Jean Coutu Group's (JCOUF) CEO Francois Coutu on Q4 2016 Results - Earnings Call Transcript

| About: Jean Coutu (JCOUF)

Jean Coutu Group PJC, Inc. (OTCPK:JCOUF) Q4 2016 Earnings Conference Call April 27, 2016 9:00 AM ET

Executives

Helene Bisson - VP, Communications

Francois Coutu - President & CEO

Andre Belzile - SVP, Finance & Corporate Affairs

Analysts

Irene Nattel - RBC Capital Markets

Michael Van Aelst - TD Securities

Mark Petrie - CIBC World Markets

David Hartley - Credit Suisse

Jim Durran - Barclays Capital

Vishal Shreedhar - National Bank Financial

Keith Howlett - Desjardins Securities

Operator

Welcome to The Jean Coutu Group's Financial Results for the Fourth Quarter and Fiscal Year 2016 Conference Call. I would now like to turn the meeting over to Ms. Helene Bisson. Please go ahead.

Helene Bisson

Thank you. Good morning, everyone. The Q4 earnings release was put on the wire earlier this morning and it was then posted on Jean Coutu Group's corporate website. The quarterly press release is accompanied by additional financial information and we will refer to the quarterly results slide presentation and MD&A during this call. The press release and MD&A are also available on SEDAR. Here with me this morning are Francois Coutu, President and CEO; and Andre Belzile, Senior VP, Finance and Corporate Affairs. Mr. Coutu will discuss Company's results and key operating highlights and Mr. Belzile will then cover a few financial details. This will be followed by a question-and-answer period for analysts only. I would ask you to limit yourself to only one question at a time, so as to allow us time to address as many different analysts' questions as possible. Media are invited to contact me for comments or interview purposes. We would like to remind our listeners that the Company's forward-looking statement disclaimer applies to all our communications.

Now Mr. Coutu will begin our presentation.

Francois Coutu

Thank you, Helene and good morning, everyone. I hope you are all doing well. During the fourth quarter, we began the transfer of our operations from our distribution center and head office to their new location in Varennes. We expect to complete the transfer by the end of the summer. The quarter's results were affected by the costs related by this gradual transition as well as by a decline in the incidence of influenza during this period. Let's look at the details of these results.

During the fourth quarter, network sales increased by 0.6% to CAD1.105 billion, while the Jean Coutu Group's consolidated sales were down by 1% to CAD634.3 million. As shown on the first table, network pharmacy sales decreased by 0.1% while distribution center pharmacy sales were up by 0.8%. The introduction of new generic drugs reduced retail pharmacy sales growth by 0.4% in the last quarter and price reductions of generic drugs reduced by another 0.3%. Furthermore, the periodical withdrawals agreement between the Ministry of Health and Social Services and the AQPP reduced the growth of those sales by an additional 1.6% without these deflation factors, network pharmacy sales growth would have been 2.2% in the last quarter.

The generics penetration rate increased by 1.8% year-over-year to reach 70.3% in the last quarter, thus impacting pharmacy sales. Note also that last year, network pharmacy sales growth of 4.4% was helped by more introductions of new expensive specialty drugs. Network front-end sales showed an increase of 1.3% while distribution center front-end sales decreased by 3.5%. The difference between growth of retail and wholesale revenues was explained mostly by the increase in sales of products shipped directly by suppliers to pharmacies, such as prepaid cards, seasonal confectionary for Easter and other things; and by the decrease in OTC sales which resulted in a reduction of inventory at retail at quarters' end.

Turning to the next slide, we see that operating income before depreciation and amortization decreased by 5.4% this quarter to CAD79.6 million. This decrease is explained by a reduction in gross margins on sales of prescription drugs as well as margins on sales of product drugs; the increase in general and operating expenses, such as higher labor expenses for annual inflation and higher volume handled in the distribution centers; and to the expenses for the transition of the distribution center to the new location in Varennes. Net profit amounted to CAD51.5 million or CAD0.28 per share during the quarter and at February 27, 2016 compared with CAD55.2 million or CAD0.30 per share last year.

The following slide shows the quarterly same-store sales growth due to PJC network. On a same-store basis, network pharmacy sales decreased by 0.3% during the fourth quarter of fiscal 2016 over the comparable quarter, while prescriptions count grew by 3.1% year-over-year. Once again, keep in mind that combined with a 70.3% generic penetration rate, introduction of new generic drugs, price decreases and periodical withdrawals by the government, reduced pharmacy's retail sales growth. Also on a same-store basis, front-end sales decreased by 0.9% year-over-year. Overall, network sales increased by 0.3% during the past quarter on the same basis.

During the first fourth quarter, we have put forward many different marketing initiatives such as special weekly flyers as well as TV and radio campaigns. We also launched various promotions and popular contests. We're also very pleased to report that The Jean Coutu Group was ranked as the third most admired company in Quebec and first as a retailer in a survey conducted by Leisure Marketing recently. This preferred position in the market is once again well ahead of our competitors in the retail sector and the consultant population is almost unanimous on its positive opinion of our Company.

On the real estate front, we opened one new store in Baie-Comeau, Quebec. And on slide 8, you can see a photo of the new drugstore. Furthermore, there are 20 renovation projects underway. During the fourth quarter, we introduced online family health records. Through this simple and user-friendly platform, a single account can be used to access all health records for the members of a single family from newborns to grandparents. This new service proved to be very popular.

So, thank you. Now let's have a look at the financial review by Andre Belzile.

Andre Belzile

Thank you, Francois and good morning, everyone. The table shown on slide 11 reconciles operating income before depreciation and amortization to net profit. Income taxes amounted to CAD19.4 million in the fourth quarter of fiscal 2016 compared to CAD20.7 million in the comparable quarter of fiscal 2015. Earnings are still subject to a 26.9% tax rate in our 2016 fiscal year and there wasn't any significant item affecting this rate in the quarter. Note that our tax rate was impacted in the first quarter by a tax provision of CAD4.7 million relating to a Quebec court appeal decision, as mentioned back then.

The Supreme Court of Canada granted, in November, the leave to appeal filed by the Corporation in this file and hearing is scheduled for next month. Depreciation and amortization charges amounted to CAD9.1 million during the fourth quarter of fiscal 2016 compared to CAD8 million for the comparable quarter of fiscal 2015. Fourth quarter fiscal 2016 OIBA decreased to CAD79.6 million compared to CAD84.1 million in the comparable quarter of fiscal 2015. The gross profit was impacted by a CAD1.5 million one-time adjustment following changes in sales terms, with product under which all inventories of their products in our warehouse are in consignment from now on.

Also, the gross profit of product declined in the quarter following formulary price reductions earlier in the fiscal year. The lower quarterly EBITDA is also explained by an increase in general and operating expenses, such as higher labor expense for annual inflation and higher volume in our warehouses, as well as transition expenses of our headquarters and distribution center to their new location in Varennes. You also have a summary of our statement of financial position on the following slide. There was no bank debt used at quarter-end, again and we had CAD100.3 million of cash on-hand. We have sufficient liquidity with availability of CAD250 million under our revolving credit facility with an optional accordion of another CAD500 million. The book value of total liquidity amounted to CAD1.123 billion compared to CAD1.274 billion at the end of the previous fiscal year.

The construction of our new distribution center and office in Varennes is finished and we now expect to complete the gradual transition of our product inventories in our new facilities at the end of September later this summer. There is obviously a cost in our results associated with this gradual transition, but we want to avoid any unplanned operational issues by taking the right time-frame and enter a smooth transition. On slide 13, you can see that the cash flow related to operating activities amounted to CAD73.5 million during the fourth quarter of fiscal 2016. Cash flow used in investing activities was CAD34.6 million during the last quarter, including CAD24.1 million used for the construction and acquisition of store or DC-related capital assets and CAD1.4 million invested in intangible assets. I'll remind you that the sale of one building in Longueuil and the related investment in Poloday was also completed in the quarter.

Total selling square footage was 3,230,000 square feet at the end of the last quarter compared to 3,185,000 square feet at the end of the same quarter in the previous fiscal year. In fiscal year 2017, the Corporation plans to allocate approximately CAD60.1 million to capital expenditures and banner development costs, including CAD19 million to settle accounts with suppliers for our construction of the new distribution center. We plan to open seven stores, including four relocations; complete nine major store renovation and expansion projects, resulting in an expected total selling square footage of the network of 3,321,000 square feet at the end of fiscal 2017 or a 2.8% surface growth. The Corporation purchased for cancellation 2.2 million Class A shares for a total consideration of CAD41.5 million under its normal course issuer bid during the last quarter, CAD40.7 million of which was paid in the quarter. As usual, the last slide shows the contribution from our generic drugs manufacturing subsidiary in our consolidated results. Sales decreased by 0.8% while margins declined slightly when compared to the same quarter of the last fiscal year.

That concludes our presentation on the fourth quarter fiscal 2016 results. I will now ask the operator to open the question period.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Irene Nattel with RBC Capital Markets. Please go ahead.

Irene Nattel

I was wondering if we could just start by talking a little bit about your outlook on Pro Doc's? Now that we've the terms of Bill 28 announced, current thoughts around Bill 81? And also if you could please explain the change in terms of the accounting that you referred to on Pro Doc moving to consignment and whether that minimizes your risk or what impact that has as we look ahead to what will likely be lower earnings out of Pro Doc?

Francois Coutu

Yes, we found for the consignment situation -- as far as the other thing, we have lived through a period of uncertainty. It looks like now there is a little bit of clarity as far as the removing of the cap or putting a new cap -- it's something that will go drag until next January. So for product, as far as I'm concerned, it's business as usual. And we have -- like I say, we have a certain position with our pharmacies about a great majority of our franchisees use Pro Doc and they intend to continue in that fashion. And while there is negotiation with government as far as where it's going mid-to long term, that's something we don't know yet. But as far as the other part of your question, I'll leave Andre to answer that.

Andre Belzile

Yes. The decision to move from an effective sale from Pro Doc to Jean Coutu Group as soon as the inventory was moved into our distribution center to a consignment term. This is just a decision to be more efficient in terms of management of those inventories for treasury purposes or end taxes. Also as professional allowances will be at some point -- the cap on professional allowances will be removed at some point, it would be much easier for Pro Doc to manage than sell, what are the rebates available to each of the different pharmacists without having the Jean Coutu Group being involved.

As far as the adjustment I referred to in the presentation, this is only a one-time adjustment. There won't be any difference in product profitability going forward. As you know, on a consolidated basis, any intercompany transaction was already eliminated on a consolidated basis anyway, so it won't change anything going forward.

Irene Nattel

And just a follow-up on the subject, as part of this whole negotiation or discussion with your suppliers, were you able to negotiate any kind of break or any kind of -- basically, were you able to negotiate anything that might mitigate a negative impact to your earnings from Pro Doc as a result of the elimination of the cap on PA's or certainly the increase and then elimination?

Francois Coutu

Yes, to a certain degree, we can, let's say, share the pain with them. But again, the level of the professional allowances being capped at 25% for six months and then moving to 30% for nine months obviously is not going to cost as much as some may have expected. So, these savings will vary depending of the level of those professional allowances going forward. But obviously, we don't make any specific disclosures on that. But you will see for sure, with the cost of these rebates going up, the profitability of product going down.

Operator

Our next question is from Michael Van Aelst with TD Securities. Please go ahead.

Michael Van Aelst

On the pharmacy same-store sales, there was also -- was there also some branded drug price reductions? Because when you look at the same-store sales up 3% and then you take all that deflation into consideration, it still seemed like it was about 100 basis points down that's not explained.

Francois Coutu

Yes. We referred in the presentation, if you remember, to the fact that, last year, we benefited in our same-store sales growth from the introduction of a lot of new very expensive specialty drugs that are really costly and that are kind of boosting a bit the pharmacy sales. This year, we're still seeing growth in those expensive drugs, but not as much as last year.

Michael Van Aelst

But that would explain the slowdown in the growth, but it wouldn't explain the difference between the deflation -- the real same-store sales growth of--?

Francois Coutu

Yes, if you tried to make the calculation of the full difference, you would have to account also for the increase in the penetration rate of generic drugs. You know, this penetration rate is increasing not only because of the introduction of new generics, but more importantly, because of a general move toward more generics from the private insurers and governments. So, as you saw, we increased this penetration rate by 1.8% as compared to last year which is much more than the impact of the new generics alone.

Michael Van Aelst

Okay. And just on the NCIB, you ramped it up in January and then you stopped it in February, late February. So, I guess two questions on that, why did you stop it? And then, given your strong balance sheet? And then, secondly, when we renewed it this time, you renewed it for only half the amount of shares, at 4 million shares. What would be the reason for doing that?

Francois Coutu

For the first part of your question, we stopped buying just before the window actually closed. If you recall, as an insider, we're prohibited from buying our own shares, as per our policy, from the end of the quarter end. And for the second portion, because last year, we didn't buy the full program, actually it's the TSX that asked us to limit ourselves for the time being at 5%. So they authorized only 5% of the float instead of the usual 10%, because we didn't use it internally last year. And if at any point in time during the current fiscal year, we complete the first 5% of the float purchases, they told us that they will authorize the balance for the rest of the year, so we get to the full 10% that we're usually asking for.

Michael Van Aelst

And is that your intention to try and buy at least the full CAD4 million?

Francois Coutu

Again, that's what we would like to do, but it depends on a few variables, as you know, depending on how the stock is reacting. We're trying to buy again opportunistically, so it's accretive to our earnings. But at some point, if you recall last year, when the retail stock multiples went through the roof, we thought we would be more prudent to stay on the sideline. So if it happened again, we may do the same thing. But we'd like to complete it internally; sure.

Michael Van Aelst

So, as far as your balance sheet leverage is concerned, you're happy leaving your balance sheet unlevered at this point?

Francois Coutu

We would like to use leverage and use it to grow our business, but if there's no opportunities, we will look at other ways to return capital to our shareholders. But again, as we've mentioned many times in the past, we want to do it in an efficient manner. So, we don't think buying our own stock, when PE multiples are over 25 times, makes sense. So we'll see how the stock is reacting.

Operator

Our next question is from Mark Petrie with CIBC. Please go ahead.

Mark Petrie

I just wanted to ask about the transition to the new distribution center and sort of next steps over the next few months, if there's anything beyond sort of the transition of inventory? And then I was wondering if you are willing to put any sort of number or a range around the excess costs that you incurred in Q4? And if not, perhaps you could just give us your expectations in terms of the trajectory of those excess costs over the next couple of quarters?

Francois Coutu

I think seems to be in line; like I say, it's a big operation. It's something, in the history of Jean Coutu which will be remembered, I would say. And so far, we're doing well. We want to make sure all the transition is done properly. We have an obsession here, it's to make sure that our franchisees, our customers and ultimately our consumers, are -- do not experience any difficulties along the way. So, we're kind of careful there, making sure that every steps is done carefully. It may cost a little bit more; we don't know yet. We will see that as we progress, but at this time, everything is under control.

Mark Petrie

And are you willing to sort of give us a bit of a range or any sense of what the excess costs were, in your estimation, for Q4?

Francois Coutu

No. Obviously, as you saw in the press release, there's no specific disclosure on that. Let's say it's significant enough to have an impact. But this will be ongoing for at least the next six months, so we can complete, as we said, by the end of the summer, the full transition. But again, we're really looking at the long term. We see it as a good investment. Instead of trying to do everything to quickly and disturb the operations in the stores, we don't want to see some of the hold you may have seen in stores in other chains while they were implementing such a new system and new distribution system. We want to make sure we do that transition smoothly. And we can afford the luxury of doing that. We still have a lease on our former distribution center in Longueuil, so we can ship from these two locations for the time that is required to, again, have a smooth transition to our new location.

Mark Petrie

And then I guess just in terms of the efficiencies that the new DC is going to afford you over the course of time, I mean when do you expect that we'll start to see that in the numbers?

Francois Coutu

Again, we should start to see savings as soon as all the product categories are shipped from Varennes. As you know, with the automation equipment, the unit-picking will be much more efficient. And because of that, we will be able to handle all the volume of Longueuil plus a large portion of the volume that is currently done in Hawkesbury, with the same number of people that we had in Longueuil alone. So, as soon as all the inventories are being moved, we should see us starting to be showing better numbers in terms of SG&A because of that reason.

Operator

Our next question is from David Hartley with Credit Suisse. Please go ahead.

David Hartley

Just a quick question on inventories and sell-through direct from suppliers to stores. You highlighted that in the quarter around seasonal supply. Is this a bit of a change? Has this been expanded in terms of the shipment from suppliers? Should we expect more of that going forward, whether it be on a seasonal basis or on a regular basis? Or is this just a temporary measure as you transition into Varennes?

Francois Coutu

Yes, it's temporary. Obviously, when you construct a 600,000 square feet inventory distribution center, it's eventually to do the most that you can sell in the store. So that's what we'll do. This time, it was more careful at this time, a transition to do it directly.

David Hartley

And does that kind of make up a good portion of the cost that you are incurring here, by doing that?

Francois Coutu

The cost of--?

David Hartley

Or lost profitability?

A Francois Coutu

The loss profitability? It's definitely something that has an impact. I'm still saying to you that my obsession is to make sure that our stores get the merchandise at the right time for the consumers. So, if we took that decision, it's -- I wanted to make sure. If we will do it again, probably not.

David Hartley

And just when I think about shipment from the DC, could you update us on, prior to the transition, how much product you were shipping from the DC to retail as a percentage of their sales? And what would that number potentially rise to, post-Varennes being up and running fully?

Francois Coutu

Yes. We had about, I believe, 85% of everything that we shipped through our distribution center. And we will attempt to increase that. We're actually in the midst of, you know, knowing exactly how much that percentage will be. Maybe next time I can tell you. But definitely, that percentage will go up.

Operator

Our next question is from Jim Durran with Barclays. Please go ahead.

Jim Durran

On Bill 81, do you have any idea what the timing might be in terms of additional clarity?

Francois Coutu

I don't know. Honestly, we went to Quebec City the other day to make representation as to the uncertainty with the Bill 81. I think the administration know that we have a very efficient way of doing business here and I don't preclude the fact that he wants to reduce prices of prescription drugs which I told them you should; you should work hard with the Canadian Coalition to make sure that all Canadians get a good price. And that's their right; it's their duty as well. But I told them not to do anything with the existing distribution pattern which is very efficient and something very reassuring for the population. So, we'll see. We'll see. I hope he has understood, the message we sent to him.

Jim Durran

On your store network, I mean, you've obviously done a lot of renovating over the last few years. Can you give us a sense of what percent of your store network has now been sort of upgraded over sort of a five-year time-frame or whatever you feel is the right time-frame? And do we reach a point where the amount of capital required to keep the store network fresh is going to reduce? Or does it stay at sort of the current run rate?

Francois Coutu

That's a good question. I think it's an ongoing process. For example, Loblaw's has told everyone that they would reinvest into their stores. And I know they always did in the past. At this time, though, I would say that our network has never been in such a good shape as it is now, as compared to our competitors. Stores are clean and they are large. They are very appreciative from our consumers.

And the renovations we're doing are usually the ones that are foreseen. They are not necessarily an expansion of the size of the stores. Most of them has been tailor-made for the community that they serve. So I'm very proud to say that, at this time, our network is definitely in the best shape it has ever been.

Jim Durran

And last question, just on geographic expansion. I mean, I know it's been a difficult thing to pursue, but do you still aspire to be moving beyond the borders of Quebec in a meaningful way? Or do you feel that your best bang for buck on capital expenditure is in the Province?

Francois Coutu

I think it's still the big buck would be in the Province and New Brunswick as well.

Operator

Our next question is from Vishal Shreedhar with National Bank. Please go ahead.

Vishal Shreedhar

Just on the graduated approach to uncapping the PA's, how should we expect PJC to meet this challenge? I know you already alluded to this, but will the effective royalty rate change in lockstep with that graduated approach? And will the vendor concessions also move in lockstep with that?

Francois Coutu

Vishal, we will see, as the cap is removed in February of 2017, what we do regarding that. But until we have more clarity on the level of rebates that will be established by market, we're in a competitive market and we will make sure the product is competitive in the marketplace. And we have our own deals, obviously, on where these rebates should be, but it's not our decision, as I'm sure you understand.

So we'll see what we could do in terms of support programs to our franchisees, whether they are required or not required any more, depending on how their profitability is improved from these additional rebates. But from the time being, there is absolutely no changes in the support programs that we're providing to our franchisees.

Vishal Shreedhar

Okay. And just moving on here to digital which seems to be a topic of increasing focus for many of your peers, just wondering what your thoughts are on digital, be it eCommerce or digital marketing initiatives? And how should we think about that as it pertains to the costs or adjustment in the upcoming fiscal year?

Francois Coutu

Mind you we have a quite a nice website and we're doing pretty well, as far as I'm concerned. We have high objectives there to increase. We will be definitely well-positioned when we all be serving out of our Varennes situation, Varennes distribution center. So, this is something we look forward to improve quite a bit.

Operator

Our next question is from Keith Howlett with Desjardins Securities. Please go ahead.

Keith Howlett

Yes. I was just wondering -- on the transition to Varennes, when you say six months, is that sort of an October time-frame when it's complete? That your transition is complete?

Francois Coutu

Sorry?

Keith Howlett

Yes, you mentioned it will be about six months till all the transition is fully complete. Is that from the end of the second quarter or from as we speak?

Andre Belzile

Well Francois, we said end of the summer.

Francois Coutu

Yes. End of summer. So from now, we should be into that transition for another six months. That's what we meant. So, again, by the end of September, it should be pretty much done.

Keith Howlett

And then just in terms of the transitional cost, I presume there's some freight and some labor. Does part of it show up in cost of goods? Or does it all show up in SG&A?

Francois Coutu

It's actually being shown in SG&A. It's made of only SG&A. It's made up of a lot of different things, obviously salaries, labor, because of the extra cost of working from two locations, but also as you said, additional transportation, taxes, building repairs and maintenance, a lot of different items in SG&A. But the bulk of it is really limited to operating expenses and this is a one-time situation, obviously.

Keith Howlett

Right. And then just to make sure I understand, in terms of the one-time adjustment on the inventory, the way you account for inventory for product, that the inventory you hold -- there's no impact, as I understand it, on the consolidated statement; is that correct?

Francois Coutu

Yes, there is an impact, the one-time impact. But from now and from the date we switched to consignment, there won't be any additional impacts on a consolidated basis going forward.

Keith Howlett

So there was a CAD1.5 million negative impact on the cost of goods in that quarter?

Francois Coutu

In the margin, yes.

Keith Howlett

And then just on the professional allowances, I guess we start going towards 25% in May. From your--

Francois Coutu

April 28th.

Keith Howlett

April 28th, tomorrow. Is that--?

Francois Coutu

Tomorrow.

Keith Howlett

So given it is tomorrow, is there any possibility that the new level of rebates is lower than 25%?

Francois Coutu

We'll see. Again, it depends on competitiveness of the different market players. Some may elect to give the full 25% on most of their products and limit it to less on certain others which are less profitable; we will see. We obviously don't know exactly at this point what are the intentions of our competitors, but we should expect most of them to provide for the full 25%.

Keith Howlett

And is it the case that there's some fidelity required if someone gets the rebate, that they must buy some percentage of the overall?

Francois Coutu

No, actually there is no conditions to this -- absolutely, no. It's not legal to ask for loyalty program with this.

Keith Howlett

I see. So it's molecule by molecule?

Francois Coutu

Exactly.

Keith Howlett

I see.

Francois Coutu

You earn it as you purchase the prescription drugs. It cannot be conditional upon conformity to certain programs.

Keith Howlett

I see. And then just on the regulations surrounding wholesalers and their legislated markup and resale price, is there some thought that the government might deregulate the wholesale markup, given we're deregulating professional allowances?

Francois Coutu

It is regulated currently. The 6.5% also margin on prescription drug is a maximum limit that is established by the government.

Keith Howlett

Right. No, I know that. I was wondering whether they might deregulate that, given they just deregulated professional allowances. I'm wondering why they regulate the wholesaler markup if they are deregulating professional allowances?

Francois Coutu

PA's, as you know, the deregulation of the PA's was seen as a compensation for the pharmacists against the obvious costs of reducing their prescription fees. So that was a compensation for them for this reduction of their revenues. Their regulation of the wholesale margin has absolutely -- at this point, at least, no reason to be even considered because first of all, it wouldn't go in the pockets of the pharmacist at all.

Operator

Our next question is from [indiscernible] with Bank of America. Please go ahead.

Unidentified Analyst

Just wondering if you are hearing anything new from the Pan-Canadian Pharmaceutical Alliance? I know that they've recently lowered prices for four more drugs back in April. Are you hearing any updates from them in terms of what they are planning to do in the future?

Francois Coutu

Yes. I think they renew their vows in all of their Provinces. And when's the next they are meeting? I think it's sometime this year they will look at it again. And there is an agreement that they will look at some 18 new molecules and see what they can do with it. I think they need to renegotiate the deal which expired with the last price reductions in April. So we'll see what's the conclusion of that new negotiation with the manufacturers.

Unidentified Analyst

Okay. And with respect to the PA's, I just want to make sure I understand maybe the impact on products margin. And at the risk of being a bit too simplistic, assuming your PA rate goes from 15% to 25% next month, if the impact on your product margin essentially is sort of a 10% drop, maybe from 44% to, say, 34% but partially offset by whatever pain that your suppliers are willing to bear and therefore, the net impact on your margins will not be as grave as a 10% drop. Is that being too simplistic, the way to think about the impact on your margin?

Francois Coutu

It's pretty much the way it works.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Ms. Bisson.

Helene Bisson

Thank you, everyone, for your interest in The Jean Coutu Group and your participation in today's conference call. If you have any further questions, please feel free to call us. Our contact information is contained in the Company's communications. We look forward to report on our first quarter results of fiscal 2017 on July 5, 2016. Thank you very much and have a great day.

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