Executives
Paul Beesley - Executive Vice President and Chief Financial Officer
Paul Sobey - President and Chief Executive Officer
Stewart Mahoney - Vice President, Investor Relations and Treasury.
Bill McEwan - President and Chief Executive Officer of Sobey Inc
Francois Vimard - Chief Financial Officer of Sobey Inc
Paul Jewer - Senior Vice President, Finance and Treasurer of Sobey Inc
Analyst
Perry Caicco - CIBC World Markets
Jim Durran - National Bank Financial
David Hartley - BMO Capital Markets
Ryan Balgopal - Scotia Capital
Empire Company Limited (EMP.A) F1Q09 Earnings Call September 11, 2008 2:30 PM ET
Operator
Welcome to the Empire Company Limited first quarter results conference call. (Operator Instructions) I will now turn the conference over to Paul Beesley, Executive Vice President and CFO.
Paul Beesley
Good afternoon and welcome to Empire Company Limited’s fiscal 2009 first quarter conference call. Thanks for joining us today. Our comments will focus primarily on the financial results for the first quarter ended August 2, 2008. This call is being recorded in live audio on our website at www.empireco.ca.
Today’s discussion includes forward-looking statements. We want caution you that such statements are based on management’s assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors which could cause actual results to differ materially form such statements.
Today joining me on the call are from the Empire Company Limited, Paul Sobey, President and Chief Executive Officer and Stewart Mahoney, Vice President, Investor Relations and Treasury. From Sobey’s we have Bill McEwan, President and Chief Executive Officer; Francois Vimard, Chief Financial Officer and Paul Jewer, Senior Vice President, Finance and Treasurer.
This morning we released Empire’s financial results for the first quarter ended August 2, 2008. Revenue for the first quarter equaled $3.78 billion compared to $3.52 billion the previous year, an increase of $258.8 million or 7.4%. Sobey’s acquisition of Thrifty Foods on September 12, 2007 impacted revenue comparability in the quarter. Adjusting for this item Empire’s first quarter sales growth would have been 2.9%.
Consolidated operating income in the first quarter was $127.5 million, unchanged from last year. The increase in food retailing division operating income of $10.3 million was offset by a decline in real estate division operating income of $9.4 million and the decline in operating income from investments and other operations net of corporate expenses of $900,000.
First quarter operating earnings; that is earnings before net capital gains and other items equaled $70.3 million or $1.07 per share compared to $60.4 million or $0.92 per share in the first quarter last year, a 16.4% increase. Net earnings in the first quarter amounted to $75.1 million or $1.14 per share versus $142.3 million or $2.16 per share in the first quarter last year.
In the first quarter this year, net capital gains were at $4.8 million as a result of the sale of a non-core property. Net capital gains during the first quarter last year, totaled $81.9 million as a result of the sales of investments. The ratio of funded debt to capital at the end of the first quarter, declined to 38.5% from 39.8% at the end of fiscal 2008 and from 43.1% at the end of the first quarter last year.
At the end of the first quarter on a consolidated basis, authorized bank credit facilities exceeded borrowings by $731 million as compared to $673 million at the start of the year. Empire’s direct indebtedness at the end of Q1 was $388 million compared to $398 million of the start of the fiscal year.
During the first quarter in July, both the Dominion Bond Rating Service and Standard & Poor's Ratings Services upgraded through the rating trend on Sobey’s to stable.
I will now turn the call over to Paul Sobey.
Paul Sobey
We are pleased to start our fiscal year with earnings before capital gains and other items of $70.3 million up 16.4% over last year, a record level for our first quarter, but these results continue to be very solid and same store sales growth of 3% improved selling margins and ongoing cost initiatives; Bill will provide his comments a little later.
A few comments on our real estate business performance; our strategic and operational progress in real estate has been substantial over the last few years. Specifically, the creation of Crombie REIT 2006 and in the fourth quarter last year, the successful completion of the sale of Sobey Leased Properties real estate assets to Crombie both of which have served to enhance our net asset values.
During the quarter Empire’s real estate division recorded operating earnings of $13.1 million as compared to $16.7 million in the prior year. Sale of Sobey leased properties in the fourth quarter last year accounts for $2.3 million of the decline in the real estate divisions earnings. In the first quarter, the real estate division also recorded net capital gains of $4 million associated with the sale of a non-related property and the demand.
My comments will now focus on the major components of the real estate operations and going forward we will continue to do so. First Crombie REIT; with the completion of the latest property sales to Crombie we have essentially transformed our management focus from the property only managers to that of a developer of the related real estate for the benefit of both Sobey’s and our real estate operations.
Property owner management function is now being delivered by Crombie in which Empire holds a 48% equity interest. Our investment in Crombie at quarter end had about $90 million. Crombie’s equity accounted earning contribution to Empire in the first quarter was $4.6 million versus $3.9 million last year, an increase of 18%.
With respect to Genstar, our residential operations which is represented by a 35.7% ownership position in Genstar Development Partnership. Genstar contributed $9.6 million in earnings in the first quarter compared to $10.8 million last year. The decline in Genstar’s income contribution as we had communicated previously was anticipated given the well publicized slowdown in the housing markets from previously unsustainable levels.
We continue to anticipate a similar percentage decline in both revenues and net earnings for the current year as that experienced in fiscal ’08. As a matter of interest Genstar has generated over $250 million in cash for Empire on an initial investment to $29 million back in January 2001 and continues to be an outstanding investment even in stable or declining markets.
On the development front, ECL developments current pipeline and new properties under development consist of 10 retail locations in Ontario, Quebec and Atlantic Canada comprising approximately 1.1 million square feet. Development timeline for this portfolio ranges from two to four plus year, some of which is anticipated to be completed during the coming year.
Due to the current accounting rules under Generally Accepted Accounting Principles, Canadian GAAP no net income contribution is permitted to be recorded from the sales of these assets to Crombie in which more than 10% of the future minimum lease payments is derived from related parties such as Sobey’s. Instead the gain must be recorded as a charge against accounting value of our investment in Crombie not reflected in the income statement.
This was indeed the case in our fourth quarter, the book of fiscal ’08 in which we realized net after tax gain of $144 million on the sale of Sobey Leased Properties Crombie and with a corresponding reduction in the carrying value of our assets. On a go forward basis, we will be disclosing more and discussing about the economic values of these transactions. We look forward to accelerated growth of our pipeline and particularly a food-anchor shopping plazas as we move forward.
Just a few comments in our investment and other operations; both Empire Theatres and Wajax continue to benefit in Empire by providing steady cash flow while enhancing our financial flexibility. Revenues from investment and other operations totaled $42.1 million during the quarter, compared to $43 million last year primarily due to Empire Theatres.
Operating earnings from investments and other operations, net of all of our corporate expenses equaled a negative $4 million in the quarter compared to a negative $1.2 million last year and this improvement approximately in dollars is the result of lower interest expense and higher equity earnings from Wajax.
The Theatre chain currently operates 387 screens at 53 locations and continues to innovate by that technologies, that’s just 3D cinema. Wajax celebrated its 150th anniversary this year and the one who sold this company says (Inaudible) information and continues to be a solid business. Our equity accounted earnings from Wajax in the first quarter were $5.5 million versus the $4.2 million contribution last year and I’ll turn it over to Bill for comments about the operation of Sobey.
Bill McEwan
I will now provide a financial overview of Sobey’s results as well as a brief operational update. Sobey’s earnings contribution to Empire in the first quarter of this fiscal year were $57.6 million compared to $44.9 million in the first quarter last year, a 28% increase.
Sales for the first quarter increased 7.9% to $3.7 billion compared to $3.44 billion last year, an increase of $217 million. Same store sales grew by 3% for the first quarter during a period of slightly higher, but still modest retail price inflation. This sales force was a result of increased selling square footage from new stores and large rooms and the acquisition of Thrifty Foods in September last year along with the continued implementation of selling and merchandizing initiatives across the country.
Adjusting for the impact of Thrifty Foods acquisition, first quarter sales growth would have totaled 3.3%. Sobey’s EBITDA in the first quarter increased to $21.8 million or 13.9% to $178.8 million from $157 million reported in the first quarter last year. EBITDA as a percent of sales increased from 4.56% in the first quarter of fiscal 2008 to 4.82% in the first quarter this year.
Sobey’s first quarter operating income contribution to Empire increased to $105.5 million up $10.3 million or 11% from the first quarter of last year. Operating income margin was 2.84% compared to 2.77% last year.
Included in Sobey’s first quarter fiscal 2009 operating income was an $11.9 million increase in depreciation and amortization expense reflected our continued rate of capital investment. Also impacting operating income is the first quarter pretax costs of $5.6 million in connection with the rationalization and severance cost as compared to pretax cost to earning $5 million in the first quarter last year, which was associated with the rationalization costs and business process initiative costs.
We invested $102 million in property and equipment purchases in the first quarter versus $76 million in the first quarter of last year with the increase primarily related to the bond Ontario distribution center. During the first quarter, Sobey’s opened, acquired or relocated 11 corporate and franchise stores compared to 13 corporate and franchise stores opened, acquired or relocated during the first quarter of last year.
An additional four stores were expanded during the first quarter compared to 10 stores expended during the first quarter of last year. A total of 10 stores were closed during the quarter compared to 16 last year. There were five stores re-bannered in the first quarter of fiscal 2009 compared to 35 stores re-bannered in the first quarter last year.
At the end of Q1 Sobey’s square footage totaled 27.3 million square feet, a 3% increase over last year. Of note over the last five years our total square footage has increased by 20%, while our total retail store count has increased by 2%. Our average store sales that increased by 18% over this period reflecting our equipment to modernizing and expanding our existing store network.
Upstream in our supply chain are automated distribution center under construction in Vaughan, Ontario just north of Toronto is proceeding on time and on budget. We expect to have this facility operational by this time next year.
In conclusion, our sales and earnings results have been and will continue to reflect the net effect of number one, unwavering commitment to focus on food retailing; number two, sustaining the hard end competitive retail price position that we have achieved over the past several and three, our growing ability to consistently improve our offering, improve our service, increase productivity, lower costs and continue to execute well and consistently service out.
We are proud of the product and service innovations that we have brought to the market over the past several years and I share with you that there are more very important innovations coming soon, so stay tuned. We are determined to be widely recognized as the best food retailer in Canada while sustaining a competitive retail price position in each format and every market we serve. We will now complete the day with Paul Sobey’s comment.
Paul Sobey
So, we’ll start with the beginning of fiscal ’09. In our go forwards, we will continue to work hard to grow the long-term sustainable value of Empire. We remained committed to focusing our energy and capital on our core strengths. First, we remain committed to spotting Sobeys in this call, to be widely recognized as Canada’s best food retailer. We expect the food retailing landscape to remain very competitive and intend to provide Sobey’s with our full support as it continues to execute its food focus strategy.
We believe our keen focus on cost and productivity has created a competitive advantage in this environment and a further growth in sales per square foot and margins across our network is achievable through the continued successful day-to-day execution of their strategy.
Second, we are committed to the development of our new food-anchored shopping plazas by expanding our development pipeline of projects that creates the opportunity for certainty and a place of growth for Crombie. Our goal is to accelerate the growth and square feet available in our pipeline for sale by focusing on investments and locations with the greatest opportunity for a rough value creation for both Sobeys and our real estate operations.
Third, we are committed to prudently reducing our leverage further in fiscal ’09 through working capital management and renewed focus on capital out flows. Our goal is to reestablish Sobey’s investment grading with both rating agencies and of note, both agencies upgraded their rating trend to stable, a very positive first step.
In summary, Empire Management remains committed to operational excellence, innovation and disciplined growth. This commitment is aimed at building sustainable growth in each of our businesses over the long-term.
In closing, both Bill and I would like to thank all of our dedicated and outstanding employees and franchises and the affiliates of the Empire Group of Companies who have stayed focus on the plans and have delivered results. It is their continued dedication and ongoing commitment of serving our customers day-in and day-out more than anything else that will sustain our success.
We’re now happy to respond to any questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Perry Caicco - CIBC World Markets.
Perry Caicco - CIBC World Markets
I want to go start to our discussion on consumer behavior at this point in time if I could; Bill, I was just kind of wondering what adjustments or changes you’ve seen in consumer behavior relative to your stores over the past six months; has there been trading down of private label, higher promotional mix, shift into discount; what are you seeing right now?
Bill McEwan
I wouldn’t say that format-by-format there has been a dramatic shift from either of full service of community into discounts Perry. We would suggest that there has been a higher promotional mix and it’s been important to be careful as we’ve set our mix between regular and installed features and promotional strategies, but I would say that in one factor that transaction of minutes have declined, but sales per transaction are considerably up and that’s a pretty significant trend that I understand to be consistent with what’s going on in other retail, not just food.
So the behaviors are more that; that’s the most dramatic change as it completes the transaction size generally speaking and there is a slight improvement in the mix on the promotional side but I wouldn’t call it dramatic.
Perry Caicco - CIBC World Markets
Did it change much over the course of the quarter Bill and are there any significant geographical differences?
Bill McEwan
It’s an interesting quarter that saw some money but the fact that there was particularly poor weather in a few areas where weather’s important to us and so it’s hard to know whether the mix was related to the consumer behavior, associate with any sort of economic factors including the reduced or the increasing gas prices and the impact that had on people’s willingness to migrate as an example from a city to a cottage which we know was down based on some of the activity around our markets where that’s a factor, but I wouldn’t say it was as acute in June as it was in July. July there was particularly bad weather and I hate to have blamed the weather but I just might have to make an exemption.
It’s a peculiar time weather wise and that has changed the mix and to a certain extent some of the strength and its been difficult to manage and it’s difficult to separate the economic impact from those other weather related factors, but we are not in significant.
Perry Caicco - CIBC World Markets
Right and Bill if I could, would you mind exploring the topic of custom goods inflations where suppliers seem to be seeking some pretty substantial cost increases and I was kind of wondering a few things; is there more pressure now than there has been over the course of the year, what’s your experience been in trying to move some of these increases through and I guess I’m wondering just how much of a balancing act there is right now for you between cost increases, the various price balance and the market and consumer end?
Bill McEwan
Yes I think Perry you can characterize it this way; the cost increase has started months ago and they’ve grown steadily and they begin to streaming in at a much quicker rate now and generally speaking we are having not particular difficulty in passing through a good percentage of those increases in retail.
Although in net terms of inflation, net of the market basket changes on regular pricing driven by commodity and cost of goods changes and the deflation associated with the shift and the promotional mix is about 1% this past quarter which ended at the end of July. We expect it would be higher in the coming quarter, we don’t know for sure, but we are monitoring it closely.
I would just say that the cost of goods streaming in quicker, we are monitoring it very closely; it is a very significant balancing act between the ability to pass on in your regular price phrases and how you promote during that time and its different region-by-region and market-by-market based on the various competitive pressures and the mix of discount versus the service formats etc, but you’ve hit a particularly big point and that it is a tricky balancing act but I’m comfortable on top of it and we’re going to be able to cross these through and I see more of that happening elsewhere in the market as well.
Operator
Your next question comes from Jim Durran - National Bank Financial.
Jim Durran - National Bank Financial
I just wanted to dial back on the inflation count. I’m not sure I understood, are you saying that there was 1% inflation excluding manufacture price increases or what are we seeing here?
Bill McEwan
There is 1% retail inflation. As we’ve talked about before, cost inflation and retail inflation are not necessarily the same thing and in line coincidental one with the other and that’s what we referred to in the last answer that as cost increases run through we’ve had a reasonably successful capture rate, but there has been some intense promotional activity in some regions versus others that has been deflationary.
So the net effect of our ability to pass on retail increases and the deflation associated with the shift in promotional next in key regions nets up to a 1% inflation order. What I’ve said is that it was building through the quarter and we expect it will be higher in this quarter but it would be inaccurate to think that inflation in net terms for our organization was more than 1%.
Jim Durran - National Bank Financial
Would you say that you saw any change in the price environment in say Ontario specifically as the quarter progressed?
Bill McEwan
I wouldn’t say it was noticeable; it was more a camouflaged by the promotional mixing that was going on in that market place, both in discounts in the conventional segment. It’s not very evident, the kind of price changes that we are hitting in July, but we would suggest it’s more evident subsequent to the end of the first quarter.
Jim Durran - National Bank Financial
Okay just on Thrifty Foods is Thrifty Food’s margin improving now through synergy contribution and is Thrifty Food’s margin higher than your consolidated number?
Bill McEwan
We don’t split out the margins as you know on a division-by-division basis, but I’m happy to report that we are ahead of plan on the capture of the Synergys who identified that at the time of acquisition and we continue to make available the resources of this company to that team to continue to prove particularly their back shot. Of the most significant note is the distribution capability which I think we mentioned at the time of acquisition we are very strained.
We’ve opened a new facility in Sobeys BC at BC hotels to facilitate better distribution of products and that has relived pressures so we have better service levels associate in the Victoria facility. So Thrifty is ahead of track on the Synergys and we are satisfied that they have healthy and growing margins.
Jim Durran - National Bank Financial
Okay and the last question; you’ve bought a number of franchise stores this quarter, is that material to what we see in terms of reported revenue in margin?
Bill McEwan
No, not material at all.
Operator
Your next question comes from David Hartley - BMO Capital Markets.
David Hartley - BMO Capital Markets
Could you just update me on the number of franchise and the affiliated stores in your network today?
Bill McEwan
Paul is just going to pull the accurate numbers …
David Hartley - BMO Capital Markets
Yes I’m just going to add another question then; it’s good to see that you are ahead of plan there; does it mean now that Thrifty is indeed a creative to your earnings?
Bill McEwan
Yes we’ve always thought it would be and it is certainly.
David Hartley - BMO Capital Markets
Okay, you don’t break out SG&A and etc and I guess you have some other initiatives that affect your cost of goods; could you talk a little bit about all these initiatives from distribution center, consolidations and other initiatives you’ve had to streamline the business and prove your efficiencies and how much they contributed in the quarter?
Bill McEwan
In the quarter across the entire organization or are you focused on Thrifty?
David Hartley - BMO Capital Markets
I’m focused on the whole organization.
Bill McEwan
Well I can’t pinpoint for you the exact contribution of the distribution Synergies that took place in this given quarter, but I would say to some total of the improved productivity in the Adminton Calogram, Win a pick facilities and the dramatic improvement year-over-year in the service levels.
Productivity would be in Melton, combined with the new facilities that is just on broad in Trough, Riviera and the redistribution of business, small store business, convenience channel business associated with the ADL and the continued productivity of select and we are satisfied that in every region of the company they are distribution efficiencies and service levels. I need to give you a basis points for specific margin of proven associated that is beyond my capability right now.
David Hartley - BMO Capital Markets
Okay so it’s going to be hard to tell like kind of what move the earnings made or for Sobey’s was it more like the business itself or the efficiencies and the some of those other initiatives. Which was it that you think drove the needle this quarter?
Bill McEwan
David at the risk of sounding like a broken record I’ll take you back to the last three or four conference calls and say it’s the sum total of various initiatives on the selling and productivity side between fresh handed management and workforce management and smart retailing between the distribution center improvement, between the better utilization of information associated with SAP, the better understanding of relationship pricing and private label versus national trends. It’s the sum total, the recipe as we call it of everything we do to move that.
There is no singular activity or singular event or credential item that made the performance anything different than what people would have expected. It’s just progress along and continue and at the end of the day the company doesn’t get things done, people get things done and I think we’ve done a much better job I would say particularly in the last couple of years of enabling our people and our people have grasped the changes we made in systems and business processes and they are improving the utilization of those every given quarter.
David Hartley - BMO Capital Markets
Okay just two more questions if I may; price drop, you’ve come out with a much stronger flyer now, I’m just curious about the performance there, the strategy there and where you go from here?
Bill McEwan
Well as we’ve always said, Ontario is an and intensity set up an environment and heavily concentrated on discount not just us, but new entrants and players that have been in the business for decades and that goes to the promotional mix that I was answering Perry on as retail pricing has gone up based on cost increases, promotional intensity has increased in some banners or some form as more than others, price shopper being one of them and we are satisfied and we are making progress that we have expected of ourselves in the price shopper banner; although I won’t segment this as a good one.
David Hartley - BMO Capital Markets
Okay just finally on I guess a return on invested capital; this quarter the growth I guess you saw on earnings in the quarter is perhaps attributable just really if you net it all out to a decline in minority interest, so you kind of bought the earnings growth this quarter; perhaps not the right way we look at it, but it’s one way to look at it. Where do you see your return on invested capital going forward? What type of hurdle rates are you achieving on some of your initiatives, CapEx initiatives etc, could you give us a little color there?
Bill McEwan
First of all I’m going to turn that over to Francois and Paul in a moment, but I’m not sure that I could let you go with buying result in the quarter with some interest changes, but having just answered that question on all the continuous improvements that have taken place over multiple quarters, I think it’s a combination of all factors including any changes associated with the account treated with minority interests, so I know you are seeking a singular event and minority interests wouldn’t be at any more than the others; Paul.
Paul Beesley
Yes on return on capital David, the key point is it’s going to go up and that’s our target and we have already other depending on the type of risk we’re taking in each project, but we still see a lot of improvement going in our return on capital and we’re managing our capital according.
Bill McEwan
And you also had a question on corporate versus franchise stores; we have 717 franchise stores and 632 corporate at the end of the quarter.
David Hartley - BMO Capital Markets
Okay; just a follow-up on the return on investment, thank you for that answer there. With the new stores that you’re opening, are you finding it a lot more challenging in this environment to get these kinds of returns? I mean what is your focus there? What are you thinking there in terms of being able to get these returns? Is there something you’re able to do that given the environment allows you to kind of side step some of the competitive issues out there to squeeze a better return out of the box as you’re putting up?
Paul Beesley
Overall, I would say no, we don’t have more issues than in the past because we are managing like Bill said different elements, which is margin in productivity and so that gives us that capacity to deliver those return.
David Hartley - BMO Capital Markets
And the costs for putting up these stores, have you taken it down a notch or is the same typical costs that you’ve seen in the past in putting up some of these stores?
Paul Beesley
There is some pressure on the rent side also and the equipment side, but because of the productivity we can take up lot of the store, whereby we can generate a return. We continue to refine our prototypes format-by-format, we continue to take costs out without compromising the offerings, so it’s a [inaudible].
Operator
Your next question comes from Ryan Balgopal - Scotia Capital.
Ryan Balgopal - Scotia Capital
Bill I just wanted to confirm, were gross margins as a percent of sales up in the quarter?
Bill McEwan
Yes.
Ryan Balgopal - Scotia Capital
Okay, maybe just in terms of we’re in a bit of an economic slowdown; what are you doing differently within your stores, whether it be by format or merchandizing mix to hope see you through this, to address the needs of consumers?
Bill McEwan
Ryan, on the economic slowdown is not dramatic trend of events and customers have a variety of options in our stores on a day-to-day basis, so without changing anything particularly of that to what we do change in a weekly basis, they have a variety of options when they come in based on their individual circumstance from trading up or trading down to private label to buying more promotional features, buying different sized packages, all those sort of consumer self controlled initiative that we have in flow of the business.
Where we do, as I said before see some shift and we have to anticipate and plan and program and monitor is in the promotional mix. We are finding that people are more attuned to the promotional activity not by leaps and bounds, but significant enough to mention that the promotional ways to promotional sensitivity is little greater in these times and these days and that’s about it. The rest of it is just the ebb and flow of the mix in the business and I have no more to add than that.
Ryan Balgopal - Scotia Capital
Okay, maybe just on the capital side of things, Paul you mentioned that you wanted to get to investment grade status, while you could get some working capital improvement, I was wondering if you could quantify it for this year and also you said you would manage, you said your capital expenditures; I am wondering if there’s been a bit of a change there in terms of what you’re planning in order to hope you get to investment grade status?
Paul Sobey
I guess the first thing is with these acquisitions that we’ve done and despite of our overall strategic direction if you would, we’ve been going through and looking at this call would be done at non-core assets. In this particular quarter, we sold a property in New Finland and subsequent to the quarter end as said we sold our self storage business that we had and those two combined and that’s -- like the other one just closed the other day, it’s around $44 million in capital. So, those investors are a little example of the reallocation of capital.
The sale of these property assets again we’ll return a 48% interest in that and we’ve sold that to Crombie and that freed up $317 million in capital. So, we’re looking for ways that we’re going to enhance the return on our capital employed. We look at working capital management in all of our subsidiaries. Sobey does that on a in and day out basis and it’s just making sure that we are managing our capital prudently and again there’s no magic about it, but we’re going to get rid of our assets and assets really don’t add to the mix and enhance the returns if it makes economic sense to do so. Francois or Paul Beesley, do you have any?
Paul Beesley
On the Sobey side, as we said, the capital plan for this year is inline with the capital plan we did for last year, so it should be in that.
Paul Sobey
And we’re about in a grade rating with DVRS and they’ve upgraded us to a stable trend and with SN&T, they’ve upgraded us to a stable trend as well and both of which are positive steps and hopefully we’ll get both of the months side overtime and so that’s our objective perspective of Sobey’s anyway, it is important for us.
Ryan Balgopal - Scotia Capital
Maybe Bill, just one last question just on the $5.5 million or $5.6 million of severance in that, what sort of restructuring were you doing?
Bill McEwan
Although, the severance costs were associated with the distribution center. We had negotiated collective agreements with our unions in anticipation and preparation for the shit associated with opening Devon next year. So those are costs associated with the future activity that are now behind us that we needed to expense in the time period.
Operator
Your next question comes from Jim Durran - National Bank Financial.
Jim Durran - National Bank Financial
What’s the cooperate debt at the Empire level?
Paul Beesley
$388 million.
Jim Durran - National Bank Financial
And what would your Real Estate trailing FFO be now?
Paul Beesley
$13.2 million, that for the quarter.
Bill McEwan
Jim I think it’s important on the Real Estate side of the equation when your looking at it on a go forward basis, you’re going to have the equity contributions and cash flow obviously from Cromby REIT; there will be the revenue and income component of the Genstar investment, but on the development front because we sold these property assets, you’ll really have minimal revenue streams from those assets or may be some redundant assets that are lapped, but it will be a very, very some component and we are going to be talking in the future about the economics of the transaction versus quit frankly the accounting of the transaction, because it has sailed to Cromby and Griffen when they are going to purchase.
Jim Durran - National Bank Financial
I understood on that; I guess just one other question and with respect to the Genstar business; have you seen any further deterioration in the performance in Western Canada? I mean relatively speaking, they are holding up quite well, but it’s certainly a tough market out there.
Bill McEwan
No, it is a tough market and it’s still producing very, very solid returns, but at our annual general meting and even may be today, I’m not sure if I said it today, but we certainly said it at the AGM. We were anticipating similar declines in both revenue and in that earnings contribution as experienced during fiscal ’08 and even with that if you look at the historical flows its still solid returns, but we want to try and make sure everybody’s levels are with respect to that particular corner of our business.
Jim Durran - National Bank Financial
Okay and the feeders business; we don’t strip it our, but it certainly looks like maybe a little bit weaker than I would have expected; what’s the outlook there?
Bill McEwan
Well the outlook there Jim again is a small component on an income basis that generates good solid cash flows. It’s more of a function of their ability to continue to streamline the operations on a cost side and the quality of the product offering and some of their innovation, so we are looking for continued improvement, but I don’t think it will make a meaningful difference one way or the other to the contribution during this current year. Not looking for a substantial change that will make a meaningful impact one way of the other on our bottom line; we look for a study to improving results.
Operator
Your final question comes from Perry Caicco - CIBC World Markets.
Perry Caicco - CIBC World Markets
Yes, Bill I’m going to ask you a bit of an unfair question. I’m going to ask you if you could try to help us predict the future a little bit. When you look over the remaining calendar year, I know you have mentioned that I guess after the end of the quarter there is a little bit more intensity on promotional pricing. I was just kind of wondering, what are the forces at play in the industry that we should be contemplating; in other words what issues are used steering the company through and that we should be considering in the industry between now and the end of the calendar year.
Bill McEwan
I think more that even in this past several years, he who executes best wins and it comes down to the day-to-day execution of service levels etc. so I’ll say that right up front. The second piece is, I would hope that there wouldn’t be the kind of radically intense activity that perhaps we all learn from this time last year as not been effecting going forward into November, December and into January, and don’t think I would suspect we won’t see that kind of activity. I don’t see a huge abatement in the base promotional activity, but I assume we’ll see the radical activity that we saw this time last year.
Inflation factor; clearly if you look internationally there is double digit inflation in some parts of the world and the modest inflation that we’ve incurred thus far is against that stream and they should continue to flow though. It’s important for us to capture that inflation and that cost of goods inflation and retail pricing and we don’t see that there is any way that can be avoided or resisted by any retailer, thus taking a rational focus in the market place in Canada. It’s still going to be intensely competitive but some forces are too compelling to ignore and this inflation factor is one of them.
The currency changes are not insignificant as well year over-year-and we are just now coming our of the local product seasonal period put back into back into a dollar adjusted prudence procurement cycle out of the United States, so that will have an effect, I’m sure you can calculate.
So, I’m seeing several different bullet points, but I hope we don’t see the same irrational, radical activity in the market place that we will continue to focus on who we are and what we do and execute consistently and remain, maintain our competitive price position with an aspiration to fairly and effetely to cost increases past though retail and it really comes down to execution market-by-market; at the end of the day that’s always the difference.
Operator
Mr. Beesley there are no further questions at this time.
Paul Beesley
We appreciate your continued interest in Empire Company Limited and look forward to having you during our second quarter conference call scheduled for December 11.
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