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

CFO
Analysts: Irene Nattel - RBC Capital Market Mark Petrie - CIBC Kenric Tyghe - Raymond James Peter Sklar - BMO Capital Market Chris Li - Bank of America Jim Durran - Barclays Michael Van Aelst - TD Securities Keith Howlett - Desjardins Securities Patricia Baker - Scotiabank Vishal Shreedhar - National

Bank
Operator: Good day ladies and gentle and welcome to Loblaw Companies Limited Third Quarter 2016 Conference Call. For your information today's conference is being recorded. At this time I would now like turn the conference over to Sophia Bisoukis. Please go ahead, Madam.

Sophia Bisoukis: Thank you and good morning.

Welcome to the Loblaw Companies Limited third quarter 2016 results conference call. I'm joined by Galen Weston, President and Executive Chairman; and Richard Dufresne, Chief Financial Officer. Before we begin today's call, I want to remind you that the discussions will include forward-looking statements such as the Company's beliefs and expectations regarding certain aspects of the financial performance in 2016 and future years. These statements are based on certain assumptions and reflect management’s current expectations and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the Company's materials filed with the Canadian Regulators from time-to-time.

Any forward-looking statements speak only as of the date they are made. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than what has been required by law. Certain non-GAAP financial measures may be discussed or referred to today. Please refer to our annual report and other materials filed with the Canadian Securities Regulators for a reconciliation of each of these measures to the most direct comparable GAAP financial measures. As a note today's call will end 10 minute prior to 10 AM.

I will now turn the call over to Richard.

Richard Dufresne: Thank you, Sophia and good morning, everyone. In the third quarter we continue to deliver against our financial plan achieving positive same store sales with stable gross margins. We achieved diluted adjusted earnings per share of $1.26, an increase of $0.28 per share or 28.6% compared to the third quarter of 2015 and grew adjusted net earnings by 25.5% to $512 million. We also continue to return capital to shareholders buying back approximately 2 million shares in the third quarter.

Our Food Retail business achieved 1.4% same store sales growth, while our internal rate of inflation declined this quarter and was lower than food CPI rate of 0.2%. Positive trends for same store sales in drug retail continued this quarter with total comp sales of 2.8%. pharmacy store same store sales grew 3.9%, pharmacy same store sales grew 1.6% with market share gains being offset by a decrease in average value, prescription count increased by 2.6%. With positive same store sales growth in both food and in drug retail total revenue in our retail segment was $13.9 billion, up 1.3% year-over-year. Adjusted retail gross margin remained within stable trading band and was 26.1% compared to 25.8% a year ago.

This excludes the impact of consolidating franchisees during the quarter. Adjusted retail gross margin increased by 30 basis, promotional investments to reduce prices and support sales initiatives in our food retail business were offset by improved drug retail pharmacy margin and better shrinking compare to prior year. Adjusted SG&A as a percentage of sales improved 50 basis points including the impact of consolidating franchisee. Adjusted EBITDA was $1.14 billion in the quarter, an 11.8% increase from last year. Our consolidated EBITDA margin now stands at 8.1%, an increase of 80 basis points from a year ago.

Looking ahead, we continue to remain confident in both our strategy and financial plan. Our long-term financial strategy continues to be aimed at positive sale growth in stable trading environment with a sharp focus on lower costs and reduced complexity across our businesses. Finally, as a reminder last quarter we noted that we achieved the $300 million synergy target we set when we acquired Shoppers Drug Mart in 2014. As a result we are no longer speaking separately to synergy benefits being realized. However, we continue to generate benefit from the Shoppers acquisition in the third quarter.

This concludes my comments. I’ll turn it over to Galen.

Galen Weston: Thanks Richard, and good morning. Q3 was strong quarter and I’m pleased to be continue to execute against our strategic framework, delivering the best in food, the best in health and beauty, operational excellence and growth. We delivered good sales metrics including positive same store sales in both of our -- both our food and drug retail businesses.

We continue to operate within our financial model delivering stable gross margin, operating leverage and earnings growth. During the quarter, we saw the grocery market shift from an inflationary environment to a deflationary one. This shift is consistent with cycling the highest inflation periods from last year and then keeping with the strategy outlined in previous calls we made measured targeted environments to drive volume and it has worked. Customers responded well to our lower prices and we continue to growth the top line. We made these investments while at the same time slightly improving overall gross margin through strength improvements in the food business and strong front store performance at Shoppers Drug Mart.

Finally, as Richard mentioned in his remarks we were able to generate strong earnings growth as a result of a particularly good quarter for SG&A at 50 basis points. Although this does not represent a run rate for the business, it is an important indication that our ongoing focus on cost savings and efficiencies is getting traction. Looking forward, we expect the food retail business to remain highly competitive, within this environment we will focus on investing intelligently to grow the top line and offset that investment through our mix advantage and our relentless focus on cost management and in doing so continuing to deliver our financial plan.

Sophia Bisoukis: Thank you Galen. We can open up the bridge for call -- for questions now.

Operator: Thank you, Madam. [Operator Instruction] We will now take our first question from Irene Nattel of RBC Capital Market. Please go ahead.

Irene Nattel: I would like to start by focusing on operating leverage please, because if we look at the items that you site in the MD&A or the press release around the drivers of gross margin, some of those can perhaps be considered onetime items. So can you give us a little bit more color about what's going on, on an underlying basis, please?

Galen Weston: Yes, there are a few onetime items Irene, but they are relatively small.

I guess when we look at our performance, as I mentioned in my remarks, we’re still generating benefits on the shoppers acquisition although we don’t talk about it specifically now. We had good performance on gross margin side and we have clearly improved traction in generating cost savings in the quarter. So together that’s what resulted in our performance in the quarter.

Irene Nattel: If we think about the path towards where you want to be in terms of operating efficiency versus where you are today, and we’ll use a hockey analogy, are we in the sort of our first period, the second period, how far along that trajectory would you say that we are?

Galen Weston: I would say that hopefully we’re just in the first period. I think that should be the story for Loblaw for the next few years as we try to reduce complexity in managing our business.

So -- and it won’t call come in big -- like big increments as we’ve seen this year, but what the drop in cost that we’ve seen this year are sustainable. Our ability to generate like further cost increase, we don’t think it will be to the tune of 50 basis points year-over-year, but we will continue to work hard to bring those numbers down.

Irene Nattel: That’s great, thank you very much. And just one final question if I may, I miss those to a trading environment, what are you seeing around competitive intensity and consumer behavior at this point in time?

Galen Weston: Well, it's intent to be sure. I mean it's still very much rational, I think you’ve heard from us on a number of occasions that we are making targeted investment and what we believe to be intelligent investment.

We are seeing the consumer respond really well for those investments. And we are seeing a result in tonnage that is a meaningful improvements from where we were in Q1 which as you’ll recall was the point where we expressed some concern about how we were trading relative to the rest of the market.

Irene Nattel: That’s great thank you.

Operator: We will now take our next question from Mark Petrie from CIBC. Please go ahead, sir.

Mark Petrie: Another strong gross margin performance from the shoppers business and I want to if you can just provide a bit of a sense on drivers there? And then also any context you can give in terms of how that business is performing on SG&A?

Galen Weston: The value proposition of Shoppers continues to resonate very well with consumers. You see we have been talking about the addition of food which is certainly A factor and for that trend is continuing. We are actually quite proud to see that despite the strong comp we experienced last year, if you remember last year we were comping front store close to 6%, the fact that we are still comping close to 4% is quite amazing and we see that traction continuing. So that is the key driver from a performance perspective.

Mark Petrie: And to drive those same store sales that sort of growth, I mean how should we think about the SG&A performance within shoppers and then I guess on a more net basis earnings growth in this period and then into 2017?

Galen Weston: SG&A performance in Shoppers is tougher than in food because essentially their costs are driven by script growth, essentially and so -- but because we’ve been experiencing significant growth in front store, it allowed us to actually get some SG&A leverage in terms of rate.

So we hope to see more of it, but our focus is more to try to generate some SG&A improvement on the food side.

Mark Petrie: Yeah, okay. And then just on the food side, obviously you guys have made some significant capital investments in the conventional assets over the last few years and it seems like that segment of the market has become more challenged through 2016. So how do you balance return on those investments with customer experience expectations and is this where strength has been a benefit for you guys?

Richard Dufresne: So we are pretty happy with the investments that we’ve made, I think you’re probably referring to our inspire network that we’ve upgraded over the last couple of years, and that tends to be one of the really strong areas of performance in the market division. One of the others is to move that we’ve made to convert a bunch of those extra food source out in Western Canada into our neighbor market format, which is our -- your independent grocer business and we’re seeing a really terrific response in those markets.

Essentially a fundamental upgrade in the full service conventional proposition that is being made available to those consumers. There I mean, there is -- for sure there is a pressure in the market stores where we have a high level of direct competition from the discounters and from Walmart, but we are feeling reasonably confident in our ability to offset that. And again the way to think about it is, we are not going to put inspire type capital in hundreds of stores, because it’s only in selected stores where we have a customer base that responds positively enough to those value added services that it generates the right return on capital.

Galen Weston: Yeah, Mark. I’d like to add is, if you look at the performance of our market division according to plan, it’s actually very much on plan.

Mark Petrie: Okay. That’s helpful. Thanks. I’ll pass it on.

Operator: [Operator Instructions] Our next question comes from Kenric Tyghe from Raymond James.

Please go ahead.

Kenric Tyghe: Galen, you touched on your targeted investments, and, if memory serves, we are now cycling two years of PC Plus in your discount banners. I wonder if you could speak to how effective that has been in discount and perhaps provide a little bit more color about the uptake of PC Plus in discount and on your ability to effectively target investments in your discount banners, particularly in Western Canada.

Galen Weston: Yeah, so PC Plus continues to be a growing and important part of how we make margin investments to drive targeted sales in the consumer. One of the strongest formats in terms of adopting PC Plus is actually our superstore format which is one of the major platforms in our discount division and it's something that they are starting to use to great effect to deliver discounts or value that is differentiated from what's available in the market today.

So we are really happy with the performance there. No Frills is the other place where we deployed PC Plus. There we’re growing, we’re improving, but far in a way the most powerful mechanism for driving customer traffic and volume through that platform continues to be supplier and item price. We are not seeing quite the same level of response in a hard discount business to those targeted offers, we are working on it, but very happy with the superstore investment.

Kenric Tyghe: Great.

If I could just switch gears quickly to Shoppers and the front store, you did highlight growth in all categories. I wonder if could just give a little more color on specifics there with respect to which categories you did see growth. And perhaps, also, beyond that, looking at the opportunity set how you're thinking about that going forward given your success year-to-date and how we should be thinking about that given your successes year-to-date.

Galen Weston: Well, that is the big question you want us to articulate our sort of medium term front store strategy for Shopper. I’ll try and give you a little bit of feel for it, but starting point is that we have strong growth pretty much across the board in the front store at Shopper Drug Mart.

We think part of what is driving that is the enhanced -- the improvement in the food proposition that may actually be driving more traffic, more visits and that’s actually listing a number of the other categories. But frankly we feel good about the overall proposition everything seems to be doing well in the front store. As far as how we’re going to build that business going forward, foods continues to be an area of opportunity. Today we have about 35 enhanced fresh food shops and we are continuing to expand that, I think I’ve commented that where we see really, really significant success in adding fresh food is in the urban market. So we are looking all across Canada places where we can increase the foot print in urban markets.

And then the other area which is a great strength for Shopper Drug Mart always has been and we think is a big part of the next wave for Shoppers growth is beauty. We are looking at a number of new sights that we can put various versions of our enhanced beauty boutique and those tend to over deliver on the investments that we make in them, so we’re looking for every opportunity to put more of them in.

Kenric Tyghe: Great thank you.

Operator: Our next question comes from Peter Sklar from BMO Capital Market. Please go ahead.

Peter Sklar: Galen, during your commentary I believe you said that during the quarter you went from food inflation to food deflation. I'm just wondering if you could elaborate a little bit more what the trend was like in the quarter, how you exited the quarter, and what you are experiencing so far in the fourth quarter in terms of deflation. Also which categories you're seeing it in. I assume you are seeing a lot of it in meat, and what are the other categories?

Galen Weston: Yes, so you are right, I did comment specifically on that. So our calculation for inflation or deflation in the quarter was basically flat.

But we had more inflation in the first part of the quarter and we shifted quite definitively into a deflationary position as we exited the quarter. We think its meaningful deflation, its manageable deflation and a truly a function of as I mentioned before the lapping of the peak period of inflation that the market experienced last year. And then also it is being contributed in some way by the investments that we are making in the business and you’re right a part of it is in the Fresh Food category, those are the areas that we have particularly meat produce, these are places where inflation was in the low double-digit for period last year. And so it’s almost impossible to cycle that kind of inflation. And what we actually also with customers trading in other categories and so we are reducing the prices to see if we can draw the customer back in and we’re having a reasonable degree of success.

In terms of grocery, grocery is probably responding the best to our price investment where we are making them, in that tradeoff between the deflationary dollar and actual unit growth is showing up really nicely in grocery too.

Peter Sklar: Okay. And in terms of the investments that you are making in terms of -- and it seems that the investment you're making in price can be promotion, shelf pricing, more dollars in PC Plus, are those dollars going more into conventional or more into discount? Or is that investment being made across the board?

Galen Weston: Yeah, I think it’s the good question, it’s probably the right question, but it’s not something that I feel comfortable answering. Its part of taking a very targeted and disciplined approach in making these investments is not telling people where you’re doing it and trying to make sure that you’re therefore having the possible impact. So I think I got to go back to the line, which is, these are targeted investments and we’re looking at it very carefully making sure that the investments are generating a satisfactory return and we’re pretty happy with the results so far.

Peter Sklar: Okay. And just lastly, are you still seeing trade downs from conventional to discount banners?

Galen Weston: Yes.

Peter Sklar: Okay. Thank you.

Operator: Our next question comes from Chris Li from Bank of America.

Please go ahead.

Chris Li: I just have a couple follow-up questions on operating leverage. I think you mentioned earlier that the impact on these one-time items were relatively small. So my question is of the 50 basis point improvement for this quarter at least, would you say maybe 40-ish basis point is really kind of more sustainable factors, kind of more small one-time factor?

Galen Weston: The actual level of cost is sustainable, i.e. the savings that we generated we expect them to be sustainable.

What we're talking about is the ability to bring them down even further. It's going to be tougher. We won’t be -- I would be happy to do 50 basis points decrease in SG&A year-over-year. But I think that is too much. So that is what we're talking about.

Of the one that we're seeing, most of it is sustainable and we will follow through in 2017.

Chris Li: Got you. Okay. And then one specific one. In one of the factors you mentioned in your press release about the favorable changes in the value of the companies investments in the franchise business.

I just want to maybe get some clarification, is that some function of the improvement in the underlying profitability of your franchisees and as you do this valuation on a quarterly basis, you know if it is improved than you’ll recorded a gain on that and that helps your SG&A?

Galen Weston: It has more to do with the fact that we’re consolidating franchisee and we are reversing certain of the impairments we had on certain specific stores. So it's not that significant.

Chris Li: So my last question is, we talked about would helped your SG&A, but can we talk a little but about what drove it lower in terms of your deleverage, I’m thinking pretty close to some of the incremental growth investments in things like Click and Collect and your loyalty programs in the [indiscernible]. Can you give us some insight into how that progressed or how that pressured your SG&A thought out the quarter?

Galen Weston: From a financial perspective what we're trying to do is deliver a stable financial operating model that generate steady growth and earning. And when we put that model together we take into account the investments we’ve making in initiatives such as Loyalty or Omnichannel.

And so we continue to manage our business that way and therefore we feel confident that we should be able to deliver our financial model going forward.

Chris Li: Okay, great thank you.

Operator: Our next question comes from Jim Durran from Barclays. Please go ahead.

Jim Durran: There's been a lot of chatter that Walmart is going to focus aggressively on its online offering.

When we spoke last quarter I believe that you indicated that you were going to potentially take a pause at the end of this year once you had done the rollout you were committed for the rest of this year. Is there any change in that approach, and can you give us an indication of how many stores you will have Click and Collect by the end of this fiscal year?

Richard Dufresne: Yes, so we got 82 Click and Collect stores now. We are reasonably happy with the way they are performing and I think relative to the model -- the investment model, they are actually performing better. And we will continue to roll out stores through the balance of the year. We will probably get somewhere around 100 through the end of the year and we have a program to keep expanding throughout 2017.

I think the message that we are trying to express here is, we don't yet see such a compelling threat that we need to race to full deployment of click and collect across our entire network at the expense of the P&L of the business or at the expense of a poor return on capital and we have more click and click locations in the marketplace than Walmart does today and we expect to continue to grow. If there is a substantial accelerating pace, you know, from the rest of the market or our competitors such that we see a potential long-term disadvantage, then we will have to look really hard at accelerating it. But right now I think it's a measured approach. I think that's the right approach and we're still are the leaders in the market in terms of delivering click and collect. Keep in mind however that click and collect is not the only omnichannel or ecommerce platform that's important to us.

We have launched the beautyboutique.ca. Beauty is a big business online in the United States and rapidly growing here in Canada. So that's another area of aggressive expansion that we are considering and deploying over the next number of months.

Jim Durran: And you said that there has been some improvement, are you at or getting closer to the holy grail of breakeven on an online transaction?

Richard Dufresne: Well, we certainly have a line of place to it.

Galen Weston: We have certain stores that are performing way better than expectation, obviously not all of them, but that gives us hope that we can get there.

Jim Durran: So your feeling would be that, while it may be a deterioration to margin, it’s not highly destructive and really therefore --.

Galen Weston: If you remember what this all hinges on is the amount of incremental sales that you actually achieve from having an online proposition. The more it is a direct sort of dollar for dollar cannibalization exercise, you can understand how difficult it is to make it work if you’re actually adding cost to the system. But if your mix improves substantially and your basket size increases substantially and the number of customers who are actually shopping at one of your stores increases in a meaningful way, these are all things that move it along the lines of being a satisfactory investment. And as Richard pointed out, we have some stores that are showing some very promising results.

It takes time for them to scale up to the right level and we don’t know at this point how many stores are actually capable of achieving the kind of incremental performance. So, we are proceeding with caution but with some confidence, too.

Jim Durran: Just one last quick question on deflation. Within the quarter and as you sort of look at it over the next two quarters, is that FX that’s really going to be a driver to deflation story in the Canadian grocery industry or is there incrementally some commodity input cost deflation occurring from the source that’s going to drive that?

Galen Weston: Yeah, I mean I think at the moment, you got to look at the inflation that we are cycling from the previous year, that’s probably the biggest force that is contributing to the shift that’s taken place over last few months. And yes for sure, another big driver of inflation/deflation is the value of the Canadian dollar, anybody can speculate and what’s going to happen in the U.S.

based on recent events and will certainly affect the outlook. And then as I said before, we are making some targeted investments in areas where we think that the actual unit price on items is too high and we are lowering prices and we are seeing consumers respond in those categories to the lower prices and that’s driving unit up. So it’s really tough to isolate all specifically, but if you have to pick one, look at what the cycling of inflation is from last year.

Jim Durran: Okay. Thanks, Galen.

Operator: Our next question comes from Michael Van Aelst from TD Securities. Please go ahead. Michael

Van Aelst: Thank you. And congratulations on the numbers. On the inflation it sounded like the price investments started at the end of Q2, if I remember correctly or near the latter part of Q2 and continued through Q3.

However, your price or your price asked from your suppliers is 1.45% only kicked in in September. So is there a bit of a disconnect between the timing of when you're making that investment and when you're getting the rebates from suppliers?

Richard Dufresne: There is a bit of a disconnect, there is a bit of a disconnect there in terms of the cost of the investment. But suffice to say we have an expectation of how much we were going to get from suppliers as a result of that ask, and that was really built into the way that we designed the investment plans from the end of the second quarter through to the balance of the year.

Galen Weston: You’re right Michael, the money from the vendors started to come in in September. Michael

Van Aelst: Okay.

Should we expect a little bit less pressure on your gross margins in Q4 or would you be looking to increase your investments?

Richard Dufresne: Look again, I think you got to go back to our stable trading platform, nothing has changed in terms of our views around delivering stable gross margin overtime and we thing that we will invest as necessary in order to maintain our and improved our competitive position. And beyond that I think it would be inappropriate to comment.

Galen Weston: The only thing I would add Michael, is obviously our gross margin is helped by the performance shoppers and we are starting to see some benefit from shrink which is also helping. Michael

Van Aelst: That shrink is in the food or in the drug?

Galen Weston: It's in the food. Michael

Van Aelst: All right.

And then finally, on your -- and your free cash flow has been exceptionally strong year-to-date, but your buyback hasn’t been all that aggressive, I am wondering why you’re not spending more of your free cash flow on your NCIB?

Galen Weston: Actually we are spending all of our free cash flow, Michael, if you noticed we actually paid down $525 million of bonds that came due I guess in the summer or in beginning of the summer. So we made that decision because we thought it was good one. So essentially if you look at our cash balance, it is actually not moving. So we are using all of our free cash flow and there is no debt repayments in 2017. So we should be reorienting our cash flow to buyback.

Michael

Van Aelst: All right, I’ll follow up offline on that. Thank you.

Operator: Next question comes from [indiscernible] from Dundee Capital Markets. Please go ahead.

Unidentified Analyst: Just wondering if you can speak to the factors that drove the improved retail pharmacy dispensary margin?

Galen Weston: We don’t specifically talk about the improvement in margin in drug, but overall the only thing I would say about the pharmacy business is that overall we continue to gain share in that business, and that’s clearly a positive factor.

Unidentified Analyst: Okay, and then just as we look out in the Q4 in 2017, any particular areas on the regulatory front you are keeping an eye on?

Galen Weston: When you say Q4 2017 --?

Unidentified Analyst: I mean Q4 2016 and beyond, that’s what I mean. Pardon me.

Galen Weston: No nothing beyond the norm, we are not --.

Unidentified Analyst: Okay. And then just on the QHR [ph] acquisition that was obviously something that you could afford, but meaningful acquisition none the left, you got some well capitalized players in that space, how you sort of view the evolution of that business overtime? And where does it kind of fit in between the Loblaw and Shoppers sort of ecosystem?

Richard Dufresne: Yes, so it rolls up into Shoppers, and think about it as part of a medium/long term view on how healthcare is going to evolve over in the next number of years.

And our perspective on that is just fundamentally rooted in the digitization of healthcare system, e-prescribing and wellness and so on and so forth. We think that Shoppers Drug Mart and Loblaw, I’ve articulated on the number of occasions, our collective believe in the combination of wellness driven by nutrition or food and the health driven by therapy management and pharmacy, the intersection of those two and the acquisition of QHR adds the medical practice, it adds doctors to create a bit of a triangle and we are developing a strategy where we think our business had the opportunity to prosper as the digitization of healthcare starts to take place.

Unidentified Analyst: And one last question just today are there any concerns like as you start to go a little bit more vertical in the healthcare space just in terms of patient data privacy, how do you manage those things going forward?

Galen Weston: Yeah, good question. Probably not questions that we can answer sort of in a satisfactory fashion on the call, but suffice to say, yes. All of these things are consideration that need to be looked at, we are doing that and those will be a part of how we deploy that strategy.

Unidentified Analyst: Okay. Thank you very much for your time.

Operator: Our next question comes from Keith Howlett from Desjardins Securities. Please go ahead.

Keith Howlett: Yes, I wonder if you could speak as to how the general merchandise and apparel business is performing both in sales and margin.

Galen Weston: Yeah, so margin is strong, sales are a little tougher, especially since we’ve had such a warm fall. And now heading into sort of a rainy November, that’s never great for a seasonal merchandise coat, scarf, and for Christmas GM. But it’s not something that we consider a major source of concern.

Keith Howlett: And then I just saw on the shrink improvement in the food business, is that part of a -- like a larger program that you’re part way through or is it related to a specific improvement at one category of the store or what does that relate to.

Richard Dufresne: So Keith shrink essentially now we are fully on the SAP.

We cannot measure it correctly or consistently and the operators now believe the numbers they’re seeing and therefore we see when you can measure it, you can manage it. So now people are actively managing it and therefore we’re starting to see improvement across the board, so we are quite excited about what we’re seeing, but I wanted to make the point that in Q3 of last year, it was actually a really bad quarter from shrink perspective. So the year-over-year improvement is significant, but going forward we expect to see more benefit of shrink going forward as people understand it, about its source, it’s one of the SAP benefits that we’re quite proud to highlight and therefore we can see more improvement going forward.

Keith Howlett: And then just a question on the Shoppers Drug Mart when you rollout the expanded food assortment, would you prefer to have a larger footprint Shoppers than the sort of 14,000 model or is that model sufficient for the food program?

Galen Weston: So, no we don’t need a larger Shoppers Drug Mart to deliver enhance food, in fact one of the things that we are learning as we put most of these enhanced food department into smaller Shoppers Drug Mart in the downtown core of Toronto is that, we can do a lot more with less space than we previously realized. And it is -- it’s very exciting.

Keith Howlett: Thank you.

Operator: Our next question comes from Patricia Baker from Scotiabank. Please go ahead.

Patricia Baker: I think it's fair to say that Q3 you certainly saw that if you get the price right for consumers they will come and shop and drive the unit value. So if we shift away from that and look at the shopper front store and you had a really nice comp there are 3.9%.

How promotional -- leaving aside beauty, how promotional to have to be in that segment to maintain volume growth and same-store sales?

Galen Weston: Yes, so a lot less promotional today than that business needed to be two or three years ago, and that’s why we keep coming back to this point which is as we significant enhanced that food assortment and let’s just forget fresh, to improve the food assortment, that is a high traffic repeat purchase part of the shoppers Drug Mart proposition. And as strong as it is, it's allowing that team to invest a little bit less in some of their more traditional traffic driver, that might be milk or pasta [ph] and so on so forth. That is part of what's contributing to the margin, its sale with a less aggressive investment.

Patricia Baker: Okay. That's very helpful Galen.

But you referenced earlier in answer to someone else's question that you are gaining market share in scripts. Is that just general -- is any of that coming from the fact that you are drawing more traffic to the front of the store with the food and you’re getting some conversion there, or is it just the general sort of attraction that we're seeing in that market from other players.

Galen Weston: Well, I mean I think we are still benefiting and it may go on for a long time. We are benefiting from the exit of Target, even though it seems quite a long time ago. That business continues to improve the customer proposition in pharmacy, we have been working hard to target areas or customer segments that we under index like retirees and we’ve seen some positive traction on that.

We have made some pricing decisions on the co-pay over the last couple of years which is also contributed really positively bringing new customers into the stores. So what I would say is that the team is doing a great job in a way that they’re trading the business across the board and it's contributing to positive share growth in pharmacy.

Patricia Baker: Okay, thank you.

Operator: [Operator Instruction] We will now take the next question from Vishal Shreedhar from National Bank. Please go ahead.

Vishal Shreedhar : Is a quick one here on shoppers drug Mart and marijuana dispensing. I want to get you your view on what your thoughts are for pharmacies potentially doing that and what kind of opportunity is there for shoppers in terms of dollars?

Galen Weston: Okay, so good question. I mean first maybe I can clarify the two things that are covered in the media as it relates to marijuana and shoppers Drug Mart. The first is that we have applied for a mail dispensing license, so that we can dispense marijuana the way that other mail order pharmacies can actually do that and that’s legal. It's just a -- it's an application process and we hope that that will turn out positively for us.

The second thing that we are doing in conjunction with the pharmacy industry as a whole is we are engaging with the federal government and engaging with the provincial government around dispensing marijuana -- medical marijuana directly from our pharmacies. And we see that as a really compelling sort of change in approach for managing marijuana. We think that the pharmacy is extremely well suited for processing controlled substances and we think that there are significant medium term opportunities for marijuana to be part of the pain management therapy formula for Canadians as we move forward. So we are keen on it. As far as what the size of the opportunity is, let’s say it’s meaningful, but it’s not transformational to the pharmacy business.

We make a point of processing drugs and that’s what our business model is based on and this was simply the -- an incremental addition to that. Vishal Shreedhar : Thanks for that. Do you any idea where the government is regarding the marijuana legislation, probably years away? Is it near term?

Galen Weston: Yeah, I don’t think we can comment, that’s really in the hands of the government, you’ll have to ask them. Vishal Shreedhar : Okay. Thanks a lot.

Operator: We now have a follow-up question from Keith Howlett from Desjardins Securities. Please go ahead.

Keith Howlett: Yeah. Just one thing if you could update us on the beer and wine that you’re now able to sell in a small number of stores in Ontario. How that’s worked out whether it adds anything or builds traffic or what’s your early view of it is?

Galen Weston: Yeah, so broadly speaking there are simply deregulation effort underway across pretty much every province as it relates to beer and wine specifically and in some cases alcohol.

We believe that the grocery channel should be a robust and important part of the deregulation of alcohol, it’s a great place to improve access for the Canadian consumer. We’ve demonstrated it very successfully in a number of provinces that we can effectively manage it as a controlled. What’s happening in Ontario is one variant on how you deregulate beer and wine sales, we are I’d say happy with the results, they drive traffic, they drive traffic and improve basket more than it is a direct positive contributor in terms of margins and we are being very careful that we don’t overpay or the licenses that we do want to have access to, but we will continue to add as those licenses become available.

Keith Howlett: Just one last question on the conventional business in Western Canada. You’ve opened some Loblaw market stores and it sounds like you’re moving some extras to your independent grocer.

In terms of the residual extra stores are they more likely to become conventional versus No Frills or is just specific market-by-market.

Galen Weston: Yeah, so the first wave was converting to No Frills. The second wave is converting them to your independent grocers. Right now I’d say we’re down to kind of the last remaining and we are looking at them on an individual site-by-site basis and we’re going to make the most efficient capital investment to keep them performing at a satisfactory level.

Keith Howlett: Thank you.

Operator: As there are no further questions at this time, I would like to turn the call back to Ms. Sophia Bisoukis for any additional remarks.

Sophia Bisoukis: Thank you to everyone for joining us today. If you have any further questions, you can contact our Investor Relations team. We look forward to speaking with you all again to discuss our fourth quarter 2016 results, which will be held on February 23, 2016.

Have a good day.

Operator: Ladies and gentlemen, this concludes the Loblaw third quarter 2016 conference call. Thank you all for your participation today. You may now disconnect.