Executives: Roy MacDonald - Vice President, Investor Relations Galen Weston - Chairman and Chief Executive Officer Sarah Davis - President Darren Myers - Chief Financial

Officer
Analysts: Irene Nattel - RBC Capital Markets Kenric Tyghe - Raymond James Jim Durran - Barclays Mark Petrie - CIBC Patricia Baker - Scotia Bank Michael Van Aelst - TD Securities Jennifer Lynch - BMO Capital Markets Vishal Shreedhar - National Bank Chris Li - Macquarie Keith Howlett - Desjardins

Securities
Operator: Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the 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. Roy MacDonald, you may begin your conference.

Roy MacDonald: Great. Thanks very much, Tiffany. Good morning, everybody.

Welcome to Loblaw Companies Limited second quarter 2018 results conference call. I’m joined this morning by Galen Weston, our Chairman and Chief Executive Officer; Darren Myers, our Chief Financial Officer; and our President, Sarah Davis. 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 2018 and in future years. These statements are based on certain assumptions and reflect management’s current expectations, and 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 the 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 now turn the call over to Darren.

Darren Myers: Thank you, Roy, and good morning, everyone. We delivered solid financial results in the second quarter. This quarter saw the full impact of changes to minimum wage rate and the incremental healthcare reform came into effect on April 1. Overall, we were pleased with our performance against these headwinds. On May 4, Choice Properties completed the acquisition of Canadian Real Estate Investment Trust or CREIT to create Canada’s largest real estate investment trust.

The financial impact of CREIT is reflected in our Choice Properties segment. On a consolidated basis revenue increased by $69 million, adjusted EBITDA by $48 million and net interest expense and other financing charges of $48 million in the second quarter of 2018. As a result the acquisition had a nominal impact on adjusted net earnings in the quarter. Looking at Q2 on an adjusted consolidated basis and normalized for the disposition of the gas bar business and the acquisition of CREIT, revenue grew 1.4%, delivered growth in EBITDA of 1.3%, net earnings declined by 2.8% and fully diluted earnings per share grew by 3.7%. We continue to drive positive same-store sales with growth of 0.8% in food retail and 1.7% in drug retail.

Drug retail same-store sales growth had front store growth of 3%, largely attributable to strength in HPA and cosmetic categories. In pharmacy, we saw same-store sales growth of 0.3% on strong prescription growth performance, our pharmacy same-store sales negatively impacted by drug reform. Looking at food retail, our internal inflation was marginally lower than CPI of 0.1%. Against another quarter of intense promotional activity we were pleased with our performance. We delivered growth in tonnage, traffic, volume and basket.

Retail gross margin was 29.5%, up 140 basis points from last year. Our retail gross margin improved 20 basis points year-over-year after excluding a favorable 70 basis points from the impact of the gas bar and a favorable 50 basis points from the impact of the consolidation of franchises. Food retail margin was up slightly in the quarter while drug retail was relatively flat despite the healthcare reform headwinds. Retail SG&A as a percentage of sales as reported was 20.9% or 140 basis points worse than the prior year. Our SG&A rate decreased by 30 basis points year-over-year after excluding an unfavorable 60 basis points from the impact of the gas bar business, and 50 basis points from the impact of the consolidation of franchises.

SG&A was negatively impacted by higher labor rates and foreign exchange losses in the quarter. Against the headwind, we benefited from higher supply chain fees and previously announced cost saving initiatives. On an adjusted basis, net earnings available to common shareholders were $421 million, a decrease of $25 million compared to last years. Normalized for the disposition of the gas bar business net earnings decreased by $12 million in the quarter and $7 million year-to-date. In the quarter, redemptions against the Loblaw Card Program represented $36 million or $53 million year-to-date.

We saw redemptions averaging less than $3 million per week in the quarter down from $4 million per week at the end of Q1. As we stated last quarter, the sale and corresponding profit did not benefit the company’s financial performance. Free cash flow was $248 million in the quarter and we continue to return capital to our shareholders, buying back $4.6 million common shares, at a cost of $300 million. Overall, we were pleased with our financial performance in the quarter. On July 1, new Canadian tariffs were imposed on $16.6 billion of US imports.

It is difficult to estimate the ultimate financial impacts of these tariffs as it will depend on how suppliers respond to have Canadians ultimately choose to trade. In addition to the tariffs, we also see continued cost pressures going forward from higher transportation cost and a lower Canadian dollar. We remain focused on overcoming these incremental headwinds. The intensely competitive market in the second quarter meant that inflation was more muted than we might have expected. Looking forward, we would not be surprised to see upward pressure on prices given the underlying cost pressures and incremental headwinds noted.

Stepping back, we’re executing well against our 2018 plan. We remain committed to our long-term financial framework and are continuing to focus on stable trading, promotional effectiveness, process improvements and efficiencies while we invest 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. Our long-term strategy relies heavily on a commitment to stable trading in our core businesses.

This steadiness supports shareholder value and allows us to invest in new and exciting areas. In this respect, we were successful in Q2. Two key elements to our strategy are operational efficiencies and making the most out of our data. In terms of efficiencies, during Q2 we added self check-out key off to 58 more Shoppers stores bringing the total to over 350 nationwide now covering all provinces. We will complete the year with more than 400 sites where the key off are available more than 25% of our customers are using them.

In our food business we are upgrading our self check-out technology which is improving scan rates and customer satisfaction with our latest upgrade intervention have declined more than 50% and penetration rates are improving. This tells us that customers like the convenience. On our use of data, customers remain at the forefront of all we do particularly in promotional and marketing activities. Our campaigns are meant to excite customers while maximizing our investments. As we give customers clearer promotions we are getting credit for value.

We feel good about the balance we have struck across our promotional mix in store, in flier and through our loyalty programs. Our confidence is particularly strong in loyalty, less than six months since the launch of PC Optimum, 13.5 million Canadians are now active members and they are swiping, earning and burning points at a remarkable clip. Penetration rates or the per transaction use of loyalty has surpassed 70% in important categories of our business. These are not only world class usage levels. We’re seeing year-over-year comp increases in the high single digit.

I’d back to our customer satisfaction scores of 85% and it’s clear that Canadians are loving PC Optimum. Soon members will have more to lap when we go live and at the stations nationwide offering points for fuel and bring us to a total of 4,500 locations where PC points are available. This is the kind of convenience we promised. Taking a quick look at our pharmacy operations, we continue to seek and find efficiencies. In our Shoppers business we’ve seen good growth in our C pack or Compliance Pack business, automating complex prescription fills and providing patients with simplified packaging that provides convenience, safety and adherence.

It also frees our pharmacists to focus on higher value patients service and care. Throughout our Shoppers stores we are improving our service offer. We added 20 new enhanced food sections this quarter bringing the total to 68, on track for nearly 100 by year end and in the stores with the enhanced food offering is established, we are seeing a fresh item in more than 25% of customer baskets. We also opened two next generation beauty boutique formats in the quarter. For those of you in the Toronto market you can see a creative application of both enhanced food and enhanced beauty in our new Yonge and Dundas location where we took over the former Hard Rock Cafe with an inventive take on a modern urban Shoppers store.

Across the enterprise we delivered on our promise for the quarter with a strong core performance. This is part of our recipe for success allowing us to invest for our growth. With that I’ll turn it over to Galen.

Galen Weston: Thank you, Sarah. Good morning, everyone.

As Darren and Sarah have outlined the retail market is challenging. Competitive pressures remain intense and anticipated headwinds remain significant. In this environment, we delivered value to customers, grew same-store sales, improved share and controlled costs. It was a good quarter. Looking forward, in addition to anticipated headwinds we see incremental FX and transportation costs and the impact of tariff cost pressures.

As a result we expect some acceleration in retail price inflation in the back half. We are executing our strategy, improving processes, reducing cost and expanding our digital presence to deliver the best in food, health and beauty for Canadians. We’re doing this right across the enterprise. For instance as PC Bank has concentrated its focus on payments, they continue to post strong performance and set the stage for future innovation. In our retail businesses, we are enhancing our e-commerce services to PC Express and home delivery options, the recent launch of our mass beauty assortment online and serving a rapidly growing number of patients and caregivers through our e-pharmacy.

And six months after the last PC Optimum our loyalty scan rates are higher than ever establishing a powerful platform that will play an increasingly fundamental role in our relationship with customers. Year-to-date across our retail divisions we are drawing more customers in discount and market grocery, at Shoppers Drug Mart and online. Best of all we are serving customers smarter with consistently improving customer satisfaction scores that tell us we’re firmly pointed in the right direction, our strategy is working.

Roy MacDonald: Thank you, Galen. Tiffany, could I ask you to introduce the Q&A process please.

Operator: [Operator Instructions] Your first question comes from the line of Irene Nattel with RBC Capital Markets. Your line is open.

Irene Nattel: Hey, everyone, couple of questions if I may. We heard the word accelerating inflation in the back half of the year a couple of times in the prepared commentary. Can you talk about what you’re seeing already, whether you’re seeing cost cushion inflation, what the tone has been and I guess that we’re about four, five weeks into Q3, so is it already starting or is it more still to come?

Galen Weston: Yeah, so look the market remains intensely competitive and that has kept a lid on inflation over the first six months of the year, but what we’re seeing now is such a significant incremental over and above set of costs that have begun to impact us like transportation and the costs that are going to impact us in the future like the impact of tariff.

And so when you take the planned headwinds that the industry faced in 2018, add these incremental headwinds, we see a very strong possibility of an accelerating retail price inflation in the market. And are we seeing it yet? Yeah, we’re seeing some indications of it across certain categories and as those pressures continue to land on the desks of the merchants from the suppliers we expect that we will see some more.

Irene Nattel: That’s very helpful. Also on the subject of the tariff, I mean the whole thing is very complicated. Can you walk us through in terms of the products that you actually have listed in store where you see the impacts of the tariffs and what the plans are in terms of adjusting for these?

Darren Myers: Hi, Irene its Darren.

I mean, as you say it’s very complicated and as much as I’d love to just to give you some numbers and some estimates it’s very difficult to do so because what we have to figure out is how suppliers are going to react, what action do they take and ultimately it’s going to be up to the customers on what they choose to do and there will be alternatives for them. So it’s a little bit difficult to say, but we’re certainly close to monitoring it and actively managing it.

Irene Nattel: Okay, I understood and then just one final one for me if I may. In terms of the e-commerce rollout, where are we in terms of store count and are we on track with regard to announcements you made at Q1?

Galen Weston: So we are absolutely on track, very pleased with the progress both in terms of the rollout of PC Express or Click & Collect proposition and then also our home delivery relationship with Instacart. I wasn’t going to say the number that we’re at, at this point, but we’re just over 500 Click & Collect locations and we’re on track to deliver the numbers we expect for the year.

Irene Nattel: That’s great, thank you.

Operator: Your next question comes from the line of Kenric Tyghe with Raymond James. Your line is open.

Kenric Tyghe: Thank you, good morning. Galen to drive tonnage traffic volume in basket as highlight in the context the market takes on doing, could you speak to some of that strengths and perhaps also just even directionally how much of those wins were PC Optimum traction sort of driven as Sarah highlighted?

Sarah Davis: Okay, I think I’ll take that.

It’s Sarah. So I would say some of it definitely comes from the new loyalty program, our customers do seem to really like it and we are seeing the high penetration rates that I mentioned. Another piece to it would be just we are working on our promotional effectiveness, which I think I talked about the last call, which is really finding the – as perfect the mix as you can between your promotions in the flyer versus in-store promotion as well as combining it with loyalty and finding that great mix which allows you to have incremental sales, but costs you as little as you can while at the same time exciting your customers, so that’s really the work that we are currently working on. We started in one of our food divisions, it was something that Shoppers did quite a bit of before, so they’re now adjusting to the new PC Optimum program, but continuing that work and we’ve started that in one of our food divisions and we’re basically going methodically through categories and then also starting to bring that into one of the other our other food divisions. So I would say it’s trying to be a little more analytical, we’ve sort of wrapped up in that kind of course strength within our business as well and that would be part of what you’re seeing.

Kenric Tyghe: That’s great, thanks very much Sarah. If I could quickly just switch gears on the gross margin and drag in healthcare reform you highlighted not much impact or modest impact in quarter end, could you just share with us, was that broadly along with your expectations, are there increased margin pressures expected in terms of health care reform in the back half or the pressures of tracking as expected, the old mitigating actions proving as effective as you expected however you get on to the question.

Galen Weston: Yeah. Sure. So we were definitely pleased with the performance I would say as expected.

A couple of things I would note to you. First is that we had 11 or 12 weeks of reform in the quarter. We were also – we were helped by our focus in stable trading, as well as in supply chain handling fee and we did get some benefits from shrink as we have a number of initiatives around inventory. We are seeing some of the benefits of that in the quarter. As we look forward, we are not giving guidance.

I would say that we would expect to see some pressure with the full impact of reforms as we go into the second half.

Kenric Tyghe: Great. Thanks very much. I’ll leave with that.

Operator: Your next question comes from the line of Jim Durran with Barclays.

Your line is open.

Jim Durran: Good morning. So just going on to drug reform side, the 0.3% RX comp store sales number, should we then be expecting like the volume stays at sort of the 3% level that drug reform brings us back close to 0% comp store sales for the rest of the year until we lap in April?

Galen Weston: Yeah, I don’t want to give guidance on the number. Going forward we certainly had good script growth this quarter and we had some favorable mix that we would expect to continue in the back half, but there will also be some additional pressure with full reform in the back half. So there will be a little bit of a downward pressure I would say as a directional comment.

Jim Durran: Okay. I appreciate that. On ecommerce just on Instacart, is there anything you can give us in terms of observations about how that business is performing and some idea about the rollout plans from here?

Galen Weston: I think not much more than what we said in the last quarter other than to affirm our conviction, we continue to roll Instacart out across the country in multiple incremental markets. We are very pleased with the response that we see. There is a high level of interest.

We see it predominantly incremental to the Click & Collect business. It seems to be continuing to trend at a different shopping need or shopping experience that quick one hour to two-hour turn around, very attractive to customers. The baskets are not quite as big suggesting that they are again more convenience-oriented shops as opposed to full stock-up shops. But none of that is different to what we talked about in Q1 and we would expect to continue to drive that strategy through the balance of the year.

Jim Durran: And how do you find the competition for that ecommerce customer? Is it placing any incremental pressure on the pricing that Instacart is trying to bring into the market and how much they are trying to charge for handling fees or full-year membership?

Galen Weston: No.

Jim Durran: Simple answer. Thank you.

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

Mark Petrie: Yeah, good morning.

Thanks. Thanks for the color on food retail gross margin performance. But I just want to come back to it and just to understand it a little bit more clearly is essentially the positive result is really the payoff from loyalty and your work on data analytics and refinements and promotional strategy and tactics or other factors driving that number?

Darren Myers: Yeah. It’s certainly those items that Sarah talked. I mean that’s overall how we are managing and driving margin improvements, but in addition to that I would say in the quarter we are seeing the benefits despite the handling fee and as well in food and drug we saw benefits from shrink.

So our teams did a very good job in particular in the face of the head rooms that we’ve seen in managing the stable trading.

Mark Petrie: Okay. Thanks. And I’ve heard you made comments in the past about sort of tolerating tonnage softness in the first half of 2018 or through the course of 2018 as you’ve kind of learned processes for those adjustments in terms of merchandising and promotional ways and tactics, but the tonnage performance has been quite strong. Wonder if you could just talk a little bit about how you are feeling about the performance and what your outlook is for the balance of the year.

Sarah Davis: Okay. So I think it’s true. We did say maybe the last call or the call before that we are focused on good tonnage and not doing things just to drive tonnage that may not be in the best interest of our customers. And so really that’s still what we are doing. We are pleased with the tonnage that we are seeing.

We do feel like the business has been performing well. It’s always hard to predict how you are going to perform in the back half of the year, but we don’t have any plans to change anything. So we are still – we’ll continue competing as we do focused on the areas that we’ve talked about being a little more analytical focusing on the customer and hopefully that will mean that hard tonnage continues the way that we’ve seen it in the first half.

Mark Petrie: Okay. Thanks.

And then just last, Sarah, could you just clarify your comment in the script with regards to the optimum program and the year-over-year comp increases in the high single digits. What’s that referring to exactly?

Sarah Davis: Yeah, it’s a focus and basically we have many different types of customers and we group them into different levels and what we are seeing is in some of our most engaged customers, which are of course the ones that we love to have, we are looking at and those that we are involved in both programs. In the prior year we are seeing that they are – there is some – even more cross-Shoppers are loving the program more and then for those customers we are seeing high single digit improvements, which is great. We want our very loyal customers to love the program and that’s what we are seeing.

Mark Petrie: Okay.

Thanks a lot.

Operator: Your next question comes from the line of Patricia Baker with Scotia Bank. Your line is open.

Patricia Baker: Oh, thank you very much. I think this question is for you Galen.

If we go back to the initial announcements that the minimum wage is going to increase and we had the health care reforms and at that time there was a lot of people were talking and speculating that what would happen is that you would try to pass through and mitigate both some of those costs by increasing prices and then if we go back to your commentary and I think the month of March you are quite adamant in stating that the last thing that you really wanted to do was to take prices higher. And at that time we were aware of the minimum wage. We were aware of the drug reform and the higher transportation costs. So looking at what you are saying today and you have an expectation that we will see higher prices, likely higher prices in the back half, I’m wondering if that statement is primarily coming from the impact of the proposed tariffs?

Galen Weston: Yeah, I mean, look, I think transportation in addition to tariffs is impacting us in an increasingly meaningful way and we see that continuing for some period of time. Look, my view is that inflation over the long-term; too much inflation over the long term is not good for our competitive position.

We are committed to delivering value to our customers as often as possible with our pricing strategy. And – but there are limits. We are trying to manage our financial plan. And as the costs continue to pile up, we are changing our view a little bit and see that these structural changes are going to put pressure on retail pricing across the industry. We don’t think it’s going to be meaningful, super significant, but it certainly will be higher than what it is today.

Patricia Baker: Okay. And if I may, I would like to ask a question about Shoppers. We look at the script count growth was 2.9% this quarter. We’ve seen a decline in the trend there. It’s been decelerating.

Is there anything particular happening in the market and do you know where the market was overall in the period?

Galen Weston: When you say ‘do I know where the market was’ which market do you mean?

Patricia Baker: The script count, overall script volume in Canada.

Galen Weston: Oh, I see, yeah. So, look, we are quite pleased with the performance of our script volume. Obviously there is deflationary pressure on the top line. It’s a concern that we have to actively manage, but relative performance in the market is very satisfactory.

Patricia Baker: Okay. And one final question. Sarah, you gave us the penetration of self in the Shoppers’ side of the business and referenced that you are seeing increased penetration. Can you give us what that number is?

Sarah Davis: Yeah and food has always been in the low 20’s. So now since we’ve made some adjustments to the software to make it a little bit more customer-friendly, we are seeing it about 25 to 26 that type of range.

Patricia Baker: Okay. Thank you.

Operator: Your next question comes from the line of Michael Van Aelst with TD Securities. Your line is open. Michael

Van Aelst: You covered pretty much all my questions other than just maybe you can just give us an update on some of your technology initiatives including timeframe of when you will be adding SAP into the drug side?

Sarah Davis: Okay.

I can take that. So basically most of our technology upgrades have become sort of the back-office is pretty done with SAP and Loblaw and JDA we used for our supply chain and we do, in both businesses, have that back-office. In terms of SAP, we still have got a bit of a phased approach going where SAP and JDA is already in the distribution, so bring SAP specifically to stores, we don’t actually have a timeframe. It’s not happening in the next couple of years. But having the back-office and all of the financials and supply chain all on the same systems, we are on track to have that done in the next year or so.

But clearly in the stores we don’t have a plan to roll out SAP to the Shoppers’ network in the next couple of years. Michael

Van Aelst: All right, thank you.

Sarah Davis: And maybe I’ll just add that ultimately we do want them on the same system, but because their systems are working fine, we don’t feel like we need to make the investment until it’s time to make an investment in the store systems and then we will bring them on to the same systems.

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

Jennifer Lynch: Hi, this is Jennifer Lynch filling in for Peter. I just have one quick question. I notice that the square footage growth in the quarter was pretty minimal. So how do you see that playing out for the rest of the year and going into next year?

Darren Myers: Hi, Jennifer Lynch, it’s Darren. I mean that’s expected.

I mean narrow strategy has not been to add significant square footage each year. So it’s consistent with what we’ve stated before and that’s what you should expect us to be maintained.

Jennifer Lynch: Okay. Thanks. That’s it from me.

Operator: You next question comes from the line of Vishal Shreedhar with National Bank. Your line is open.

Vishal Shreedhar: Hi. Thanks for taking my questions. On RX script count growth, do you see any benefit to the actual count growth when prices go down maybe in the cash pay business?

Galen Weston: Not meaningful, no.

Vishal Shreedhar: Okay. So once upon the time Shoppers used to say that they would focus on professional services and pharmacy in part to offset the pressure from reforms. Is it still a focus for Loblaw and if so, is it a material benefit and how big is the professional services business?

Galen Weston: So professional services continue to be an important part of the strategy and we’ve been growing that business steadily consistently across the country for the last three or four years. It’s slow going, because it’s dependent upon the regulatory frameworks in each of the provinces in terms of what they allow and as you probably know they are quite different across the country. At this stage it’s not an enormous business.

I wouldn’t describe it as material. But now we do see it continuing to grow. Ultimately it will become a meaningful part of how we generate revenue inside our pharmacy business. And then the other place that we are focused is on specialty pharmacy and that’s an important area of strategic growth for us and we’ve had some good results in the second quarter there too.

Vishal Shreedhar: Okay.

Galen, I think in the script you said that this is a good quarter, but looking – let’s say taking a few steps back looking at the course of the year, what metrics if you can simplify for us and pick a few, what metrics do you use to define what constitutes a good quarter or a good year actually? Is it return on invested capital, tonnage growth, or the ones that you would point out for the investment community?

Galen Weston: We have a financial framework and that financial framework is the starting point for how they measure our success. That financial framework translates into a budget and then we provide our perspective on the year based on that budget. And so that’s how we judge our performance. It includes all the things that we’ve talked about. It includes stable trading.

It includes stable margin. It includes making sure that we have stable to positive share. It includes SG&A leverage and it includes returning capital to shareholders and improving our return on capital. So it would be all the metrics that you would expect us to look at in that context of a more difficult year than in past years. We feel this was a good quarter.

Vishal Shreedhar: Okay. I think I may have tried to ask in the past but it seems some quarter-to-quarter Loblaw says they are successful in more often than not in achieving stable trading and that’s gone to the point where I don’t really know what that means. Is there any help you can give me maybe like is there a gross margin range that management looks at? Is it quantitative when you are saying stable trading? Maybe some help there would be appreciated.

Galen Weston: Yes. The stable trading for us, we don’t have big swings in the top line or gross margin performance in the business in between quarters.

And so that’s really ultimately what we mean. We measure it in terms of share, relative share performance. We don’t need to overshoot in a given period of time with share and we also don’t want to give up a significant amount of grant. And the same thing we have a band in terms of what we think our gross margin share to ultimately look like because if you reduce your gross margin in a particular quarter, that delivers good earnings, but it creates volatility in future quarters and if you overinvest in your gross margin in a particular quarter, the exact same things happen. So this is about managing within consistent bands in sales and margin and share from quarter-to-quarter and year-to-year.

Vishal Shreedhar: So this is a quantitative measure. So it’s not qualitative when you say we’ve achieved stable trading?

Galen Weston: It’s both, but it has quantitative bands that we guide ourselves to internally.

Vishal Shreedhar: Okay. And those bands are internal and they are – you can’t share those with the investment community or any help that you can provide there?

Galen Weston: No.

Vishal Shreedhar: Okay.

That’s it from me. Thanks.

Operator: Your next question comes from the line of Chris Li with Macquarie. Your line is open.

Chris Li: Hi, good morning.

I think, Sarah, last quarter you highlighted some initiatives have begun to reduce the cost – to reduce the goods amount for resale. Just wanted to see if you can give me an update in terms of where are you on that initiative and what is the size of the opportunity there?

Sarah Davis: Okay, for sure good talk for retail would always be one of the areas we would go to for whenever we are looking for cost savings. There is a lot of money that we spend in that area in terms of a target, I don’t think I want to get to the target of exactly what we are looking for. But we would always look for improvements from year to year in that area and I think that’s about all I can say on that.

Chris Li: And would we see the benefits manifested being in the cost of sales line or in operating expenses?

Sarah Davis: That would be in operating expenses, SG&A.

Chris Li: OpEx, perfect, okay and Galen, I wanted maybe to get your high level thoughts on the prospect of national pharma care being implemented and how you think that could potentially impact the pharmacy business over the longer term?

Galen Weston: Yeah. So, look, this is an important subject of discussion across at the federal level, at the provincial level and clearly for those of us who are in the industry. Our perspective we support a pharma care system that provides coverage for Canadians who don’t currently have access. We also support a consultative approach and we look forward to and are actively working with the government to develop an effective policy that serves Canadians’ needs. At this stage it’s hard to say ultimately which way it’s going to go.

Suffice to say I think everybody is working together to make sure that we have the right coverage for Canadians and we need to make sure that we do that in a cost-effective way. As we get more clarity on how that policy is unfolding, as we get more certainty, we’ll certainly share that with the analyst community.

Chris Li: And is it your understanding that the recent five-year agreement between the provinces and the [Indiscernible] manufacturers. That agreement would not be affected even if Canada does go to a full national pharma care system for the next couple of years?

Galen Weston: You will have to ask the federal government that. At this stage we can’t comment.

But suffice to say we don’t know ultimately what this is likely to look like. But we are actively participating in conversations.

Chris Li: Okay. And my last question is as the industry continues to evolve being in ecommerce or health care, can you share with us your latest part on M&A and potential opportunities to strengthen the company in certain areas?

Galen Weston: Yeah, so clearly like everybody, when asked this question, we don’t comment on our M&A activities. So it’s also important I think to mention.

We believe we have a very, very strong set of assets and that we can compete effectively both in the present and in the future with those assets. Would we ever consider supplemental M&A to help us execute that strategy? Sure, I think every big company would, but in terms of water jack positions that you might contemplate that really doesn’t fit into our strategic outlook at this time.

Chris Li: Okay, thank you.

Operator: Your next question comes from the line of Keith Howlett with Desjardins Securities. Your line is open.

Keith Howlett: Yes, I had a question on the front end of Shoppers Drug Mart, which I guess has a high and low strategy much like I guess grocers, but I’m wondering whether you – what your plans are to take that business online and whether it will pose any specific problems relating to its front end pricing strategy.

Galen Weston: So I think a little premature for us to comment on that. You can see in the last couple of weeks we launched our mass beauty proposition from Shoppers Drug Mart online, that’s very exciting for us. Beauty is obviously a huge area of growth and it’s an attractive – it’s got attractive online economics. Ultimately, it’s fair to imagine that there will be an online proposition available to customers in other parts of the center of the store, but it’s too early for me to comment on how exactly that would look or what the economics are likely to be.

Keith Howlett: And then I was just wondering on the – if you can give a bit of a recap of the supplier and handling fees as to how well it was implemented across this flyer basin, whether it’s where – at the level you anticipate it and whether it was sufficient to offset some of the – the headwinds that you had forecasted?

Darren Myers: Yeah, Keith the supplier chain handling fee has done as expected certainly and it’s been rolled out and accepted by the supply base. So I would say, everything is on track from that end and it has certainly that plus the other cost reduction as we put in place and certainly on track, which is part of the reason we’re getting the good performance that we’re getting in the current environment. So I’d say everything is going as it should be.

Keith Howlett: Thank you.

Operator: [Operator Instructions] Your next question comes from the line of Jim Durran with Barclays.

Your line is open.

Jim Durran: Thank you. Yeah, I’ve just been hearing from some US sources that perhaps the China, US tariffs could result in excess supply of products in the United States and therefore potentially provide a deflationary opportunity for Canadian grocers importing products from the United States. In your comments about increasing inflation as you look out, is that incorporate or are you seeing the possibility of any deflation in the imported products?

Galen Weston: Oh, goodness, I mean there is so much speculation at this point about the cross border impacts, the global impacts of the trade wars that are taking place. We’re trying not to speculate on the future, we’re trying to focus on the policies that are firm, the ones that we can understand and the ones that we can make day-to-day decisions on and so that’s what we’re doing with the tariffs.

We know about the ones that the Canadian government has put on US imports and that’s where we’re focused today. Consequential impacts at this stage are purely speculative. If they become clear and they become meaningful, we will certainly have a point of view.

Jim Durran: Thanks, Galen. I appreciate the complexity.

Operator: Your next question comes from the line of Keith Howlett with Desjardins Securities. Your line is open.

Keith Howlett: Yes, I wondered if you can just comment on what you’re seeing from the consumer in terms of their choice of channel and how they’re spending on goods across the grocery store, whether they look pinched or whether they look confident that sort of thing.

Galen Weston: Yeah. No, notable changes in trend from past quarters or probably even in past years.

I wouldn’t say that the consumer anywhere is feeling particularly flush in the way that they’re spending. You can see the competitive intensity that’s out there. They’re particularly focused at the discount and where people are aggressively looking for the value Shoppers. But that is not a big change, that’s been the case in this country for many years and it continues to be the primary battle ground for customers and we’re actively engaged on that front. So that would be it.

Keith Howlett: Thank you.

Operator: Your next question comes from the line of Chris Li with Macquarie. Your line is open.

Chris Li: Well, hi, just one quick one on Click & Collect. Galen, I believe you now have some stores that are offering Click & Collect for three plus years now and I’m just wondering for those stores are they generating enough volume now that you’re breaking even in terms of covering the labor expenses recorded to pick the goods.

Galen Weston: Yeah, so we see positive contribution in our Click & Collect business and obviously that contribution is significantly positive in the locations that have been opened for a longer period of time. And it’s a reflection of volume and the efficiency which those stores are able to process that volume, both improved overtime.

Chris Li: Okay and just overall for your Click & Collect business, what would you see as the average substitution rate is so far on average?

Galen Weston: So I don’t think we’re publicly disclosing that, but we would say that our service levels which we measure very closely in PC Express and Click & Collect are not wildly different from the service levels the service levels that people would experience in store and we have an active program of working with customers to make sure that we’re making attractive substitutions available to them and there’s always opportunity to improve those service levels both at store level and with Click & Collect and we are actively working on that too.

Chris Li: Okay, thank you.

Operator: There are no further questions in queue at this time.

I turn the conference back over to our presenters.

Roy MacDonald: Great. Thanks, Tiffany and thanks everybody for your time this morning. If you have any follow-up questions, you know where to contact me. And please mark your calendar November 14 when we will be online discussing our Q3 results.

Thank s very much and have a great day.

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