our management board in our operating businesses would be the sponsor of a specific initiative across the divisions. So if it’s a shrink initiative, there is one management board member who is responsible for shrink and that shrink is tracked in Shoppers and in both due diligence with one accountable exec. And all of the process and efficiency initiatives have been budgeted into the plans as well. So, everybody knows what they are driving towards.

Peter Sklar : Okay. Thanks for your comments.

Operator: Your next question comes from Vishal Shreedhar with National Bank. Your line is open.
Vishal Shreedhar : Hi, thanks for taking my questions.

Are these process efficiencies, are they more than SG&A item or gross margin or is it mixed?

Sarah Davis: It’s mostly SG&A, but shrink goes up in gross margin. And there is some supply chain initiatives that would be a combination of both SG&A and gross margins. Vishal Shreedhar : Okay. So given that food gross margins were flat year-over-year and you've increased promo effectiveness, would that suggest that on average, Loblaw is a little bit more aggressive on pricing than they were part a year ago?

Sarah Davis: I mean that's what the math would show. So, I mean, based on what you're saying, yes, that would be it.

It's always hard to exactly know. But yes, we feel like our pricing is in a very good position. Vishal Shreedhar : Okay. And I just want to make sure I have the definitions correct, but in food, if we add basket growth, plus traffic growth. Does that roughly equal same-store sales?

Galen Weston: Yes.

Vishal Shreedhar : Okay. And the internal inflation that you use, is that LPI, the one you gave us now?

Sarah Davis: Yes, it is. It’s not – sorry, I was just going to say, it’s not a perfect measure, but it is what we’ve been using.
Vishal Shreedhar : Okay. So just for our internal, so we can get our bearings straight.

If I were to – how would LPI compare to your average ticket price a year-over-year? Maybe, you can't give us numbers, but you can give us which one is stronger or weaker?

Galen Weston: But we’ve seen improvement in our mix. So when you look at ticket price at all, the mix is going to be very important factor. And so that would be higher, I’ll tell you it’s higher and what we are seeing with LPI. LPI is an item-to-item comparison similar to what CPI would be. Vishal Shreedhar : Okay, so…

Galen Weston: As we are more effective on the promo effectiveness and we change the mix, you tend to see a healthier basket.

Vishal Shreedhar : Okay, so, LPI is higher than your average ticket price comparison year-over-year?

Galen Weston: No, LPI would be kind of lower than the average ticket price. Vishal Shreedhar : Okay. Got it. Got it. Okay, okay.

And so, okay, I think I have the story straight. But in terms of investors trying to understand, obviously, you have many efficiency initiatives going and it seems like a very big focus at Loblaw and if we want to – and you are investing as well, but you are not giving us the magnitude of the investment. So we don't know. So how would an investor be able to tell if these efficiency initiatives are successful? What metrics would we look at given that we don't know – we don’t know the two numbers?

Galen Weston: Well, I think ultimately, you should look to see continued SG&A performance, because, we as I said it’s a balancing act. We have to balance it all is what we are doing.

We are investing, but we need to find the process efficiencies as you saw, our SG&A go up to a large amount, you would be coming back and as investors are challenging us as to why that would be unless we have massive amounts of revenue growth with that. But that’s not the plan yet. The plan is to keep things stable trading and to deliver the financial framework over the long-term and that’s what we should be justified. Vishal Shreedhar : Okay. So, you mentioned the financial framework, so, the way I understood it in the past and I understand 2018 was a bit of outlier year.

Is that EPS without the drivers ultimately something 8% plus kind of thing, is that what we should expect for 2019, EPS?

Galen Weston: For the long-term, that’s what we are driving forward. As we said before, we can’t give guidance for 2019. But I will preface that it’s a year that we are investing more heavily. I’ll leave it to everybody to put their number where they would like to put it. Vishal Shreedhar : Oh, okay.

So that financial framework, that's more of a long-term measure and it may or may not apply to 2019?

Galen Weston: Yes, that’s a long-term framework.
Vishal Shreedhar : Thank you.

Operator: Your next question comes from Keith Howlett with Desjardins Securities. Your line is open.
Keith Howlett : You said some questions on the Discount business.

Firstly, I was wondering about the consumer take up on the pilot Click and Collects at I think, both at Maxi and No Frills.

Sarah Davis: Yes, I mean, it’s still fairly early, because those would have been the ones that we’ve rolled out later. So – but, it’s got some positive pick up. I think people are quite excited about it. It’s a little bit different.

It’s a little bit more self-serve where actually the picking is done for you but you actually have to go into the store to do your pick up and you pay, it’s not brought out to your car. So, it’s a little bit of a different model. But I think so far, the take up has been good. And people- we are still working through the feedback that we are getting to determine is that’s the way we are going to continue to go for that – for the Discount model. Keith Howlett : And I was wondering in Western Canada where you’ve got a combination of mostly Real Canadian Superstore and No Frills and I think the loyalty is applicable everywhere.

Whether you see that it’s the same customer with different shopping occasions going to one or the other or if it’s sort of a different segment that prefers to go to No Frills versus Real Canadian Superstore.

Sarah Davis: Yes, that’s a good question. I would say, across our business and what we can see in the loyalty data that we have is that many of our customers sought multiple formats depending on the occasion. And they also, sometimes are in-store shoppers and sometimes they are digital shoppers. And so, definitely, we see, so, the same would be in Western Canada.

I think fundamentally, it is a different person. Generally, people love to use to go to superstore or and maybe do an in-sale with the No Frills or it’s just a quick trip where you are going in for a few items or and people who are No Frills shoppers are pretty dedicated to No Frills. But there is cross shop across all of our banners. And the same thing happens in Western Canada. Keith Howlett : And then, I was wondering about the Digital Media pilot.

I don’t know how much you can share about the structure of that experiment. But have you sort of made an offer to some PC Optimum users to opt into this program? Or how is this done?

Sarah Davis: Yes, so basically, what it would be, so let’s use – I don’t know, if we could pick any vendor, but we could pick, maybe we will pick QUO, so one of our own brands in beauty. And basically the idea would be that you would target people who are likely to, who have purchased a QUO product or maybe another product and basically the idea would be that these people are selected to be part of that that they can opt out of the program if they choose to. They don’t get anymore incremental advertising than what they would get before. But what they do get is the advertising that’s more relevant to what they are interested in.

And so, we are not – there is no additional advertising. It’s just a change in the type of advertising they see. And they can actually earn points on – by looking at the ads as well. So, it’s an interesting thing. We think it’s very customer-friendly as well.

Keith Howlett : And this is applied to their normal web browsing activity, that sort of, you are there with them and you feed them ads or something on the website?

Sarah Davis: That’s right. Yes, no, it would be part of their regular web browsing. But they would get whether they are on different properties, like any of them where they would be getting different ads that come to them. This just allows their ads to be more relevant. Keith Howlett : Excellent.

Thank you.

Operator: Your next question comes from Irene Nattel with RBC Capital Markets. Your line is open.

Irene Nattel: On the PC Express piece, so, as you know, I recognize we are in the early stages of the maturation process. Above and beyond, sort of the desire to have shorter windows, what are other kind of feedback are you giving around what would drive sort of higher uptake? And are you continuing to see the uptake build? And what would you be at right now, in terms of an annual runrate on sales?

Sarah Davis: I don’t know if I am giving you the annual runrate.

So you know that last year on our Digital properties, we were $500 million. So definitely looking – and it was a ramp year. So at some point we will give you how we did. In 2019, we are not giving out what we are expecting quite yet. But we would say that we are seeing comp store positives on the – across the properties.

So, we have a combination. We are seeing significant growth, partially because we rolled out later in the year, last year and partially because we are seeing comp growth. So we are seeing an increase across our properties. I would say, what do we need to do. I would say, we haven’t been marketing it very much as we work through some of the things trying to figure out exactly what the customers like.

We’ve been piloting a lot of different things. Different times and different time slots. So we haven’t been out marketing. So I would say, definitely some marketing would probably help and I would say, just continuing to improve the offer making sure that we don’t – didn’t want to market as we rolled out, because we wanted to make sure we had a good service before we market it as well. So, definitely focusing on improving the lead times and things like that and the product substitutions would be another area.

So definitely, focused on that now. But good uptake and people who like it, really, really like it. So we have very good returns that where people will continue to use at once they are on.

Irene Nattel: Anecdotally, I’ve heard kind of mixed feedback depending sort of a store-by-store basis in terms of the experience. Is that’s something that you are tracking? And sort of have you identified the stores who do it really, really well? What they do differently?

Sarah Davis: Yes.

I think that’s probably true for stores in general that some stores perform better and are more customer-centric than others. And we definitely have the data. So we do track our customer satisfaction scores by stores and if we see a store that isn’t performing as well as we would like, we would put measures in place to improve it.

Irene Nattel: That’s great. Thank you.

Operator: There are no further questions at this time. I will now turn the call back over to the presenters.

Roy MacDonald: Thanks everybody for your time this morning. I am more than happy to address your questions, follow-up questions offline. And please mark your calendars for July 21, when we'll be back online to discuss our Q2 results.

Have a great day.

Operator: This concludes today's conference call. You may now disconnect.