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Executives

Paul Beesley - EVP and CFO

Paul Sobey - President and CEO

Stewart Mahoney - VP of IR and Treasury

Frank Sobey - VP of Real Estate

Bill McEwan - President and CEO of Sobeys Inc.

Francois Vimard - CFO of Sobeys Inc.

Analysts

Jim Durran - National Bank Financial

Ryan Balgopal - Scotia Capital

David Hartley - BMO Capital Markets

Keith Howlett - Desjardin Securities

Empire Company Ltd. (EMP.A) F2Q08 (Qtr End 11/03/07) Earnings Call December 13, 2007 3:00 PM ET

Operator

Welcome to the Empire Company Limited second quarter results conference call. (Operator Instructions)

I will now turn the conference over to Mr. Paul Beesley, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Paul Beesley

Thank you very much, Gloria. Good afternoon, and welcome to the Empire Company Limited fiscal 2008 second quarter conference call.

Our comments today will focus primarily on the financial results for the second quarter ended November 3, 2007. This call is being recorded in live audio, and it will be available on our website at www.empireco.ca.

Today's discussion includes forward-looking statements. We want to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.

Joining me on the call this afternoon are, from Empire Company Limited, Paul Sobey, President and Chief Executive Officer; and Stewart Mahoney, Vice President, Investor Relations and Treasury; and Frank Sobey, Vice President, Real Estate.

From Sobeys, Bill McEwan, President and Chief Executive Officer; Francois Vimard, Chief Financial Officer; and Paul Jewer, Senior Vice President, Finance and Treasurer.

As previously communicated, we announced the completion of Sobeys privatization in our first quarter on June 15, 2007. This transaction saw Empire acquire all of the outstanding common shares of Sobeys that it did not already own. As a result of this transaction, Empire's second quarter fiscal 2008 financial results reflect 100% ownership of Sobeys as compared to a 72% ownership interest in the second quarter last year.

This morning we released Empire's financial results for our second quarter ended November 3, 2007. Revenue for the second quarter equaled $3.48 billion compared to $3.35 billion previous year, a 3.9% increase. There are two items that impact revenue comparability in this quarter.

First, Sobeys sales were positively improved by the acquisition of Thrifty Foods on September 11, 2007 and by ADL acquired on August 27, 2006. These acquisitions collectively increased the second quarter fiscal 2008 sales by $103.5 million over the same period last year.

Second, late in the second quarter of fiscal 2007, a major Canadian tobacco supplier began to sell and distribute directly to certain Sobeys' customers. This reduced second quarter fiscal 2008 revenues by $30.1 million relative to the second quarter last year. Adjusting for these items, Empire's consolidated sales growth would have been 1.7%.

Consolidated operating income totaled $118.2 million compared to $113 million in the second quarter last year, an increase of $5.2 million or 4.6%. The increase was the result of an $11.1 million or 13.9% increase in operating income contribution from the food division; an increase in investment and other operations' operating income, net of corporate expenses of $1.6 million, partially offset by $7.5 million decline in operating income from the real estate division.

The decline in real estate operating income was anticipated largely as a result of completion of a major condominium project in Q2 last year due to slower residential lot sales.

Second quarter operating earnings, that is earnings before net capital gains and other items equaled $59.9 million or $0.91 per share compared to $49.8 million or $0.76 per share in the second quarter last year, a 20% increase.

Net earnings in the second quarter amount to $58.4 million or $0.89 per share compared to $55.8 million or $0.85 per share in the second quarter last year. Company incurred capital losses and other items, net of tax, of $1.5 million during the second quarter of fiscal 2008 largely as a result of a 10% fair value adjustment recorded by Sobeys on $30 million of asset-backed commercial paper withheld at the end of the quarter.

Capital gains and other items, net of tax, of $6 million were recorded in the second quarter last year primarily from the sale of liquid portfolio investments.

The ratio of consolidated funded debt to capital at the end of the second quarter equaled 45% versus 34% at the end of the second quarter last year and 43% two years ago. After deducting cash and cash equivalents of $133.1 million, Empire's net debt to capital at the end of the second quarter equaled 43%.

The increase in debt to total capital ratio from last year reflects increased debt levels as a result of the Sobeys privatization as well as the additional debt used to fund the acquisition of Thrifty Foods. At the end of Q2, there was $237 million on unutilized bank lines. Interest coverage for the second quarter remained healthy at 4.3 times.

Finally, senior management of both Empire and Sobeys want to reinforce that we are committed to not only building long-term shareholder value, but also strengthening our financial condition. Before we recognize, this is most likely to be achieved through a combination of debt reduction and ongoing sales and margin expansion.

I'll now turn the call over to Paul Sobey.

Paul Sobey

Thanks very much, Paul, and good afternoon, everyone. We are pleased with the progress to date in fiscal '08. Our operating earnings for the second quarter and the first half of the year are both at record levels compared to the same period last year.

Operating earnings have grown by 20% in Q2 and by 17% fiscal year-to-date. Our growth in the Q2 earnings before capital gains and other items is largely the result of having a 100% ownership of Sobeys, following the privatization completed last June.

In the second quarter, Sobeys continue to generate solid same-stores sales growth and operating income resulting from consistently competitive pricing and programs innovation, cost management initiatives and improving day-to-day execution that Bill will provide in his comments little later.

We're also pleased to have closed the acquisition of Thrifty Foods in the quarter. The assets acquired include 20 full-services supermarkets, a main distribution center and a wholesale division on Vancouver Island and the lower mainland of British Columbia. The acquisition was accounted for using the purchasing effort with the results of Thrifty Foods being consolidated as of the acquisition date September 12, 2007.

I will now provide a few comments on our real estate division's performance. Second quarter real estate division revenues, net of intercompany amounts equaled $28 million versus $66 million last year. Revenues from commercial properties increased $1 million while revenues from residential operations declined $39 million.

Residential sales decline was anticipated reflecting primarily the completion of the Martello condominium project in Halifax last year which accounted for approximately $34 million of this decline.

The real estate operating income in the quarter totaled $21.5 million, a $7.5 million decrease over last year. Operating income for commercial properties increased approximately $400,000, while operating income from residential operations decreased by $7.9 million. The decrease in residential operating income was a result of the completion of the Martello project last year and lower quarterly residential lot sales activity in western Canada, primarily western Canada.

The focus of Empire's real estate activity is clearly on the development and sales of food-anchored retail centers, rather than managing of our portfolio as this activity is previously mentioned, is now undertaken by Crombie REIT.

We continue to work closely with Sobeys to more fully exploit property development pipeline and Empire's 100% ownership of Sobeys solidifies this relationship. As properties are developed, they will be first offered for sale to Crombie and the capital generated will be redeployed into further property developments.

With respect to our investment and other operations, at the end of the second quarter, Empire's investments consisted largely of its equity accounted investment in Wajax Income Fund and in Crombie REIT. The market value of the investments at the end of the second quarter equals to $410 million on a carrying value of $140 million resulting in an unrealized gain of approximately $270 million.

Revenue from investments and other operations totaled $50 million in the second quarter as compared to $35 million last year. Empire theaters recorded significantly higher revenues as a result of improved product quality and also the change in its fiscal year-end to December 31, which resulted in the typically strong months of July being included in the second quarter of fiscal 2008 results.

Investment income generated by the portfolio in the second quarter equaled $5.5 million, compared to $7.5 million last year. The dividend income decline of approximately $2.5 million was as expected given the sale of our investment portfolio by the end of the first quarter of this year.

Equity earnings from Wajax Income Fund grew by approximately $400,000.

I'll now turn the conversation over to Bill McEwan for his comment on Empire's food division, Sobeys.

Bill McEwan

Thank you, Paul. Sobeys' sales for the second quarter increased 4.8% to $3.41 billion compared to $3.25 billion last year, an increase of a $155 million. Same-store sales grew by 2.3% for the second quarter.

Our sales growth was driven by the continued implementation of selling and merchandising initiatives across the country, coupled with an increased retail selling square footage from the development of new stores, and an ongoing program to enlarge and renovate existing store assets. Sales were also driven by the acquisition of ADL and Thrifty Foods, as Paul mentioned earlier.

As communicated in prior quarters, a major Canadian tobacco supplier began to sell and distribute directly to some of our customers, resulting in a decline in tobacco sales. This change in distribution, along with lower market demand for tobacco overall, reduced sales by $30.1 million during the second quarter of this fiscal year.

Margins on tobacco sales are significantly lower than other products, therefore the loss of these sales does not have a material impact on earnings. After adjusting for the impact of the decline in wholesale tobacco sales and the ADL and Thrifty's acquisitions, second quarter sales growth would have been 2.5%.

Sobeys' operating income contribution to Empire increased $11.1 million, or 13.9%, a $90.8 million. Operating income margin equaled 2.67% compared to 2.45% in the second quarter last year. Included in the second quarter of fiscal 2008, operating income was a $7.2 million increase in depreciation and amortization expense, reflecting continued capital investments.

Also included in Q2 operating income was $4.8 million of pre-tax costs related to our business process and system initiatives, as compared to $11.1 million of costs in the second quarter last year.

EBITDA for the second quarter of fiscal 2008 increased $19.3 million, or 13.8%, to $159.5 million from $140.2 million reported last year. EBITDA as a percent of sales increased from 4.31% to 4.68% in the second quarter of fiscal 2008.

Sobeys invested $114.9 million in property and equipment purchases in the second quarter of fiscal 2008, an increase of $20.1 million from last year.

During the quarter, 26 corporate and franchise stores were opened, acquired, or relocated compared to 40 corporate or franchise stores opened or relocated during the second quarter of last year. And additional six stores were expanded during the quarter compared to four stores expanded during the second quarter of fiscal 2007. 19 stores were closed during the second quarter of this year compared to nine in the second quarter last year. There were 13 stores rebannered in the second quarter of this year compared to 15 stores in the second quarter last year.

As previously announced during the first quarter, and as Paul mentioned, we completed the purchase of Thrifty, a very well respected British Columbia food retailer. The similarities between Sobeys and Thrifty Foods were clear to us, as we were looking at the acquisition: unwavering focus on food, dedicated employees, a great service culture and very strong values, including a strong commitment to their individual communities.

This acquisition provides Sobeys with a presence in the expanding BC market and a base for continued growth in that province. I had an opportunity to visit the Thrifty's operations on a number of occasions before and since the acquisition, and I am pleased to report the transition is right on track.

I would like to conclude my remarks with acknowledgment that competition coast-to-coast, but particularly in Ontario, is intense. Our sales and earnings results have been and will continue to be impacted by our unwavering commitment to sustaining the harder end price competitive position that we invest in to achieve over the past three or four years and our ability to consistently improve our offering, service, productivity and execution store-by-store.

In spite of some persistent challenges and in spite of some rather radical competitive activity, we continue to make progress as we've already said we would to build a healthy and sustainable retail food business and infrastructure in the long term.

We'll now conclude with Paul Sobey's remarks.

Paul Sobey

Thanks, Bill. So, second quarter is off to a good start and for the first half of the fiscal '08 with improved earnings performance to plan and last year. Going forward with respect to our food division, Sobeys, we remain very supportive of Sobeys food-focused strategy and their intention to continue to invest in infrastructure and productivity improvements necessary to build a healthy and sustainable retail business for the long term.

With respect to real estate, the management group intends to continue with policy of maximizing and prudently reinvesting its cash flow to further strengthen and develop its portfolio of residential and commercial properties.

And in summary, Empire's management remains committed to executing operationally and capital allocation decisions that will grow the company's earnings, cash flow and net asset values in each of our businesses over the long term.

In closing, I would like to thank our dedicated and outstanding employees, franchisees and affiliates of the Empire Group of Companies who have stayed focus on our plan and have delivered results. It's their continuing dedication and ongoing commitment to serving our customers day-in and day-out more than anything else that will sustain our success.

Now, we'll have to respond your questions.

Paul Beesley

We will be happy to take questions at this point. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Jim Durran from National Bank Financial. Please go ahead.

Jim Durran - National Bank Financial

Yes, a question for Bill. Just wondering: if you could give us some idea of what kind of changes you've seen in the pricing environment across the country?

Bill McEwan

Well, they haven't been insignificant, but I would start by saying that the changes in the pricing environment have been significantly more on the promotional side than they have on the base pricing side, and that goes pretty much coast-to-coast. There has been very, very different and aggressive promotional activity and some of which we haven't seen for many years, including what we have chosen to do to build our own sales base proactively rather than react to what's going on in the market promotionally.

From the base pricing perspective, clearly, and I think you remember, we took initiatives a couple of years ago and as recently as last May in Ontario to significantly improve our food pricing position, and perhaps that had some impact on the marketplace as well.

So, we have taken our own proactive approach to the pricing and we've, as necessary as individual price zones have dictated, made adjustments to key staple items and sensitive items, just as we have all the way along.

But I would emphasize that we haven't seen dramatic regular retail price reductions, because we are taking two to three years to get to a position that we thought was more than competitive, particularly in our fresh stores. But on the promotional side, there is no question, there has been deflation associated with dramatic increases in promotional activity coast-to-coast.

Jim Durran - National Bank Financial

And, just based on the commentary from last quarter, I mean: you were suggesting that Ontario was predominantly sort of in the discount segment competitively. Have you seen any shift in the conventional segment this quarter?

And in the West, I know you had proactively moved earlier on pricing in the West in anticipation of some increased competitive activity. Have you seen the competitors come into the market now and respond in the West?

Bill McEwan

I can't even begin to imagine if they have responded to us or not, but there clearly has been more promotional activity in the West than there was when we last talked a quarter ago. That would be the same for Ontario in both, what we call: “the fresh channels” and “the discount channels”.

And in Atlantic Canada, there is no question about it. There's been additional intense activity. Much of that we anticipated, some we did not, but our numbers reflect the net result of what we plan to do and what we needed to do to see competitively keep the momentum up.

James Durran - National Bank Financial

And with respect to your same-store sales, when I look at the 2.3% this quarter versus your number last quarter, is the contraction mostly a reduction in inflation rate in the industry or is there a traffic change?

Bill McEwan

No. It's mostly the reduction of the inflation rate. Quiet frankly, the 1% that we quoted in our press release relates to base price inflation based on cost of goods. In net terms, all things considered, even with the change in the Canadian dollar, there has been deflation across the board.

James Durran - National Bank Financial

Okay, and then my last question and then let's somebody else take over. Both of the competitors have talked about significant deflation on produce mostly driven by the Canadian dollar. What kind of impact might have that had on your comp-store sales number for the quarter?

Bill McEwan

It had a negative impact on comp-store sales as a result, but frankly, because in two of our three operating regions, we had already enacted a competitive pricing program that would have benefited from the strength of the Canadian dollar. I don't think it had a negative impact on us. We already took the hit in prior quarters, because we took the prices down at the beginning of the year.

James Durran - National Bank Financial

Great. Thanks, Bill.

Bill McEwan

Okay.

Operator

The next question comes from Ryan Balgopal from Scotia Capital. Please go ahead.

Ryan Balgopal - Scotia Capital

Hello. Thanks. Good afternoon. I was wondering that your EBITDA margins were up roughly 30 basis points. Frank, if you can just talk about: how much of that came from SG&A savings from all the business process initiatives that you have done? And: what's going on in gross margins? Sounds like they're probably down, but: can you give us some more color on that?

Frank Sobey

I won't quantify the specific areas, but I will tell you that our SG&A is down as planned, that our EBITDA margins have benefited from improved mix associated with merchandising activity. It is also benefited from the improved mix as a result of lower percentage of tobacco in wholesale sales, as wholesale street sales begin to decline, that was lower margin business.

So, the arithmetic just pushes the EBITDA margins up. But on top of that, it's the sum total of everything we've said we would do. Cost reduction, SG&A, margin improvements through mix, the wholesale mix adjustments and I think there was one other component, that I'm missing but, it's the sum total there and we've talked about it all the way along.

Ryan Balgopal - Scotia Capital

So, on the gross margin with the sum total still be positive then?

Frank Sobey

On the gross margin with the sum total still to be positive, versus what?

Ryan Balgopal - Scotia Capital

Well, I was just looking at, promotional activity as it makes it a tough comparison, but you're getting mixed benefits et cetera.

Frank Sobey

The only thing that I would back that you have to say is arithmetic, or extraordinary would be the wholesale mix. Thus the wholesale mix, if you just take a low margin business and it declines or is eliminated, your numbers adjust accordingly. But net of that adjustment, our margins were up across the board.

Ryan Balgopal - Scotia Capital

Okay. Now, is that tobacco impacts -- is that the last quarter we should see impact from Imperial tobacco?

Frank Sobey

It's the last quarter we intend to talk about it.

Ryan Balgopal - Scotia Capital

Okay. I was wondering if you can update us on your plans for Quebec and putting SAP in there. I think at the beginning of the year, you were talking about business process costs of sort $27 million to $32 million. Half way through the year, we are at about $10 million, and I know Quebec was sort of put on a hold. I am wondering: if you can give us an update there?

Bill McEwan

That wasn't really put on hold. Let me explain what we've done. It's a good question. Our EBITDA reflects lower spending in transformation cost as well, slightly lower spending, but about the same as last quarter.

What we chose to do through the course of the last two quarters is reflect on the successful implementations, and I underlined that we are successful, first of all, in Atlantic years ago, but recently in Ontario, and most recently in the West. And we chose to say before we raise on to complete the execution in Quebec, let's at least reflect on the continuous improvements, the changed management makes sure the process is working.

So, we diverted our efforts to our current installations, make sure that we don't just think we've installed it and off we go. You got to work the system as the change management fails in these transformations and we recognized that. So, we are reflecting how much more of that we need do before we make a final determination on the pace at which we'll go forward in Quebec and I think we'll be in a much better position to finalize that with you by next quarter.

Ryan Balgopal - Scotia Capital

Okay. So, we can't really get a sense of what the full annual cost will be?

Paul Beesley

I would suggest you that our full annual cost well for the back half will approximate the first half.

Ryan Balgopal - Scotia Capital

Okay. Maybe more on the Empire level, wondering there is no mentioned in the press release about Sobey Leased Properties. Last quarter you had talked about potentially vending that into Crombie. I thought there was nothing there and I noticed that Sobeys took on another $100 million in debt. Just wondering, sort of: how you plan on repaying the debt that you talked about?

Paul Sobey

Are you referring to the extra debt associated with the Thrifty acquisition?

Ryan Balgopal - Scotia Capital

Yeah, I guess, that's part of it.

Paul Sobey

Okay, all right. With respect to the Sobey Leased Properties, I think, the last time when we talked on the phone, I said we'll provide you with an update as things developed. And we continue to say that we're going to do that, certainly we're having the discussions and they are ongoing and we'll be in a position to provide more information when it becomes earn.

Ryan Balgopal - Scotia Capital

Okay.

Paul Sobey

That's a quick way of saying: “not yet”.

Ryan Balgopal - Scotia Capital

Okay. Fair enough. And maybe, I'm sorry, I missed it Bill. Just: what was the actual rate of inflation in the quarter?

Bill McEwan

We said that the base pricing inflation was approximately 1%, but please understand there was net deflation, net of all promotional activity across the country.

Ryan Balgopal - Scotia Capital

Okay. Can you give us some sort of sense of how deflationary it was?

Bill McEwan

No, it's just negative.

Ryan Balgopal - Scotia Capital

Okay. All right. Thanks.

Operator

The next question comes from David Hartley from BMO Capital Markets. Please go ahead.

David Hartley - BMO Capital Markets

Good afternoon, everyone. First of all, I have been in your IGA stores in Quebec and they are fantastic stores. I'm just curious about: the level of profitability that these stores generate at this point in time? And: maybe you can give me some kind of general color outlook as to what you see them doing over time?

Bill McEwan

Well, I'd say this we don't segment divisional or regional results, either by banner or by piece of geography. But thank you for your comments on the IGA stores. They run very good stores and, on behalf of the franchisees, they run them and the team that support them, we appreciate that comment. But we are satisfied with our business in Quebec. For part of our business in Quebec, we think we operate superior food stores at solid profitability both for our company and our franchise affiliates.

David Hartley - BMO Capital Markets

Okay. And could you talk to me a little bit, you made a comment about margins being up, net of the tobacco: are you talking about EBITDA margin or gross profit margin?

Bill McEwan

Well, gross margins, both benefit from the change in the mix, yes. And when you've got a low margin business like tobacco and it's not just tobacco because we've rationalized some low profit wholesale business. So, between the wholesale street business, that we no longer have, that we've rationalized and the low margin tobacco business that has eroded, that has a positive impact on margins and EBITDA.

David Hartley - BMO Capital Markets

But, if you take that positive impact out: were both gross profit and EBITDA margins up in the quarter?

Bill McEwan

Yes.

David Hartley - BMO Capital Markets

Okay. And in terms of your revenue lift, you talked about your exposure to some of the promotional and base pricing in the country. Are you talking about it more in relation to how you are exposed? Meaning that: you'll have a higher percentage of your sales coming out of conventional or fresh stores relative to some of your competition? Does that kind of skew your numbers a little bit?

Bill McEwan

No, that's not the way it works. I don't think I used the word: “exposure”. I was asked the question about competitive activity across the country. And we intend to say competitive on base pricing and promotional activity, but we need to continue to draw our customers into our stores with competitive promotional activity and to the extent that others hiding their promotional activity or increase the promotional weights, we found it necessary to look at our plans and on our terms with our strategy, going forward with some additional weight in our promotional programs as well.

So it's not about impact from others. It's about the general environment and: how we compete? And: what we choose to do? And: how we choose to invest? So the second part of your question is: there isn't that kind of channel switching associated with where promotions are going on a week-to-week basis. I won't say there is none, but there has been aggressive activity in both the discount channel where it exists and the fresh channel across the country.

David Hartley - BMO Capital Markets

Okay. And in terms of your base pricing: have you seen it come down in discount and up in conventional in the quarter?

Bill McEwan

Absolutely not.

David Hartley - BMO Capital Markets

Could you characterize your base pricing and your promotional investments in the two channels in the quarter?

Bill McEwan

I'll tell you what they are? We are competitive on price, in fact on base price and promotional activity in the discount channel, and we have been more than competitive across the board where we compete with our fresh format stores. And that isn't a recent phenomenon. That's what I tried to refer to in my remarks on the call.

We worked hard to get into a position, anticipating what has happened in terms of aggressive retail pricing activity promotionally and on the base pricing side. So we've put ourselves in play proactively for the situation that has unfolded.

Has there been some modification since? Yes, there has. We've had to modify some prices in some areas across the country. But I think it would be misleading to suggest and inaccurate to suggest that we've had a cascading of retail prices in the past quarter or two.

David Hartley - BMO Capital Markets

Okay. And going forward: was Loblaw's announcement that they are going to take down pricing in conventional? Have you anticipated that already?

Bill McEwan

Our job is to anticipate. So, irrespective of what their strategy is, we have ours, and we will price our product and our services fairly in a way that attracts and can sustain our loyalty with our customers.

David Hartley - BMO Capital Markets

Okay. Just in terms of Thrifty, where do you think over time you'll get the greatest lift from this operation in terms of the return on investment you've made here? How much opportunity do you see in terms of putting this business together on the distribution or procurement side relative to, say, on the sales side?

Bill McEwan

Well, these are obviously not the same kind of synergies if Thrifty's were in a continuous piece of geography with one of our operating regions. That, in fact, what makes it special, makes it successful. They operate very good stores. They're productive stores with a very low customer base on Vancouver Island and improving performance on the mainland stores.

So, I'm not sure what you are saying. We intend to continue to develop inside the four walls of those stores, continue to develop in emerging market on the island and look at other opportunities in the lower mainland. And our net effort will be to invest wisely for a solid return on capital.

David Hartley - BMO Capital Markets

I guess what I am asking is, is there opportunity here to merge some distribution centers together, get some procurement savings, and have you identified these numbers and are you willing to share anything like that over time with us?

Bill McEwan

No. We are looking at distribution in the 50s of itself. We do not see any significant operational distribution synergies across the Rocky's. And we don't have any distribution facilities west of the Rocky's and it is a very solid physical barrier for distribution. So, there isn't a lot of overlap to our network today. So, there is not a lot of synergies there.

David Hartley - BMO Capital Markets

Okay. That's good. And if I may ask a last question here, in terms of your real estate business overall: is there any outlook you can provide and what you are seeing in the marketplace today, both from a residential and commercial perspective in terms of the growth that you might expect to see? And: what's happening around you in the environment there?

Frank Sobey

Frank Sobey, answering.

David Hartley - BMO Capital Markets

Okay.

Frank Sobey

What we have notice is, there has been a bit of a beginning of a slowdown particularly in the West not so much in Ontario. The reason that takes a bit of a slow down, we have not experienced the rate of growth that the US did or the lending [excesses]. So, we've noticed the rate of growth has slowed down as opposed to something else.

David Hartley - BMO Capital Markets

Okay. And so, when we think about modeling out your real estate business, it tends to be very lumpy. Can you maybe characterize the lumpiness, and the type of growth you would expect to see in the back half of the year?

Frank Sobey

We have historically not done that. You guys are on your feet, I guess, I don't know.

Paul Beesley

It's pretty hard to predict certainly on the residential side. We certainly have our own internal thoughts on that. But we've said that the residential area, is an area we have been rolling for the last five years. So that it can't continue at that same pace. Year-to-date, we had outstanding results in the residential. I think the last part of the year should be, let's say, very solid, but certainly not at the pace that we've experienced in the past.

On the commercial side, commercial properties are really basically, the Sobey Leased Properties side of the equation, which should be very stable, given the nature of that type of investments at this point in time. And the development side is lumpy. It's just the nature of the development activity and it depends on permits, it depends on a whole bunch of actors. So, it will be lumpy.

But we are shifting our operations in our real estate side equation outside of Genstar. They are being shifted more to the development side of the equation. And what we are doing is, is really developing real estate, but for our own use quite frankly, as the retailer side of the equation. And we are providing that opportunity to purchase those assets through Crombie REIT. So, the nature of our real estate holdings is changing and will continue to change over time consistent with what we have said our objective is.

David Hartley - BMO Capital Markets

So: you are making a bet that you actually will be more right in the next five years?

Paul Beesley

I don't understand the question.

David Hartley - BMO Capital Markets

I'm just joking with you. I didn't mean it. How about I'll leave it at that, and thank you very much.

Paul Beesley

Okay. Thank you, David.

Operator

Your next question comes from Keith Howlett from Desjardin Securities. Please go ahead.

Keith Howlett - Desjardin Securities

Yes. I wondered: if you could update us on the compliments program and especially heading into the holidays? Where are you right on that program?

Bill McEwan

We're very pleased with the development of our Compliments program. This year, we have introduced just over 200 additional SKUs. I am very proud of our Inspired program which is the communication around the holiday season. We have three Inspired magazines per year. We are satisfied with the growth category-by-category, not in every case, but the vast majority of the Compliments.

The extended line programs of Devon and the Organic and Disney Junior which we launched in September are exciting real innovations that have done well, and they just continues to build. So, if I look back over the last three years, I quite frankly not sure, I would have anticipated being as solid as we are with that program and as well develop as we are. So, we are very pleased with where it's headed and the consumer reaction.

Keith Howlett - Desjardins Securities

And then, I had a question on the Rachelle-Bery boutiques, you have in Quebec. I was just wondering: how far you will go with that, that something you will bring to other geographies?

Bill McEwan

I don't know, we are learning, we've got a great innovative team there that has done some great work with Rachelle-Bery and the Natriga concept inside the four walls of our IGA Extra stores, which is a small unit bolted on to our IGA Extra stores. We relocated a Rachelle-Bery [seller on street] that we're very satisfied with the early results. And its laboratory, we think we're ahead of the curve, we think it's a trend, a consumer trend that we can learn from in Quebec and should there be applications elsewhere or elsewhere in Quebec or elsewhere in the country, we've got something pretty much ready to go. But it's too early to give you any indication where that might be because we continue to learn.

Keith Howlett - Desjardins Securities

And just on the Sobeys express, I know it's a very tiny part of the business, but what are your thoughts there on: how that might unfold?

Bill McEwan

We will continue to look for opportunities to serve customers in any part of this country and to the extent that as an example urban Toronto, where you know that we have a number of urban express already, and we don't intent to stop where opportunity avails itself. We'll go one at a time, one location at a time and we see a future for it.

Keith Howlett - Desjardins Securities

And just had a question, I guess, on the Price Chopper banner you've got quite a lot, I guess, of the main Atlantic Canada. I'm wondering: so what your thoughts are going forward in Atlantic Canada on the Price Chopper banner?

Bill McEwan

We don't have any specific plans to dramatically expand the Price Chopper banner in Atlantic Canada.

Keith Howlett - Desjardins Securities

And in terms of Ontario, I noticed a few closures of Price Chopper. Is the fleet of stores that you currently have above what you want to have going forward, or how looks the outlook on Ontario for the Price Chopper?

Bill McEwan

I want to put that in context. Over the last five or six years, we have approximately the same number of stores today that we had six years ago. We closed about 50 stores to 60 stores a year, it's an ongoing process of renewal of the network. So, I would caution anybody coming to conclusion as a result of any recent closures of Price Chopper or any other banner that there has been some significant increase in our willingness to close stores. We've done it. We've always done it. We'll continue to do it.

The two Price Chopper stores that you talk about, actually there were four in the last four months, the two Price Chopper stores you talk about, we've had in our books to close for the last two to three years. So it's been a plan full network renewal process.

In terms of the Price Chopper, Price Chopper has a consumer following the price, discount segment has a consumer following and our job is just continue to offer a better and better stores, improve our execution and put that asset, that price discount store has the best chance of success. It's one location at a time, there are discount markets and there are full service fresh markets and we have a portfolio formats to satisfy individual occasion and that's the only way I can answer that for you Keith.

Keith Howlett - Desjardins Securities

And just one last question on, your IGA stores in Quebec seem to have an extremely good refrigerated serve home meal replacement or frozen home meal replacement and sort of prepared home meal replacement. I am just wondering: why that can't be more developed in Ontario? Or maybe I am misinterpreting it, but: is there much room in Ontario to sort of go that way?

Paul Sobey

Yes, there is. It has to do with the type of production facilities and the capacities of a variety of different products that are available in Quebec that aren't just developed in other parts of the country. But stay tuned. You can look forward to additional development of that type of product across our network in the country outside Quebec.

Keith Howlett - Desjardins Securities

Thanks very much.

Operator

(Operator Instructions). Next is a follow-up question from Jim Durran from National Bank Financial. Please go ahead.

Jim Durran - National Bank Financial

Yes, I am just wondering on your square footage growth: can you tell us what your square footage growth was excluding the Thrifty's business addition?

Bill McEwan

1.1%.

Jim Durran - National Bank Financial

And: how does that line up with what your plans are for the balance of the year?

Bill McEwan

The plans for the balance of the year for square footage growth, Jim, I don't have that number in my head, but I think it'll be approximately at the same pace of increase and rationalization.

Jim Durran - National Bank Financial

So: is there any change to your planned CapEx spend?

Paul Sobey

We've reduced our CapEx modestly. Francois, why don't you --?

Francois Vimard

Yes, what we've said is that the planned CapEx what you'll see are going to be on the balance sheet around $500 million, which is about the same pace we had the previous years, a bit more than we had in the previous year, but a bit little lower than our overall forecast for this year.

Jim Durran - National Bank Financial

Right. And would that 1.1% be lower than what you might have been planning going into the year, I think that seems in my recall?

Francois Vimard

Some of that is planning for sure, but the reduction of the [capital], so realign some of that capital where it needs.

Jim Durran - National Bank Financial

Okay. And the $500 million, that includes the acquisition of Thrifty's?

Francois Vimard

No.

Jim Durran - National Bank Financial

Okay.

Paul Sobey

It's separate from Thrifty.

Jim Durran - National Bank Financial

Okay. On your SG&A, wondering: when you talk about you're down year-over-year on SG&A? Are you excluding the business initiative costs or is that including it?

Paul Beesley

Excluding the business initiative costs, we'd be down, because our business initiative costs are down and their SG&A ex-business initiative costs are down.

Paul Sobey

Yes.

Jim Durran - National Bank Financial

Okay. Thanks a lot now.

(Multiple Speakers)

Jim Durran - National Bank Financial

And last question just you were talking about some of the things that are contributing to margin improvement. This one of the ones that maybe was missed out was that Thrifty's has a higher margin than some of your business?

Bill McEwan

Perhaps modestly, but it wasn't for the full quarter. And it's a significant business, a special business, but it wouldn't have a material impact on the margin mix.

Jim Durran - National Bank Financial

Okay. Thanks, Bill.

Bill McEwan

Okay.

Operator

The next question comes from Ryan Balgopal from Scotia Capital. Please go ahead.

Ryan Balgopal - Scotia Capital

Yes, I just wanted to follow up on the CapEx spend. The $500 million I am assuming is just Sobeys. I am wondering: what the total Empire on balance sheet CapEx program would be for the year?

Stewart Mahoney

Ryan, its Stewart here. We would add some dollars for Empire Theatres and some for real estate, but it wouldn't be material. We don't disclose on the theatre side specifically. But real estate, we did build in a budgeted amount there for land acquisitions.

Paul Sobey

Some older assets that we have as well, Ryan. I mean there is a going to be churn in those numbers of the Empire level now.

Stewart Mahoney

That's modest.

Paul Sobey

That'll be modest.

Ryan Balgopal - Scotia Capital

I guess I thought if you were doing lot of development, there would be some significant capital there.

Paul Sobey

Yes, we've already spent some capital at the Empire level, but we are also selling assets at the same time. So, I mean, it's in and it's out.

Ryan Balgopal - Scotia Capital

Okay.

Paul Sobey

Year-to-date is $40 million, I mean if you were to pick a number that props the same rate. I think that's probably a safe assumption.

Ryan Balgopal - Scotia Capital

Okay. Thank you, Paul.

Operator

The next question comes from David Hartley from BMO Capital Markets. Please go ahead.

David Hartley - BMO Capital Markets

Hi. Just one last question on the CapEx: is that your CapEx at the Sobey level or does that include the franchisees?

Bill McEwan

I recall I talked about our balance sheet.

David Hartley - BMO Capital Markets

Your balance sheet, okay. Just on the inventories, just a slight increase in inventories, as a percentage of sales: anything to read into that? Are you seeing anything changed at that level?

Bill McEwan

Well, the big piece is Thrifty, David.

David Hartley - BMO Capital Markets

Okay. Alright. And: what's your square footage overall right now?

Bill McEwan

27 -- we will just look it up, we are not going to go. Okay. We are running at a 25, 26 level with (inaudible) net of closures. Sorry, David, I'll get back tomorrow.

David Hartley - BMO Capital Markets

Thank you all. I'll sign off. That's my question.

Bill McEwan

We'll get it to you.

Frank Sobey

Its 27.1 million square feet.

David Hartley - BMO Capital Markets

27 point, sorry?

Frank Sobey

Thank you.

David Hartley - BMO Capital Markets

Okay. Thank you. That's it for me.

Operator

Your next question comes from Jim Durran from National Bank Financial. Please go ahead.

Jim Durran - National Bank Financial

I was actually going to give David the number out of the press release.

Paul Sobey

We will refer it with you too, yeah.

Jim Durran - National Bank Financial

Sorry, David. Bill, I guess, we're into the all important fourth quarter now, and I know you don't provide forward commentary, but do you see any significant increase in competitive activity in fourth quarter compared to what you saw in third quarter?

Bill McEwan

Well, yeah, first of all, I know you're talking about calendar fourth quarter, we're in our third quarter.

Jim Durran - National Bank Financial

Yeah, sorry.

Bill McEwan

That's okay. But, yeah there has been some significant increase in competitive activity continue at even increased levels through this quarter. Yes is the answer.

Jim Durran - National Bank Financial

And I know you have changed the adjective you are using to describe the pricing activity out there. I think we've gone from irrational to radical. I'm trying to understand: is there a certain type of promotional structure that's in place that you feel has gone further or is it just the present discount? What is it that's going on out there in your mind?

Bill McEwan

I would just call it unusual and unfamiliar. And I don't really want to comment on other competitors. It is very different from what we've seen in prior years and it's quite deep in its nature. It's radical in its approach and that's all I'm really prepared to say.

Jim Durran - National Bank Financial

Sure. I know you don't talk about competitors. But within this equation: how much of a factor are the supercenters from Wal-Mart?

Bill McEwan

They have more square footage, they are factored. But I won't comment specifically on what impact I think they do or don't have. But fairly more square footage of any kind and prices that are competitive is the factor.

Jim Durran - National Bank Financial

Okay. Thank you.

Operator

Mr. Beesley, there are no further questions at this time. Please continue.

Paul Beesley

Thank you very much, Gloria. Ladies and gentlemen, we appreciate your continued interest in Empire and look forward to having you join us on our third quarter call scheduled for March, 11. Bye-bye.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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Source: Empire F2Q08 (Qtr End 11/03/07) Earnings Call Transcript
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