Executives: Roy MacDonald - Vice President, Investor Relations Richard Dufresne - Chief Financial Officer Galen Weston - Chairman and Chief Executive

Officer
Analysts: Jim Durran - Barclays Capital Patricia Baker - Scotia Capital Equity Tal Woolley - Eight Capital Michael Van Aelst - TD Securities Kenric Tyghe - Raymond James Irene Nattel - RBC Capital Markets Vishal Shreedhar - National Bank Financial Mark Petrie - CIBC World Markets Inc. Peter Sklar - BMO Capital Markets Keith Howlett - Desjardins Securities

Inc
Operator: Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to Loblaw Companies Limited Second 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. Mr. Roy MacDonald, you may begin your conference.

Roy MacDonald: Great.

Thank you, Sharon. Good morning, everybody. Welcome to the Loblaw Companies Limited second quarter 2017 results call. I’m joined in the room here by Galen Weston, Chairman and Chief Executive Officer; and Richard Dufresne, 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 the financial performance in 2017 and in 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. 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 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 a reconciliation of each of these measures to the most directly comparable GAAP financial measure. And with that, I will turn the call over to Richard.

Richard Dufresne: Thank you, Roy, and good morning, everyone. In the second quarter, we continue to deliver against our financial framework. We grew revenue by 3.2% and adjusted EBITDA by 6.6%.

Adjusted net earnings grew 8% and our EPS grew by 9.9% compared to last year. In food retail, the market remains highly competitive and the deflationary environment, which began in the fourth quarter of last year continued in 2Q. Against this backdrop, we delivered same-store sales growth of 1.2%, or flat if we exclude gas and the positive impact of Easter. Our internal food price index declined, but was marginally higher than the CPI deflation of 1.4%. Positive trends for same-store sales in drug retail continued in Q2.

Excluding the impact of Easter, drug retail same-store sales grew by 2.9%, front store same-store sales grew by 2.3%, and pharmacy same-store sales grew 3.5%. Adjusted retail gross margin, excluding the impact of consolidating franchises improved by 30 basis point to 26.7%, driven by shrink improvements in food, which were partially offset by lower drug margins. SG&A as a percentage of sales, excluding the consolidation of franchises was 18.1% worse by 10 basis points. Continued deflation in our revenue along with one-time items negatively affected SG&A rate in the quarter. Our consolidated adjusted EBITDA was $985 million, an increase of $61 million, or 6.6%, and EBITDA margin stood at 8.9%, an increase of 30 basis points from the same period in 2016.

Free cash flow was $547 million in the quarter, and we continue to return capital to shareholders buying back 3.4 million shares at a total cost of $260 million. Looking ahead, our 2017 outlook remains unchanged. That said, in 2018, we expect incremental pressure on our business model. We estimate the impact on our labor expenses from recently announced increases in minimum wage rates to be approximately $190 million. Additionally, incremental healthcare reform will impact our pharmacy business.

This means that going forward we need to increase our focus on cost reductions and accelerate our plans to realize efficiencies. At this point, I’ll turn over the call to Galen.

Galen Weston: Thank you, Richard, and good morning, everyone. I’m pleased with our performance in the second quarter. As Richard has highlighted, we delivered another set of solid financial results.

Competition remained intense as the grocery industry marked the third consecutive quarter of deflation. And in the quarter, traffic declined and basket grew in our food business, as we benefited from favorable mix. We continue to leverage our data and analytics to drive our business forward, delivering superior value through targeted one-to-one offers to our loyalty customers. Overall, we were satisfied with our tonnage performance in Q2. Our drug retail business also performed well during the quarter.

Adjusted for Easter, total drug same-store sales increased 2.9%. In pharmacy, prescription account grew 4.4%, offsetting a 1.1% decline in the average script value. Front store growth was led by a strong quarter in food and OTC. I would like to follow-up on Richard’s comments regarding recent changes in the market. Every year, we work hard to keep our prices low by improving processes and driving efficiencies within our cost structure.

Every year, we face increased competitive intensity, particularly in our pharmacy business, pressures also from government to lower costs. As we look forward to 2018, we expect significant incremental regulatory headwinds from both accelerating healthcare reform and aggressive increases in minimum wage. As many of you know, in recent weeks, the Quebec government announced a further reduction in generic drug pricing in the province. This will put increased pressure on our pharmacy business model, both in Quebec and across the country. In Ontario and Alberta, the recently announced changes to the minimum wage rates, which we expect to come into effect in 2018, are the most significant in recent memory, and will have a meaningful impact on the operating costs for all our retail businesses.

These recent developments create a gap for 2018 that we must work hard to close. We are in the midst of our 2018 planning process and are looking carefully at every aspect of our cost base to find ways to accelerate efficiencies across our business. This means speeding up what we already have planned, such as using analytics to reduce inventory and increase our in-stock performance, using predictive tools to improve promotional profitability, turning heavily manual invoice processes into digital processes, and rolling out custom designed self checkout to help efficiently manage peak periods in our Shoppers Drug Mart stores and finding new sources of cost reduction. We have a lot of work ahead of us, as we are still assessing the extent to which we can mitigate these headwinds. That said, we remain confident in our strategic plan and committed to our long-term financial model.

We are focused on delivering the best value to our customers and we’ll continue to invest for the future. One of the more topical of the investments is e-commerce. Since we introduced a click and collect two years ago, I’m pleased to report that it has become the largest online grocery offering in Canada, with the best mobile operating and we have delivered more than 1 million grocery orders to our customers’ cars. Today, we offer Click & Collect in a 140 of our busiest stores by year-end that number will be over 200. We have a strong and comprehensive e-commerce strategy in place.

To-date, this multi-faceted plan includes delivering omni-channel experiences for customers in apparel, prestige beauty, online pharmacy and groceries. We will continue to update you as we invest in these promising online businesses. Operator, please open the call for questions.

Operator: [Operator Instructions] Your first question comes from Jim Durran from Barclays. Your line is open.

Jim Durran: Good morning. I just want to follow on Galen’s comments about the e-commerce. Can you give us any idea as to what percent of revenue your e-com platform currently would represent? How many of the Click & Collect enabled stores, I assume you’re going to some of your bigger volume stores, if you could give us any sort of size of, how consumers are now exposed to e-com from a positive benefit standpoint?

Galen Weston: Yes. So is the question how much approximate national coverage we have, or is the question, what the sort of expected penetration of sales in the individual stores?

Jim Durran: Well, I’ll take both, but I’ll start off with, if 200 stores by year-end, I assume as a percent of revenue is far greater than it would be as a percent of store count?

Galen Weston: Yes, I think that’s fair to say. We have – they’re all at various levels of maturity as well.

So the ones that have been open longer would have higher penetrations of the existing sales base. We have good clear numbers on a portion of that, which is actually incremental, which is very promising. And then in terms of geographic distribution, we’re now covering all geographies. Although, as you can imagine where we have a higher level of density in some of the major markets as opposed to others. I think at this stage, that’s probably all I can give you.

Jim Durran: Okay. So just shifting gears then Home Delivery, is there any thought about moving to a Home Delivery model incrementally to Click & Collect? And if so, when might we see that in the market?

Galen Weston: Yes. So look, we’ve said for long time that we believe that click-and-collect has a very, very high level of customer appeal. We see that in markets that are more mature than Canada places like France, the increase of click-and-collect propositions in countries like the UK. However, there is a delivery model that you see in many of these countries as well.

And at this stage, we still feel that click-and-collect should be the predominant strategic focus for our business. But our job is to meet customer’s needs, and customers tell us what they want. And to the extent that delivery needs to become part of that, we are certainly open to considering it. And at this stage won’t have any announcement to make about that.

Jim Durran: So as we think of fiscal 2018, is e-commerce another potential drag incrementally to the minimum wage and drug reform, or how you’re viewing its deployment in 2018?

Galen Weston: Yes.

It’s a little too early, I think, to comment on what the outlook for 2018, as we said in our press release. We’re working hard to overcome specific cost inflation issues things that weren’t first to say in our long-term plan. We’ve also been pretty clear that we intend to make investments in the future. We have our strategic initiatives. And at this point, we don’t see any reason to slowdown our planned investments in those areas.

Jim Durran: Okay. And on Quebec drug reform, I assume you’re in the same boat as everybody else. But you know, you’re not going to have tendering, but you don’t really know exactly how the metrics are going to work on the eventual 40% drop in generic drug price cost?

Galen Weston: You’re saying specifically in Quebec, or you’re asking about the rest of the country?

Jim Durran: Well, specific to Quebec, I mean, I’m assuming that either through the national buying group or other provinces deciding to mimic or adopt what Quebec has done there’s obviously contagion risk. But within Quebec, as you said here today, how far are you knowing exactly how it’s going to be deployed?

Galen Weston: Yes. So that, I mean, as you know, this is very recent news.

So we are processing it and trying to develop our best estimates on what the impact will be and ultimately how those impacts are going to flow through the business. And that clearly, what we need to do inside the pharmacy business and elsewhere to try and mitigate that impact.

Jim Durran: Okay. Thanks, Galen.

Operator: Your next question comes from Patricia Baker from Scotia Bank.

Your line is open.

Patricia Baker: Thank you very much. I have a few questions and thank you very much for sharing with us the impact of the minimum wage in 2018 very useful number to have. But I guess, the most important thing is the work that you’re doing now with respect to coming up with strategies and plans on how you can mitigate that? Would – are you – when you get, I understand that you’re not there yet and you can’t share with us the degree of mitigation, that’s probably the most important number we need to look at right now. When you get that work done, will you be sharing with the street and perhaps providing some sort of guidance of what FY 2018 will look like, or how much you realistically think you can offset in the first year?

Galen Weston: Look, I think to the extent that we try not to give guidance.

We don’t give guidance, as you know. But later on in the year, Q3 or more likely in Q4, we’ll share what we can if there’s any kind of impact on our traditional outlook. As we said, our focus is to close the gap and to do everything that we can to do that. And I think what we’ve – what we are flagging today is that these are big numbers. And so we are going to have to move outside the realm of our sort of expected plan to close the gap and we’re going to work really hard to do it.

Patricia Baker: No, I certainly understand that, and I’m sorry to be labor this, but I really want to get out. I really want to understand exactly what your messaging is here. And so initially, when I listen to you 190 certainly a big number than we’ve got the pharmacy as well. And I thought you were sort of saying, you do everything. But it looks like it’s a pretty big ask to offset all of that in a 12-month period.

But now just listening to what you just said to me about closing the gap, you’re sort of indicating that, you’ve got a confidence that you’re going to be able to come up with a plan, where you can, you will be able to cover off all of that. So I just want to make sure what I’m interpreting and be directionally more accurate?

Galen Weston: Yes. So to be, I think, very clear, we are not providing an outlook today on 2018. What we are doing is, we are flagging a significant set of financial headwinds and the organization is mobilizing all of its resources to see whether or not you can close that gap. At this point, we don’t know the answer.

Patricia Baker: Okay.

Galen Weston: And when we have more clarity on the subject then we will make sure that we include it in our disclosure.

Patricia Baker: Okay. Really appreciate that. Now completely different, everybody’s talking about online.

We’re focused on minimum wage or focused on drug reform. But one of the other big things that’s happened and is a topic when we talk to investors, it is hard discount. And I realize that that’s in no way shape or form a near-term headwind for the Canadian grocery industry. But I do – it reminded me that a few years ago, I can’t remember how long ago, you guys were testing a concept that was looking at the viability of a real hard discount model in Canada and that was the box. And I think you’re out of that business now.

Would you be willing to share with us kind of what you learned? What you were testing? What worked? What didn’t work? Is there any insight we can get from that exercise?

Galen Weston: Well, I’ll try and give you some high-level sort of perspective. So we learned a lot first of all and it was a very good exercise. Clearly, we concluded that’s sort of developing our own sort of small hard discount box was not a strategy we wanted to pursue. It’s fair to conclude on that basis that we have a lot of confidence in our existing hard discount formats. We think they bring an enormous amount to bear and that they are powerful assets that with the right strategic tactical and operational improvements are the place that we are going to fight any eventual arrival of the hard – the German hard discounters.

I’m proud to say that as of – I think it was last week, the Maxi business was recognized as the favorite supermarket in the province of Quebec, which is something that we are very proud of. And I think is an indication of how strong and how resonant certainly our hard discount formats are across the country.

Patricia Baker: Thank you very much, Galen.

Operator: Your next question comes from Tal Woolley from Eight Capital. Your line is open.

Tal Woolley: Hey, good morning. I was just wondering, Galen, if we look back to the entry of Walmart slightly over a decade ago, and if you could compare the size of sort of the competitive threat coming from future omni-channel entrants. Do you see the size and the risks of the competitive environment that’s similar, greater, or lesser? And then maybe also the tremendous amount of work Loblaw did to get prepared to reorient the business around discount retail? How do you see sort of the quantum of work that needs to be done to reorient the business around online. So just, yes, comparing sort of size of the threat and the amount of work internally that you think compared to that challenge just over a decade ago?

Galen Weston: Well, that’s a big, big question. Typically, I don’t think it’s our place to comment on sort of the strategies of other retailers, or other competitors.

We certainly have in our own analysis strong comparisons between the – this very different and very compelling threat that omni-channel and particularly Amazon represents to Canada. We did the same level of assessment, as you correctly point out, when Walmart was arriving in the Canadian market, as many as 15 years ago. One of the advantages that we have is, we can see with sort of five or six years of advanced notice about how certain categories or how certain formats compete and fair against these new models in the United States. That gives us an extra level of intelligence on exactly what the most effective strategies need to be when these new entrants come into the market. You know there have been lots of speculation about retailers of one sort or another over the years sort of taking over the world that hasn’t happened yet and that’s not because these formats or these concepts are not incredibly powerful and incredibly innovative, it’s because the retailers who are facing a threat respond, they make strategic changes, they take costs out of the business, they change the way that they meet customer demand and you should expect us to do similar things.

And as I said in my comments, we have a thoughtful and robust multi-faceted e-commerce strategy. We feel confident about that strategy and its sort of potential for us as a business, but we are still in the very early stages of it and it’s going to take years for these things to play out.

Tal Woolley: Okay and just one follow-up. Following the rollout of SAP across the organization, you discussed in your opening commentary about addressing an Omni-channel offering across all of your retail platforms, did having all of that in place make that process less daunting than maybe it would’ve been in the past?

Galen Weston: Yes, so even in the face of these 2018 costs, the fact that SAP is now fully embedded across the entire breadth of the non-Shoppers Drug Mart parts of the business, now the tools, the processes, the things that we can layer on to that, get far, far, far more powerful. A great example of that will launch a new promotional management tool in the later stages of this year, we expect that to significantly improve the accuracy and the efficiency of the way we bring promotions to market across the business, that simply would not have been possible had we not successfully deployed an embedded SAP.

Tal Woolley: Okay, great. Thank you very much.

Operator: Next question comes from Michael Van Aelst from TD Securities. Your line is open. Michael

Van Aelst: Thank you.

Looking at the inflation trends, you know the crude price has been moving higher since I think it’s October of last year. It looks like deflation could disappear in the next few months, but now are seeing the strong Canadian dollars as well start to have an influence, so can you – I guess, how do you see inflation trending, I know last quarter you kind of said you expect inflation this year, but how do you see it trending at this stage and what do you see the impact of the stronger Canadian dollar being?

Galen Weston: Yes, so I think to be clear about my comment in the last quarter, what I said was I did not see a return to sort of high inflation, but there has definitely been a moderating force and that’s really the function of us lapping prior years of – prior quarters of aggressive deflation. Circumstances are changing, the Canadian dollar increase tends to have a deflationary effect. I wouldn’t say that we were anticipating that incremental cost coming at retail that historically has had an inflationary effect. And then you have competitive threats that the industry is anticipating which was likely to have a deflationary effect.

So, at this point I continue to be of the view uncommitted and I think as the management team, we’re committed to being as competitive as necessary to maintain our position and as far as predicting where inflation is going to go, that right now is a bit of mug’s game. Michael

Van Aelst: Okay, can you give us some color on the one-time items in the SG&A line?

Richard Dufresne: Well, Michael, it’s like a few legal things that we faced in the quarter and so that’s why we called it one time because that we don’t expect them to be recurring. Michael

Van Aelst: Okay and so they didn’t slip into Q3 at all?

Richard Dufresne: No. Michael

Van Aelst: And then the financial services side of the business, you don’t talk about that much, but the revenues were up 5% but margins got it, can you explain what’s going on there and what we should be expecting from that division?

Richard Dufresne: A little bit more – we’re pushing a little bit more high-end cards which essentially come with higher loyalty costs, so that’s effectively what we see in their financial services business in the quarter and that’s what we expect for the next few quarters. Michael

Van Aelst: Are you expecting the higher revenues hidden in here, but significant margin contraction to stay in place?

Richard Dufresne: Some margin contraction, yes.

Michael

Van Aelst: Yes, alright, thank you.

Operator: Your next question comes from Kenric Tyghe from Raymond James, your line is open.

Kenric Tyghe: Thank you, Good morning. Galen, could you speak to your food deployment in Shoppers and perhaps more specifically to some of the key learnings from that food deployment and how that might impact your or lead to any refinement of that rollout going forward?

Galen Weston: Absolutely, no change from our comments in Q1, so we continue to be very, very, very pleased with the performance of the fresh food deployments in the urban markets. We continue to work in some of the suburban pilot areas to determine exactly what the right suburban model is going to be, and as a vote of confidence, in the urban proposition we opened our first store at the end of the first quarter in Vancouver and we continue to open fresh food enhancements in Shoppers Drug Mart in Vancouver.

Kenric Tyghe: Galen, thank you and then a follow-up on that is, as part of those – the confidence around that offering reflects the cross-pollination of optimum and PC classes, is that how you are getting this offering as right as you’re getting and then I – your initiatives with respect to loyalty sort of moving ahead on the backend as expected?

Galen Weston: Yes, some loyalty analytics and using that information to make better merchandising decisions both in food, drug, front of door, these are all – this is a major priority for Sarah and for the organization and we are seeing promising results pretty much across the board and we are seeing promising results in food in Shoppers Drug Mart, fresh food in Shoppers Drug Mart. I think what’s at the heart of the success is that people are looking for a top-up fresh food shop that is very close in proximity to where they live and so high density urban markets it’s a natural and instead of customers coming in to by aggressively promoted Pepsi or milk, customers are coming in with more frequency to pick up fill in fresh baskets that has a very positive effect on margin and an equally positive effect on sales.

Kenric Tyghe: And then just a final one from for me Galen, how is your of loyalty and loyalty analytics impacting your private label business on your – on presidents choice and the like, is it proving effective in terms of private-label penetration as well?

Galen Weston: Well, certainly it’s helping us make smarter decisions, is it the biggest driver of our control brand’s success? I don’t know the answer to that, but what I can say is that our control brand performance is something we’re very pleased with, it continues to grow both in Shoppers Drug Mart and in Loblaw led by presidents choice but no name is – yes, is also very strong so you’ll see us continue to invest in that area and using more customer specific data to make better decisions will be a part of that plan.

Kenric Tyghe: Great, thank you I’ll leave it there.

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

Irene Nattel: Thanks and Good morning. Could we just spend a couple of minutes please talking about competitive intensity, competitive activity and when in the past, Galen, you alluded to this, we’ve seen period of cost pressure, how has that typically played through in terms of offer pricing and sort of what gets absorbed versus what gets passed on?

Galen Weston: Oh goodness, I don’t think I’m expert enough on history to comment much about it. I think the way to try and analyze this is to look at today and to try and understand what the incremental competitive pressures are ultimately today and what they are likely to be in the short-term or you know, let’s say the short to medium-term, that’s the way we’re looking at it. And I think meaningful cost inflation that translates into meaningful price inflation is not a good thing for the long-term health of the industry, so certainly from our perspective, our priority is to be as competitive as possible both in today’s market and in anticipation of the threats that we see in the future and we will do everything we can to maintain that and to try and deliver against that financial plan.

Irene Nattel: That’s very helpful.

Can you talk a little bit about what you saw in Q2 around consumer behavior, discount versus conventional, where the traffic trends are? And also, you mentioned private label. What’s been the response of consumers to some of the PC organics in the discount boxes, in project?

Galen Weston: Yes. So probably the starting point is no meaningful change in consumer trends between Q1 and Q2, and there hasn’t been a radical change for the last couple of quarters. There’s still an enormous appetite for better value and where we invest in price intelligently. In our market divisions, we see a good response and where we invest intelligently in our discount business.

We see a very good response and also the building of a profitable business. What we’re trying to get away from is aggressive investments in the discount business that are essentially buying sales or buying share and that don’t actually build your business over the long-term. Our access to data is really helping us make better decisions. You saw that in Q2 in a way that we dialed back some aggressive promotional programs in the discount division in Q2 from last year. So, I think it’s the same.

Discount is a strong area for growth. And as you put organic products in the discount business, we see a pretty strong response. So, we feel pretty good about our discount business today, and we think we’re bringing product offerings to market that our other discount competitors struggle to match.

Irene Nattel: That’s very helpful. And just if you could provide a little bit of color, again.

You did mention – you mentioned food in OTC at Shoppers and front of store. Can you talk a little bit about beauty and anything else, but that service stuck out in the quarter in terms of trends?

Galen Weston: So, again, I think a steady quarter for all aspects of Shoppers Drug Mart. But notable would be this appalling cool spring and this very disappointing weather in the summer. I’m learning that the Shoppers Drug Mart business in some respects may be more impacted by some of these things, so allergy season, that’s a big part of the Shoppers’ OTC business. Sunscreen, that’s a huge part of the seasonal Shoppers business.

Both of those have traded in a very unusual fashion relative to prior years.

Irene Nattel: And just finally, one last one. One is from the subject of poor weather. I’m assuming that we’re seeing lower sales of barbecue-related items, as we go even in early Q3?

Galen Weston: Yes, that’s another garden, on the food side garden centers, barbecue, seasonal GM, these are all places that have struggled.

Irene Nattel: That’s great.

Thank you.

Operator: Your next question comes from Vishal Shreedhar from NBF. Your line is open.

Vishal Shreedhar: Hi, thanks for taking my questions. I’m going to jump back to one of the questions that’s been asked before, maybe see if you can give me a little bit more color.

Investors have come to think about Loblaw delivering on a growth framework, that’s a credit to you and your team over the years changing the perception on Loblaw that in fact values the expectations or requirements of your minority shareholders. And me, so I could be wrong. I think of this framework something like a low single-digit top line, some operating leverage and that translates something like low double-digit EPS, that’s kind of my thinking about it. And I know you’ve highlighted these 2018 challenges. So that to me is a partial 2018 outlook, I understand, you’re still looking into it.

But I guess, my question is like this, do you perceive these challenges are so significant that that framework or that investor promise maybe isn’t the right word, that that could be impaired, or are we not there yet?

Galen Weston: Well, certainly in our comments, we don’t believe we’re there yet. And if that were to change, we would certainly let you know.

Vishal Shreedhar: Okay, wonderful. Loblaw’s balance sheet, steadily improving cash flow continues to build, maybe you can talk about your view on how that SC [ph] deal has progressed when you made it versus where you are today, if you’re pleased with that or not, and Loblaw’s appetite for future acquisitions?

Richard Dufresne: Sorry, Vishal, I’m not sure I got the question.

Vishal Shreedhar: Sure.

So just talking about appetite for future acquisitions?

Richard Dufresne: Our focus remains like it’s been a few years since we completed the Shoppers’ acquisition, but we still have lots of work ahead of u, and that remains our focus. We’ve got a series of strategic initiatives that are going to be key to driving growth in the business and that remains our focus as of today.

Vishal Shreedhar: Okay, wonderful. That’s it for me, guys. Thanks.

Operator: Your next question comes from Mark Petrie from CIBC. Your line is open.

Mark Petrie: Hey, good morning. I just want to follow-up on a few things. One, I guess, just on the competitive environment comments, have you observed any change in any sort of specific geography or channel be it discount or conventional?

Galen Weston: No, but we are competitively positioned across really all three of our big retail divisions.

It’s always true that there are ebbs and flows depending on the geography, but nothing that I would consider significant in the context of our broader strategy.

Mark Petrie: Okay, thanks. And just circling back on click-and-collect, could you just give us a bit of an update in terms of kind of the trends that you’re seeing in that business be it bigger basket and sort of regular price – promotional price mix? And then, I guess, in your mature stores, would you say that those are now profitable on that click-and-collect business?

Galen Weston: Yes. So we’re, I think, not ready to comment on our view of the financial outlook for click-and-collect. We consider a very promising channel and we look at the investments that we make in click-and-collect with a rigorous sort of return on investment framework.

And we also look at it through the lens of what is it that customers are interested in and what are they going to demand from us as a retailer in the future, very simply on sort of the top line how is the customer shopping. So typically, they have a larger basket. This is in part driven by the fact that they are consumers typically who have bigger baskets. But we are also seeing an incremental shop. These are people who are motivated by convenience and if you can serve up products that meet those convenience needs intelligently, they are prone to adding incremental items to the basket.

Mark Petrie: Okay, thanks. And then just back to sort of your opening comments around intensifying focus on cost reductions and you outlined some of the tactics and plans that you have in place or will be pursuing in order to sort of address that. But I wonder if you could just sort of comment in broader terms about the sort of culture of cost containment within Loblaw and Shoppers? and where that stands today versus maybe a few years ago? And if you feel like that is – that’s been part of the change, or if that needs to continue to evolve?

Galen Weston: I would say that we are significantly ahead of where we were three years ago. And I would say that, as a management team, we believe we have some distance still to travel. And there is opportunity, as the culture gets more and more increasingly cost-focused, we will get that increasingly more cost opportunity.

Mark Petrie: And is that simply just making it part of sort of the everyday rigor of how you do business, or how do you actually go about that sort of cultural change?

Galen Weston: It’s a combination of things. It’s toned from the top. It’s how you manage the smallest expenses, how you make decisions about the largest expenses, ultimately choosing what to prioritize strategically and what to leave for another time or another year. There is no silver bullet, I think to becoming a cost-oriented culture. I think, our business is complex.

It will always be complex. So the techniques that we use and need to use more of to improve our cost base are not the same techniques that a mano-format hard discount concept would use. Technology, process improvements, these are the kinds of things that we need to focus on as opposed to things like having to steal your pencils from hotel, because there are none available in the office. That’s not the culture that we aspire to. There are other ways in our judgment to become a more cost-oriented business.

Mark Petrie: Okay. Thank you. And then one other question with – just with regards to Sanis within the Shoppers’ business, could you just give us a sense of penetration of Sanis products within the generic business overall? And then broadly speaking, is that business relatively evenly spread in terms of geography across the country, are you more developed in certain provinces or regions?

Galen Weston: Well, let me get back to you on the specific number of Sanis. Suffice to say is a high penetration and very important part of our business model when it comes to the pharmacy business and we think that there’s opportunity. It wouldn’t be appropriate for me to comment.

There are different regulatory environments in each of the provinces that have an impact on what the penetration is by geography and it wouldn’t be appropriate to comment on where we are stronger versus not.

Mark Petrie: Okay. Thank you very much.

Operator: Your next question comes from Peter Sklar from BMO Capital Markets. Your line is open.

Peter Sklar: Yes, thanks. Just a question on Shoppers for Drug Mart. I know you don’t provide segmented reporting below the same-store sales line. But I’m just wondering in this environment of ongoing drug reform, as I recall before you acquired the company, the operating profits of the company were kind of flat to kind of flattish in this kind of environment of ongoing drug reform. Are you prepared to say like qualitatively is that how Shoppers Drug Mart continues to perform in this kind of environment, because drug reform halo just seems to be never ending.

So I’m wondering if you could comment qualitatively at least?

Richard Dufresne: Well, what we’ve said, Peter, is that, since we’ve acquired Shoppers, we’ve actually been able to grow earnings and more than offset the impact of drug reform.

Peter Sklar: Thank you. And the other question I had just on shrink. It seems quarter-after-quarter now recording that you’re making improvements on shrink. And I’m just wondering what’s underlying that is the implementation of the SAP facilitating that and are there other factors at play?

Richard Dufresne: Yes, it’s essentially SAP, which is providing us much better information about shrink.

And so we’re now able to attack it from different points and it is getting better. So from a rate perspective, we have lowered shrink since last year markedly and we still see there’s an opportunity for the future.

Peter Sklar: Okay. Thank you.

Operator: Your next question comes from Patricia Baker from Scotia Bank.

Your line is open.

Patricia Baker: One follow-up on the good information you provided in answer, I think to Mark’s question on click-and-collect and you talked about the better basket and the larger basket and incremental shop. Am I right in assuming that the mix in that basket is also favorable?

Galen Weston: Yes.

Patricia Baker: Okay. And you also talked about in the quarter mix being a factor.

Can you talk specifically about what specific items are driving the better mix overall in the business?

Galen Weston: I won’t go through the entire list, I’d say, it’s broad base, again part of more intelligent merchandising plans focused specifically on trying to build the basket and to do it in a way that improves the mix as opposed to sort of dilutes the profitability. But one specific example, it’s been a real focus both of the market division and of the discount division is club back. And as you can imagine, club back increases the average range. It allows us to deliver the customer superior value. And we do see a very, very positive take up from our customers on these kinds of specific offers.

We over index in club back in control brand, which contributes to growing our control brand penetration. So these would be the kinds of things that the teams are working on.

Patricia Baker: Okay. That’s useful. It sounds, Galen, like you’ve also got a better handle on being able to measure the efficacy of different programs whether your ad effectiveness and what not seems to be here as well?

Galen Weston: Absolutely.

Patricia Baker: Okay. And then forgive me if I missed this, but did you give a number for the impact of the drug reform?

Galen Weston: No.

Patricia Baker: On Canada?

Galen Weston: No. We didn’t.

Patricia Baker: Okay.

Thanks.

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

Irene Nattel: I just have a quick follow-up please. In terms of the proceeds from the sale of the gas as far as, anything you’d like to share or you’re prepared to share with us in terms of potential, let’s say, stepped up NCIB or what your thoughts are there?

Richard Dufresne: No, general corporate purposes, Irene, that you know that if you look at share buyback this year versus last year, we’ve upped the pace a bit.

Irene Nattel: Yes, thank you.

Operator: [Operator Instructions] Your next question comes from Keith Howlett from Desjardins. Your line is open.

Keith Howlett: Yes. I had a question on your, excuse me, your specialty banners like TNT and Fortinos and the movement of I guess multicultural products elsewhere throughout the chain.

I wonder if you guys comment on how those banners are doing it or how that process of broadening the consumer offer is going?

Galen Weston: Yes, absolutely. So TNT has had a banner year. And terrific business really doing an excellent job across the country of meeting the shopping needs of the Asian consumer. and Fortinos has always been a very specific format for through the Hamilton Burlington’s or Brampton area business continues to perform well. And the broader multicultural strategy, which is getting that expertise from those businesses and deploying the products and the promotional strategies elsewhere in the network is something that we are very pleased with as well it’s hard to do it is a key point of differentiation we think for incumbent retailers in Canada and we are very pleased with our own progress on that front.

Keith Howlett: And then just on the online is our meal programs or subscription services meal subscription service is something that you would be studying or looking at or contemplating?

Galen Weston: I’m not quite sure how to answer the question. I don’t want to leave you with the wrong impression. But we look at all of these things, because they are all aspects of how customers think about eating food. And there are so many different models that are being tried that are being tested many of them that are being spun up in different parts of Canada and a whole other raft of them that have been that are being deployed in some cases achieving meaningful scale in the U.S. So we keep our eyes and ears open we look at opportunities to partner in certain cases and to test these concepts.

What I would say is, which ones are going to work, which ones aren’t, is still a long way from being proven. So our strategy is pick one we think that’s the best for us and we’ve commented on click-and-collect in food as being the right channel. But keep our options open to see what other services gain traction and adopt them or partner and deploy them as appropriate.

Keith Howlett: And then just if I could on the drug reform issues. I just had two sort of procedural questions.

One, whether you’ve actually through your Sanis division, or another ways seen the actual agreement between the Minister of Health of Quebec and the generic drug industry, that’s the first question. The second question is, whether you have any superior insight than I do, or than we typically do here on the sell-side on how quickly the rest of the Council or the Federation will reach an agreement with the drug manufacturers?

Galen Weston: So, look, this is very recent news. We have a good proactive relationship with the Quebec government. We have a good proactive relationship with the Council or Federation. But at this point, it would be too early to comment on exactly how it looks for, what we anticipate happening.

Keith Howlett: Great. Thank you very much.

Operator: [Operator Instructions] We do not have any questions at this time. Mr. MacDonald, I will turn the call over to you.

Roy MacDonald: Great. Thank you everybody for your time this morning. As always, if you have any follow-up questions, please give me a shout after the call and mark your calendars for November 15, when we will be discussing our Q3 results. Thank you very much, everybody.

Operator: This concludes today’s conference call.

You may now disconnect.