Empire Company Limited

Good afternoon, ladies and gentlemen, and welcome to the EMPIRE Second Quarter 2020 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require assistance, please press star zero for the operator. This call is being recorded on Thursday, December 12, 2019, and I would now like to turn the conference over to Katie Brine, Director, Investor Relations. Please go ahead.

Thank you, Joanna. Good afternoon and thank you all for joining us for our second quarter conference call. Today we will provide summary comments on our results and leave as much time as we can for questions. This call is being recorded and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website as well. Joining me on the call this afternoon are Michael Medline, President and Chief Executive Officer, Michael Vels, Chief Financial Officer, and Pierre St. Laurent, Chief Operating Officer, Full Service. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline.

Thanks, Katie, and good afternoon, everyone. I'm extremely proud of our team. They have transformed our company from one which had quarterly adjusted EPS of 12 cents three years ago to one that earned 58 cents or 52 cents after you back out the impact of the Crombie transaction. That's a 333% increase in EPS in just three years. And most importantly, we've built our brands and improved our customer service over that period. You know, I'm going to do this a bit differently today, and I hope to give you a bit more color on the business. Today, I want to talk about seven topics. Our performance this quarter, what we're seeing in the market, our EBITDA margin, FOLA, Farm Boy, our store renovation program, and our ownership position in Crombie. I'll leave it to Mike to take you through some of the details of our quarter, the results of Project Sunrise, the Crombie Oak Street transaction, and an update on our capital spending and share repurchases. Let's start with our performance this quarter. Sales were up in all regions, across all banners, despite a more competitive and promotional marketplace than we have seen in some time. Same store sales were 2%, with both customer count and basket size up. Internal food inflation was approximately 2.4%, and our same store sales were 2%, implying relatively flat tonnage. We also have several different data points that we use to look at market share at more granular levels. Based on these additional data points, we believe our market share held relatively steady during the quarter. We are working hard to thrill our customers with stronger execution and through our strategic initiatives. As you can see from our margins, we are not chasing empty calorie sales. Gross margin rate was up 90 basis points from our second quarter last year. Category resets continue to expand our margin as anticipated. We have not at this point done what some of our competitors have done when they say they tried to improve the trending of their food sales with margin investments. We are working hard to earn our sales growth through better execution. However, we do intend to protect and grow our market share going forward. Perhaps I'll just make a few comments about the state of the market and what we're seeing and watching out for. We are monitoring consumer spending and promotional activity closely. Although we had positive tonnage in the last month of Q2, we have seen a slight softening in sales at the end of the quarter and into the beginning of Q3. We think that part of this could be due to the relative health of the Canadian economy, and we are closely watching key indicators like employment and the recent communications of our Canadian banks. We also saw early inclement weather that can be good for some retail, but not so much for grocery. We continue to be very proud of our margin performance, but we think that we could have been a little quicker responding to a more promotional marketplace. And so, as I said, we'll be making sure we protect our sales going forward, while at the same time being smart about it. Just to be clear, we're only talking about a little fine-tuning here. Second, our EBITDA margin. This is our most closely watched number. Quarter after quarter, we continue to chew into the EBITDA margin gap between us and our two major competitors. We are extremely focused on an overarching goal to close the food EBITDA margin gap with them. We're gonna finish the job. We don't believe there's any reason for us not to be able to do it so long as we continue to execute and set a strong strategy. I do say food retail gap as there are certain structural differences between the three companies. The most important difference is that we have a smaller pharmacy business which historically has had a higher EBITDA margin than grocery. On an apples-to-apples basis, our fee IFRS 16 EBITDA margin is up 50 basis points over Q2 last year when you removed the impact of the Crombie REIT transaction. That's a big move. Our approach to closing our food EBITDA margin gap is two-pronged. We're focused on improving our cost base, and SG&A is pretty well there. With COGS, we had to start with category reset to get us on an even playing field, and now we need to be more efficient with our categories. Sunrise was the first step, and we have made great strides, but we still have way more upside. We're also focused on our sales productivity. We have great people and great assets in great locations across the country, and we will now optimize them. Third, I wanted to talk about Voila!, our game-changing e-commerce solution. While most players in the industry are focused on inefficient store pick models to fulfill their online orders, we are building automated warehouses powered by OCADO's world-leading grocery technology. We'll be able to provide customers with convenient, short delivery windows beginning early in the morning and running until late in the evening. The system is more flexible than you might think. Customers can place orders at night for the next morning or morning for later that same day. This is the only e-commerce model that at scale will eventually allow us to profitably deliver an expanded assortment of groceries to over 75% of the Canadian population with only four CFCs. While our focus is on home delivery, we can also do click and collect sourced out of the CFCs if that's what customers want in certain areas. Although I must add our data and experience tell us that when given the choice, customers overwhelmingly prefer delivery to home. The flexibility of the hub and spoke network model, where each CFC is the hub and smaller cross-stop facilities are the spokes, allows us to get closer to the customer. And we have plans to build on this best-in-class OCOTO infrastructure. We will build even more flexibility over time to meet customers' needs. There is a reason that many of the best grocers in the world, including Kroger in the US, Casino in France, Ikea in Sweden, Kohl's in Australia, Marks and Spencer, and Morrison's in the UK, and Aeon in Japan are partners with Okado. The reason being is that Okado is the most advanced and continually innovative small cube e-commerce solution in the world. Frankly, any plan B is just not nearly as good. When we study what Canadians are looking for in an online grocery offer, it's quite simple. Excellent, fresh product at competitive prices, no substitutions, delivered to their door exactly when they want it. Bola will deliver on exactly that. At scale, Voila will offer an expansive selection of up to 39,000 products, which is way more than any other grocery e-commerce business in Canada, and 15,000 more than your average grocery store, including high-quality fresh produce at prices comparable to our bricks-and-mortar, Sobeys, or IGA stores. An online grocery home delivery experience like Voila does not exist in Canada. We're going to grow the market. Voila is on track to test on soft launch in the GTA in late spring. We are so confident in the Voila solution that we have already started building our second CFC in Montreal with our partner, Crombie Reap. This CFC will serve major cities in Quebec and the Ottawa area and is expected to open in 2021. Fourth, Farm Boy, which along with Voila is a weapon for winning share in urban markets in Ontario where we are under-penetrated. Farm Boy has been part of the Empire family for just about a year now and continues to deliver on its industry-leading operational and customer metrics. It is outperforming all of our expectations. The phenomenal team at Farm Boy is making progress against its plan to double the size of the business in the next five years. The Farm Boy store camp will grow in a mix of urban and suburban communities with diverse store sizes and formats to fit the needs of local customers. We opened a new Farm Boy last week in Burlington and have announced plans to open another six stores in 2020 and two in 2021. Most of these new stores will be in the GTA, five in downtown Toronto, one in Newmarket and one in St. Catharines and one in Ottawa. The stores will range in size from a 12,000 square foot urban footprint to a 38,000 square foot signature store. This will bring Farm Boy's total announced store count to 37 stores. And this is just the beginning. Farm Boy is in different stages of development on more than 25 new stores in Ontario, a mixture of greenfield conversion and mixed developments. We intend to blanket the GTA and take market share from incumbents. In a market where we have always had low market share, Farm Boy's aggressive plan for growth is being well supported by Empire's infrastructure and capabilities in real estate, sourcing and logistics. Fifth, our store renovation program. We have an ambitious store renovation program that ensures we deploy capital to most of our bricks and mortar stores over the next seven years. We are investing capital at solid returns to revitalize our stores, both discount and conventional. Our renovations will range from a refresh to a full reset of the store, but at a minimum, you will see enhancements to decor, facades, and modifications to our key departments to better support our strategy. So far in this fiscal year, we have touched 28 of our conventional stores and we just finished refreshing all of our Freshco stores in Ontario to the Freshco 2.0 model. We will ramp full service renovations up as a result of our renovations are very strong. And finally, something we don't talk about often, our ownership position in Crombie. Crombie is our largest landlord. We currently own 41.5% of Crombie and we are pleased with this level of ownership. We are working even closer with Crombie REIT's management than we have in the past to optimize the value of our partnership. Crombie REIT leads mixed use development opportunities provides capital to facilitate our strong renovation program, and has had a history of sale and leaseback of properties, allowing Empire to effectively reallocate our capital to higher growth opportunities in other parts of our business. A great example of our partnership, mutually benefiting Crombie Reed and Empire, is our Davies Street store in the heart of Vancouver. Crombie REIT took ownership of our Davie Street store, closed it and developed a mixed use property for Crombie REIT. At the end of fiscal 2020, we will be opening a brand new 44,000 square foot store on the property, which features up to 330 residential rental units that will increase traffic to our stores. We are pleased with the momentum in our business. It is a testament to the growing strength of our team. I want to wish you all a great Christmas and holiday season, and if you want to eat really well over the holidays, shop for food at one of our great banners. And with that, over to Mike.

Thank you, Michael. Good afternoon, everyone. Project Sunrise is on track, and we continue to estimate incremental savings of about $250 million in fiscal 2020 as we progress through its final year. Incremental benefits continue to be earned at a rate of approximately a quarter every quarter of fiscal 20, but roughly 80% to gross margin and 20% to SG&A. Academy resets were completed in our stores at the end of October, and the incremental benefits will continue to show in our margin line for the rest of fiscal 2020. The increasing margin of 90 basis points This quarter directly reflects those category reset initiatives in addition to the positive effect of FOMBOY. Adjusted selling and administrative expenses as a percent of sales was 20.9% this quarter. If you exclude the impact of IFRS 16 and the inclusion of FOMBOY's higher labor cost model, SG&A as a percent of sales was essentially flat. Sunrise savings of approximately 25 basis points positively impacted the rate. largely through indirect sourcing cost reductions and continued store improvements. This was partly offset by lower impairment reversals than the prior year. Our discount expansion in the West continues as we convert underperforming Safeway and Sobe stores to Freshco. This has a temporary impact on sales and gross margin dollars as the stores are closed for conversion for several months. The first wave of Freshco stores in the West have now been open for a full quarter. And we're so far pleased with customers' reactions and the traffic we're seeing. Two years ago, when we first announced the discount expansion in the West, we noted that it would be slightly dilutive to earnings in the first few years. This quarter, the impact was approximately one cent of dilution on earnings per share. And we continue to believe at this point that the dilution impacts, as we build out the strategy, will be relatively immaterial. Equity earnings increased year-over-year principally due to the sale of a 15-property portfolio by Crombie REIT that contributed an additional $15.1 million to equity earnings, plus $6.9 million in deferred gain recognition. In total, this positively impacted our share of Crombie's earnings by approximately six cents per share after tax, which we would consider to be an unusual effect that is not expected to recur. The effective income tax rate for the quarter was 26%, and we continue to estimate that, excluding the impact of any unusual transactions or differential tax rates on property sales, the effective tax rate for fiscal 2020 will be between 26 and 28%. Our cash flow generation continues to be strong. Year-to-date, our free cash flow of $253 million reflects the improvements in our operations. and has enabled us to reinvest back into the business in a disciplined manner. One example of that reinvestment is the great success we've had retrofitting our stores with LED lighting, which will be in more than 300 stores by the end of fiscal 2020. Of course, this is better for the planet. It's also more efficient for our stores and significantly improves our customers' experience in the store. We continue to estimate that our fiscal 2020 capital spend will be approximately $600 million. Additional benefits of our improved cash flow are the ability to repurchase shares and repay debt. And in the second quarter, we repurchased approximately 930,000 shares for $33.1 million, and we remain committed to our $100 million target for fiscal 2020. In addition to that, we also repaid $250 million of our credit facilities. We're now halfway through fiscal 2020. The teams worked hard to earn this $0.52 quarter, and there is a lot of excitement building as we get closer to completing Project Sunrise, launching our e-commerce Wallet platform, and continue to expand Freshco in the West and our Farm Boy banner in Ontario. With that, have a great holiday season, and I'll hand the call back to Katie for questions.

Thank you, Mike. Joanna, you may open the line for questions at this time.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speak phone, please lift the handset before pressing any keys. And the first question is from Mark Patry at CIBC World Markets. Please go ahead, Mark.

Hey, good afternoon. So I just want to ask on the top line, same-store sales and your measurement of inflation both slowed modestly from Q1, though I think CPI was relatively consistent. Michael, you talked about the step-up you saw from some of your competitors and that you didn't necessarily follow right away. Was this shift in the competitive environment sort of the driver of – of that deceleration in the top line or modest deceleration? And could you just talk about that dynamic a little bit more, please?

Yeah, I'll elaborate a little bit more, and then I'll ask Mike to talk about CPI and inflation. Look, I wouldn't overstate it, but we're watching the economy and market very carefully. We're watching whether there's been some deceleration in the economy, particularly in Alberta. We're also seeing whether we need to be more promotional in this market, even as we are more efficient in driving for margins. You know, we continue to be focused on growing our margins through improved category performance, but the top line certainly also matters, particularly going forward when we expect a need to increase productivity in our stores. And maybe I'll just touch on a few other things, just some stuff we expected. First of all, we talked about the number of stores we're closing in the West to convert to Freshco, and as we execute with more velocity on that program... We have more square footage out of the market temporarily and our store performance is also affected as the stores ramp down, which also affects our comps. These are expected impacts and the right thing for us to do. In addition, we're also having some strong comps that we are now laughing in our discount business and also in Saskatchewan where one of our competitors was on strike last year. I think we're a company that's really pushing to close that EBITDA margin, get the margin right. In the promotional market, we kept pushing for margin, maybe a little bit too much, but that's certainly fine-tuning and something that we can adjust over time. That's what we were seeing starting in October and up until now. That's the kind of thing we're seeing in the market. So we're seeing a little bit of difference, but I don't want to overstate it, Mark. And maybe, Mike, if there's anything you want to say about inflation or if you want to add anything.

I don't think so. I think that's right. Inflation at 2.4% is always below the CPI food purchase from stores just because those indices look at a fraction of the SKUs that we carry. We had, I think, a relatively... Modest decline from the last period. And as Michael said, we've been very focused, very consistent for the last three years that margins are important to us. But equally, we need to be competitive in the market. And we'll ensure that we are.

Okay, thanks. And I know, you know, obviously improving that top line momentum is – you know, is a focus, especially into the next fiscal year. And I guess I'd be interested to hear how much you think that will come from sort of more structural shifts in your business, like, you know, the rolling out Freshco and sort of being through that noise around conversions. And then obviously the introduction of Walla into Ontario and how much of it you think will need to come from, you know, better execution, either on, you know, promotions in store assortment, you know, et cetera.

Yeah, no, it's Michael here. I think that's a great question going forward. I mean, as I said in my, I don't know if you know, Mark, but I prepared the script beforehand, so there were prepared remarks. So I talked about the fact that you can get fake kind of false readings on sales if you want. You can promote. You can hit your margin. You can look a little bitter in tonnage. Try to resist that over the last number of years because that gets you in trouble and it's not really sustainable over the long term. I do think that we could have been a little bit more promotional in the back half of the quarter going into this quarter. But the real prize, like you just pointed out, is to be better at what you do. Be better at executing, wow the customer, build your brand, and in every transaction we have to thrill the customer. I think it's clear that in Project Sunrise 2.0 that the customer is going to be even more in the forefront than it was in the last three years. That our plan is to build market share through very organized strategic initiatives, not just trying to buy the customer for a while it'll be deep initiatives that we undertake to be able to build up our market share and as you also pointed out I think that the moves we're making on fresco on farm boy and especially on voila are going to allow us to take market share as we move forward a lot of the initiatives that we have been planning now for some of them almost three years are going to be starting to bear fruit and as we move into our next three year planning period that we invested early on that, which I'm glad we did, and that's going to put a little wind in our sails. So there are things we're worried about, but that's strategic and that's long-term. We also run for quarters. We remain a little concerned about the economy and what we're seeing cross-country, but mostly in Alberta, and how we're going to respond to a more promotional marketplace than we've seen in certainly since I've joined the company. Is that helpful? Okay.

Yeah, yeah, very helpful. And I guess just since you brought it up, do you have a timeline in terms of Centerrise 2.0 and when you'll be able to share some of those additional details?

Yeah, our hope is that this spring, probably May, but we haven't committed to that. We're going to figure out the best way to communicate. We're just finishing up. the plan right now, and we'll finish it up in the new year, and then we'll communicate it to you, our owners, in probably May, but it could be late April or June. We're just figuring out the timing and when we want to do that. Yeah, appreciate the call. Thanks. All the best. Thank you.

Thank you. The next question is from Karen Short from Barclays. Please go ahead, Karen.

Hi, good morning. This is actually Renato Basanta on the line for Karen. Actually, good afternoon. I was just wondering if you could flesh out some of your comments about the competitive environment, specifically if you can speak to where you might be seeing a step up, maybe from a geography and or a format perspective, that'd be helpful.

We're seeing it across the country, and obviously there's different competitors in different regions, but we're seeing it everywhere.

Okay, that's helpful. And then just on SG&A, can you help us think about the underlying growth rate? You know, obviously some noise with IFRS, Farm Boy, the restructuring cost reversals, but what's sort of the right rate we should, growth rate we should be thinking about going forward when you sort of normalize for all of those factors?

I think looking forward, outside of those factors, which we provided quite a bit of color on in our press release, we're going to see some positive benefit as we get through the back half of the year. You know, lessening in impact, of course, as we annualize prior reductions. So we'll see some positive impacts still from Sunrise. Our store labor does increase as our sales improves, but we do get some benefit, obviously, because there's some fixed and some variable elements in there. As Michael said, though, most of the work that we had to do on SG&A is pretty well there, it's close. So I think we, as a company, we're going to continue to be very cost-conscious, and we're going to find ways to pare our SG&A down, but we are pretty close to a steady-state run rate on SG&A if you factor out those one-offs and accounting items, I guess, that we highlighted in our first release.

Gotcha. That's helpful. And then last one for me. I was just wondering if you could provide a little bit of a preview on Sunrise 2.0. You know, obviously you're working through the plan, but if you could give us some color, maybe directionally on the potential size of the program, and then maybe just some teasers on what the focus will be with respect to sales productivity and gross margins, that would be helpful. Thank you.

I like you. Nice try. But I will, because you were so nice, I will say that, as Mike just said, we're always watching our SG&A, and anybody who knows Mike Vells knows he's watching it all the time, which is good. We feel like we're in the region of where it's right. I think you can expect far more going at the cost of goods sold, especially in the early years of the plan, where there's still so much room to improve that. and also going after sales productivity in our store where we think there's some real opportunities. But I think, you know, that that takes a tiny bit more time so that you'll see us going hard at cost of goods sold in the new plan while improving our sales per square feet across the country. And we've got the room to do that. As I said, there's absolutely no reason we're not going to close that EBITDA margin gap as far as we can to our competitors. We knew we couldn't do it the first three years, But we're gonna finish the job.

All right, great, thanks and best of luck. Thank you, have a good Christmas.

Thank you, the next question is from Michael Van Eyst from TD Securities. Please go ahead.

Thank you, good afternoon. Just on the category resets, so now that you're pretty much done, and you've put them all in as of the end of October, I think you said. When you look back at them now, how would you rank them on a scale of, say, 1 to 10? And what kind of things do you think you can circle back to in Sunrise 2.0 to take out additional COGs? Sure.

On a scale of 1 to 10, I'm going to leave Pierre to give you that score. He was accountable for it, and I don't want to create any ill feeling here. But, you know, I think we've said pretty consistently that we're comfortable with it. In terms of the next phase, and as Michael said, what can we do next? Here we'll provide some color in a second, but we did this very quickly, if you think about it. And in the midst of a very major reorganization for the company, And even without knowing our company, but knowing those facts, you'd think there's got to be a lot more upside when you fine-tune that category management. And as our analytics get better and as our merchandisers get better. So, you know, that's really what we're referring to when we say there's still some tailwinds that we intend to recapture in those areas. But maybe for some color here, why don't you give us the score and And tell us what you think.

It's probably the best initiative that company executed over, I would say, many, many years. A big benefit is I think our assortment has never been updated and irrelevant like it is now from coast to coast. more simpler to manage for our team, much simpler to shop for our customer. We give more space to more efficient SKUs. So I think the productivity on shelf is much better. We revisit, we cleaned up, I would say, the data and everything. So there's a lot of benefit internally for us that we will leverage because the team will spend more time to drive sales over time. and probably we're less complex to deal with for our supplier partners. So there's a lot of soft benefits over and above all the hard benefits we generated through that initiative. So very proud of our team. So pretty tough with my team, but on this one, not giving 10 on 10 won't be fair.

Yeah, I wasn't trying to say whether you did a good job at it. I was just trying to get a sense as to how much was – How much was left to improve upon in the second round as you go back and do what Mike said in terms of going back and trying to optimize or perfect the industry?

Customer trend always changing. So we have robust data. We're revisiting our data on a regular basis. So I think the next, going forward, it will be tweaks in every categories. with suppliers. So we just need to adjust our assortment based on customer trends.

The COGS improvement I'm talking about will likely, very little of that will come from the supplier partners. A lot of that's going to come from our own processes and disciplines and taking costs out and being far more efficient, which I've seen done before, and we have plenty of room to be able to do that.

Okay, thank you. And then on the CAPEX, you said $600 million for fiscal 20. uh with the cfcs or vola um spending next year or fiscal 21 and um and the intention to to start renovating your stores maybe more aggressively do we see that number go higher beyond 2020 so uh we are going to provide explicit guidance on that as uh

as we start to close out our year and look at the next one, as we've made a habit of doing over the last couple of years. So I don't want to lead into that, but to specifically answer your question, Michael, yes, it will be higher, but not excessively higher. As Michael and I have said very consistently, I believe that We do need to reinvest in the company, but we need to do it in a disciplined way, and we're going to balance that with our cash flow generation. So, yes, you can see it. I think it's just logical to conclude that it will be higher, but I wouldn't be looking for a major change in our approach or a very significant variation in our investment program.

All right. Thank you.

Thank you. The next question is from Vishal Sridhar from National Bank. Please go ahead.

Hi. Thanks for taking my questions. Just back to the competitive environment and management's desire to stimulate sales amid that environment. Is it simple enough to think that when management says we want to stimulate our sales line maybe a little bit more, is it just simple enough to say that means gross margin investment or are there merchandising tactics that a management can employ to protect that? Maybe some color on that.

Yeah, I mean, since Michael, first of all, I'm not going to have an answer, but because I think I've said enough on that without, you know, we have competitors. Secondly, I think you should also hear from us that we like having a good gross margin and not moving that around, flipping it around like we did. We worked three years to improve our gross margin, our EBITDA margin. We're not going to just flip everything on its head. At the same time, obviously, competitors across the country have been seeking sales. And we've been maybe a little slower to react to that, which I'm okay with, but we can continue to look for ways to execute across the country to hold market share like we have over the last couple of years. So this is a – I mean, we're talking fine-tuning here, like I said. There's a fine dance in merchandising in any retail, especially grocery, in terms of balancing sales and margins. and doing it in a smart way and making it really attractive for our customers, which is really the smartest thing we can do. But seeking empty calorie sales is a short-term investment that does not pay off in the long term. So we're going to do things the right way.

Okay, thanks for that. And maybe you already alluded to this, but you notice that the consumer backdrop is getting a little bit tougher. Maybe you can just give us your context on is this very incremental at this stage or are you seeing a meaningful change quarter to quarter?

In a short period of time, it's so difficult to read. And unfortunately, nobody around this table I don't think is trained as an economist to But we did see some changes. I don't want to overemphasize them, but we did see some changes across country, but especially in Alberta. We watched with interest and listened to our large banks and what they had to say in terms of consumer sentiment. And I think like everyone else out there, we are watching it and concerned. But there is nothing to panic about right now, but we are concerned.

Okay, and maybe just changing topics here a little bit. You mentioned that your Ocado partners are getting a lot of interest in their e-commerce solution. Wondering if there is such thing as too much interest and if you perceive that the Ocado support teams may be stretched a bit thin and if you can in fact achieve your goals given that they have so much more to do.

No, I don't think they're stretched too thin because it's all in an order. One of the reasons that we moved to tie up exclusivity in Canada, one was because we wanted the best e-commerce solution. We didn't want our competitors to have it, but we also knew if we moved fast, we would be higher. We knew everyone around the globe was looking at the solution. I think at that time, Monoprix was the only one who had announced before we did. It was only a couple months before us, so we were in negotiations. And we felt that the way that OCADA was organizing themselves, which I think is very good, would be that if we were too late to the game, that it would put us off by a couple of years because they would have different partners across the globe. But they're very well organized, and so I don't have that. Obviously, we don't have that feeling.

Okay, thanks for the color.

Thank you. Your next question is from Irene Mattel from RBC Capital Markets. Please go ahead.

Good afternoon, everyone. Not to beat this horse to death, but just really on the consumer behavior piece, obviously there is something going on out there. And you mentioned your robust data and analytics capabilities. When you scrub sort of the customer purchasing behavior Are you seeing the kind of signs that we sometimes see, like trade down? Are you seeing an uptick in private label? Are you seeing anything out there that points to shifting consumer buying patterns, sort of independent of we're buying a little bit more on promotion, and are they buying more on promotion? What is she experiencing?

I mean, it's such a short period of time that this is all occurring in that it's tough to see Across the country, there's too many other things going on. We had bad weather and we had some things that we were doing that were coming up that we were doing in terms of closing stores and so much other action. That's a great question, but I think we're going to have to see a little bit more time to see if any of that is playing out. We didn't see any big move away from full service. into discount or anything like that. Pierre, are you seeing any indicators on more of a category level or a private level?

No, not at this time. And as we said, we saw that in every format, every region. So it's everywhere. So there's nothing specific to some customer segments. So we're still looking at it and But it's too early when, like Michael said, we need a longer period of time to have conclusion around that.

Thank you. Appreciate that. And then I also want to come back to something that you said around closing the margin gap. So, you know, on a pre-IFRS basis, up about 50 basis points to 4.8, on a reported basis closer to 6.8. If, in fact, we focus on that 4.8, it would suggest that there's still a nice chunk that we can look forward to. Would you agree with that commentary?

Certainly would. I think you've got to just adjust. And we've done the math, and we'll share it with you. You've got to adjust for some structural things like pharmacy, a little bit on the real estate, a little bit on the fuel. But as far as we've come, we've come a long way. There's still a huge prize out there. So I would totally agree with you.

And it's your determination, Michael, to actually get at that price.

Yeah, I'm not going to commit today whether we're going to get all that three years or more of it or right on because we're still doing the work on that. But I always knew it was a six-year job to be able to close that food retail business. Gap, I think we've performed better. I think our team has been better than I could even have imagined at this point, so I'm more confident. And we're structured right. I mean, we couldn't have done any of this if we were still a regional company. That's only been just over a year we've been a national company. So now having all this structure in place, the people in place, the initiatives in place, and by the way, we don't wait to announce. We're already underway on a few things here. I think we'll have a right start into the new strategy and close the gap. I've always said that we had a long way to go, but on the positive side, we have the most upside of anyone, and we intend to outperform the market. I think people forget how much room we have. Thanks for reminding everyone, but we have a ways to go to be able to close that, and the upside is very, very large.

That's great. Thank you. One final one, if I will, if I may. So you talk about excitement and thrilling the customer. And again, you've got an awful lot on the go, and this is clearly a journey. But wondering if you could just talk about some of the initiatives that you may already have rolled out and what we should be looking for.

Yeah. You saw a couple of things that we announced with the caper cards stuff, which is a good thing to show the customer. But I think over the last three years, we spent most of our time to organize ourselves internally and structurally. It's behind us, most of it now. And we will put our focus on the stores, the customers. We have great assets across the country, a lot of square footage. The team is working now together on the plan to focus on that. So I think that's where the fun is in retail, and the team is very excited to bring new things, you know, enhance the food offering. We have a great partner with us in this company now. We made very good strategic acquisition that we'll leverage. So there's a lot of good initiative in place now.

I think the other thing I'm really proud of is when I first joined, I would have said to this group that I didn't think that we differentiated our banners, that our brands didn't have that brand promise that I really like, and that we didn't differentiate between the banners enough. I think that the work that marketing with merchandising and ops are doing, that you're starting to see if you walk through our stores today in the Christmas season and you look at some of the ways that we're differentiating our banners and really bringing those to life, and a lot of things we're doing around our banners and appealing to our customers. We're not all the way there yet, but we've made big inroads, especially over the last six, 12 months.

That's great.

Thank you.

Thanks.

Thank you. The next question is from Peter Squire from BMO Capital Markets. Please go ahead.

As you talk about your e-commerce business, you talk in the context of having four fulfillment centers. So do you have any, can you give us a timeline of when you think you would be building number three and number four?

No, we're going to open up Toronto. All our attention is on opening up Toronto and we're moving the dirt in Montreal. We're going to open soon. You know, the opportunity here, we're going to have such a strategic opportunity and such a weapon and voila. that we're going to have to huddle after we open up Toronto, see how it's going, and then decide on the timing. We got a pretty full plate. We have a lot of opportunities as well in these store renovations I was talking about. Very excited about the returns on store renovations in a short period of time. So we'll have to look at that and see what the timing's like, but that'll give us a big head start in two of the major markets, and then we got at least two to go, right?

Yeah, but Michael, are you committed to number three and four with your agreement with Ocado?

No. We're not committed to anything other than having exclusive rights in Canada and to grow at a certain pace. We're growing much faster in the pace, in fact, that we talked to Ocado about growing at. So there's no issue in that. There's no hurry. But the thing that's bothering me and why we think about it a lot is if you've got the greatest weapon and it takes two years to get it up and put it in the market, that's a bit of a delay. And also to be able to exploit it through spokes and micro-fulfillment and all the other things we want to do to be able to own the whole market in e-commerce. So those are all the things we're balancing. But My hope would be to get the other CFCs open in a timely manner, but we're not committed. We would tell you if we were. And I want to have all of our attention on this GT opening. It is really important to our company.

Okay. On another topic, with the Fresh Go rollout out west, I'm sure you have some You do consumer market research, and I'm just wondering what you're seeing in terms of development of the brand. Did you know that there was no brand identity for Fresco really out west? And so I'm just wondering how you're doing when you undertake your market research and other measures.

Yeah, we're probably doing more market research than I've ever seen in terms of opening up to banner and we're doing really well on that and but you're right you have to consider this is a new banner to this market so we make we have to make a big splash when we open and we got to continue that for a while our competitors do not enjoy it when we reopen and we'll reopen because they've had six months or whatever it is and some of the locations to be able to take some market share which we then take back they resist we fight we get it back and but considering there's a new banner in this market, which we knew, I think that the work by, first of all, the FreshCo team led by Mike Benton and the work by Sandra and the marketing team working together has been superb. So we look at this very, very closely, as you can imagine, in terms of the customer data and the sales data for just opening and where we are, and I'll be at early days, very, very pleased. Just want to get more open. But you did see some of that. As I said before, you see in some of our same-store sales and our sales numbers that we had some closed doors, and that will all work its way through the system as we are opening and closing and doing things like that. But there's some granular level of effect to our comps as we do that. We wear off inventory and close down the stores.

Okay. Thanks. Then just lastly, can you comment how – your internal inflation was trending as you exited the quarter and as you got into the third fiscal quarter?

It was pretty consistent through the quarter. A little bit of a, probably a fall off towards the end, but really not sufficiently material to take note of.

Okay. Thanks, Michael. That's all I have. Thank you.

Thank you. The next question is from Chris Lee from Desjardins. Please go ahead, Chris.

Oh, hi. Good afternoon, guys. Just one question left for me. Just wondering, what is your outlook on transportation costs for next year? You know, Dollarama last week mentioned shipping rates are going up because of IMO 2020. I'm not sure if that would impact you guys the same way that it impacts other retailers.

I think the best way to answer it is that At this point, we don't see that as being a material impact on our company in the next 12 months or so. We may be wrong on that, but that's not a cost pressure that we have in the front end of our radar here.

Okay. That's great. That's all from me, and happy holidays, guys.

Happy holidays. Great to be talking to you, Chris.

Thank you.

Thank you. Your next question is from Patricia Baker from Scotia Capital. Please go ahead.

Oh, thank you very much for letting me on at the last. And I have a couple of two questions or two topics for you, Michael, of your seven. So the first one is Farm Boy. And I don't remember if it was you or it was Mike who said that you're at various stages of development or negotiation with, I think, was it 25 properties for a for locations for Firm Boy. And I'm just curious whether if you look back, you know, to a year ago, just after you closed on the deal, being at that level of transactions for Firm Boy, is that further ahead than you thought you'd be at this time?

That's a difficult one to answer because, you know, it would be easy to say that we, yes, we're further ahead than we thought we would be. But, you know, part of our thinking is, And part of Gail and Jeff's thinking when we combined our two companies was that we could take their rate of expansion that they had in their plans and accelerate them by using the power and the capability and the scale of our real estate group and our access to properties. So really what we're seeing is the successful execution of that belief or that hope. And so I think, as far as I know, where we are is accelerated from what the farm boy plan was without Sobeys, but is meeting our expectations about what we thought the two companies could do together.

Okay, that makes a lot of sense, Mike. And then maybe that's a good segue to my second question. included Crombie as one of your seven topics for discussion on the call and sort of talked about Crombie more than you have on other calls. You opened by saying that you currently have a 41.5% position and you're happy with that. So assuming what you're saying there is that that's, you know, for the foreseeable future, there will be no sell down in Crombie and that's an appropriate level for you to own. And I'm just wondering if you could expand a little bit further on on some of the, you talked about working with Crombie differently. So can you talk about, just give us a little more information about how that makes Empire stronger as a grocery operator going forward?

Yeah, I mean, I'll say a few things and I'm going to send it over to Mike. But I mean, I come from a background where, you know, the real estate department worked so well with the REIT at a previous company I was with. It was a really great relationship. And so when I came over, Donnie Clow and I, and then when Mike joined, Mike and Glenn and some of the others over there, and now Clinton, who's over there, there's just such a great opportunity to work together cooperatively for the best, obviously for the fiduciary duty of each of the different entities. And I would say that, and Donnie would probably say the same, that the relationship between our REIT and our real estate group, and our real estate group has been phenomenal, just phenomenal. It's working like, I'm told, in a way that it's never worked together before. And it reminds me a lot of my previous experience when that was working so, so well. And that just creates so much opportunity. I think, you know, because we've been so busy turning around, you know, our results here at Empire. We forget sometimes the power of that REIT and we don't talk about it a lot and that we're very pleased with their performance. We're very pleased with their developments. We really like how it returns capital to us and that we can have better locations for our stores and they like us in many ways too. So it's a symbiotic relationship and you think, well, that's always great. I would say that The way it's working, and I would give a lot of credit to our real estate group and to Mike and to the people over there. This is a big upside for us, and we're very pleased with the ownership and very pleased with how it's going over there. Mike, do you have anything? I mean, you spent a lot of time as well on that.

I'm responsible for ensuring that it works. So I'm going to just say it's going great. But on a more serious note... The two companies exist for their respective shareholders, clearly, so Crump has strategy, so do we, but we're heavily linked because of the grocery property factor, and there's just a long list of opportunities and collaboration that you would, if you were managing it properly, you'd expect to see. So most of the work is clarifying expectations, installing process, you know, being transparent with each other's strategies and where we could take one and one and make it equal three. So it's, you know, that's a, I think that's just smart business. And ensuring that we have the right people you know, properly incentivized and motivated to get that done really was how Michael and I had it and how we made sure that it was as good as it could be.

Okay, I really appreciate that. And I like the notion that you're working on making one plus one equals three, Mike.

I've never heard Mike say that before. I was excited. I was 42%. Thanks, Patricia. Have a great holiday.

You as well.

Thank you.

Thank you. There are no further questions at this time. I will now turn it back over for closing comments.

Thank you, Joanna. Ladies and gentlemen, we appreciate your continued interest in EMPIRE. If there are any unanswered questions, please contact me by phone or email. We look forward to having you join us for our third quarter fiscal 2020 conference call on March 12th. Happy holidays.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.