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Edited Transcript of PJC.A.TO earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Jean Coutu Group PJC Inc Earnings Call

Longueuil May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Jean Coutu Group PJC Inc earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Belzile

The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs

* Francois Jean Coutu

The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director

* Helene Bisson

The Jean Coutu Group (PJC) Inc. - VP of Communications

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Conference Call Participants

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* James Durran

Barclays PLC, Research Division - MD, Head of Canadian Equity Research, and Senior Analyst

* Keith Howlett

Desjardins Securities Inc., Research Division - Consumer Products & Merchandising analyst

* Mark Petrie

CIBC World Markets Inc., Research Division - Research Analyst

* Michael Van Aelst

TD Securities Equity Research - Research Analyst

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

* Peter Sklar

BMO Capital Markets Equity Research - Analyst

* Tal Woolley

Eight Capital, Research Division - MD of Equity Research

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. (foreign language) Welcome to The Jean Coutu Group's financial results for the fourth quarter of fiscal 2017. (foreign language) Please be advised, this call is being recorded. (foreign language) I would now like to turn the meeting over to Ms. Bisson. (foreign language) Please go ahead.

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Helene Bisson, The Jean Coutu Group (PJC) Inc. - VP of Communications [2]

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Good morning, everyone. The Q4 earnings release was put on the wire earlier this morning and was also posted on The Jean Coutu'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 André Belzile, Senior VP, Finance and Corporate Affairs. Mr. Coutu will discuss company's results and key operating highlights, and Mr. Belzile will cover a few financial details. This will be followed by a question-and-answer period for analysts only. (Operator Instructions) Media are invited to contact me for comments or interview purposes.

We would like to remind listeners that the company's forward-looking statement disclaimer applies to all our communications. Now Mr. Coutu will begin the presentation.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [3]

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Thank you, Helene. Good morning, everyone. So during the fourth quarter, there were probably 2 highlights I'd like to share with you. First of all, the front-end sales from our retail sales as well as distribution center sales had significant increase. And so it demonstrates the efficiency of our business strategies and the strength of our brand. Also, we've been pursuing the transfer of our operations from our distribution center to its new location in Varennes. So the quarter's results were affected by the cost related by this gradual transition and should be completed by the end of June later this year.

So let's look at the details of our results. During the fourth quarter, network sales increased by 4.4% to $1,242,000,000, while The Jean Coutu Group's consolidated sales were up by 12.3% to $712.4 million. Note that following the recent announcement of an agreement between the association of Québec pharmacist owners and the Québec Health Minister for the cancellation of the periodical withdrawals, the retail sales of our network will benefit from the onetime adjustment in Q1 of fiscal 2018 to account for the reversal of accrued and unpaid withdrawals.

As shown on the first table, network pharmacy sales increased by 3.8%, while distribution center pharmacy sales were up by 12.5%. Note that information on growth for network sales was established using a comparable number of weeks, while distribution sales numbers included an additional week in the last quarter.

The introduction of new generic drugs reduced retail pharmacy sales growth by 0.6% in the last quarter, and price reductions of generic drugs reduced it by another 0.3%. Without these factors, network pharmacy sales growth would have been 4.7% in the last quarter. The generics penetration rate increased by 1.1% year-over-year to reach 71.4% of all the prescriptions. Network front-end sales showed an increase of 5.2% on a comparable number of weeks basis, while distribution center front-end sales were up by 15.9%.

So if we turn to the next slide. We see that operating income before depreciation and amortization decreased by 4.8% this quarter to $75.8 million. This decrease is mainly explained by the lower contribution of Pro Doc to the consolidated OIBA following the increase of authorized professional allowances paid to pharmacist owners from 15% in the comparable quarter last year to 30% in the first 2 months of the last quarter and with no ceiling in the month of February 2017. This element has been compensated partially by the benefit of sales and royalties for an additional week in the quarter. Also, we experienced an increase in general and operating expenses such as higher labor costs and other expenses related to the transition to the new location in Varennes and the operating expenses of the additional week in the last quarter.

Net profit amounted to $47.8 million or $0.26 per share during the quarter ended March 4, 2017, compared with $51.5 million or $0.28 per share last year.

On the next slide, it shows the quarterly same-store sales growth for the PJC network. So on a same-store and comparable number of weeks basis, network's pharmacy sales increased by 3.7% during the fourth quarter of fiscal 2017 over the comparable quarter, while prescriptions count grew by 3.6% year-over-year.

Once again, keep in mind that combined with the 71.4% generics penetration rate, introduction of new generic drugs and price decreases reduced pharmacy's retail sales growth. Also on a same-store and comparable number of weeks basis, front-end sales increased by 4.4% year-over-year. Overall, network sales increased by 4% during the past quarter on the same basis.

During the fourth quarter -- fourth quarter, I mean, 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 are also very pleased to report that Jean Coutu was ranked as the second-most admired company in Québec behind Google and first as the retailer in a survey conducted by Leger Marketing recently. It is worth noting also that Jean Coutu actually ranked first among the 18 to 34 years old, often called the millennials. This preferred position in the market is once again well ahead of our competitors in the retail sector and is a testimony of the endorsement of the brand by our customers of every generation.

During the fourth quarter, we launched an important health campaign called Healthy Travel. It was launched in February and was supported by an advertising campaign on our digital platforms in store, on TV and various radio stations.

So thank you. Now let's take a look at the financial review with André Belzile.

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [4]

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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 $18.5 million in the fourth quarter of fiscal 2017 compared to $19.4 million in the comparable quarter of fiscal 2016. Earnings are still subject to a 26.9% tax rate in our 2017 fiscal year, and there was no significant item impacting the effective tax rate in the quarter.

Depreciation and amortization charges amounted to $10.1 million during the fourth quarter of fiscal 2017 compared to $9.1 million for the comparable quarter of fiscal 2016. As explained by Francois earlier, fourth quarter fiscal 2017 OIBA decreased to $75.8 million compared to $79.6 million in the comparable quarter of fiscal 2016.

You also have a summary of our statements of financial position on the following slide. There was no bank debt used at quarter-end, and we have $178.9 million of cash on hand. We have sufficient liquidity and availability under the $250 million revolving credit facility with an optional accordion of another $500 million. The book value of total liquidity amounted to $1,210.1 million compared to $1,120.3 million at the end of the previous fiscal year.

On Slide 13, you can see that cash flow related to operating activities amounted to $55.3 million during the fourth quarter of fiscal 2017. Cash flow used in investing activities was $4.5 million during the last quarter, including $9 million used for the purchase of property and equipment and $1.5 million invested in intangible assets.

Total selling square footage was 3,283,000 square feet at the end of the last quarter compared to 3,230,000 square feet at end of the same quarter in the previous fiscal year.

In fiscal year 2018, the corporation plans to allocate approximately $26.4 million to capital expenditures and banner development cost. We plan to open 13 stores, including 8 relocations, complete 20 major store renovation and expansion projects, resulting in an expected total selling square footage of the network of 3,351,000 square feet at the end of fiscal 2018 or 2.1% selling surplus growth.

Also, we're pleased to announce that the Board of Directors approved an increase of the quarterly dividend of 8.3% to $0.13 despite the difficult regulatory environment.

The last slide shows the contribution from our generic drugs manufacturing subsidiary in our consolidated results. Sales increased to $55.2 million, while OIBA margin decreased to 25.2% following further prices decline and increased professional allowances.

That concludes our presentation on the fourth quarter of fiscal 2017 results. I would now ask the operator to open the question period.

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language) Our first question is from Jim Durran from Barclays.

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James Durran, Barclays PLC, Research Division - MD, Head of Canadian Equity Research, and Senior Analyst [2]

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With respect to the new agreement with the government and the AQPP, can you give us some idea of what size of reversal you might expect to realize in Q1?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [3]

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For the franchisees, this will be something, let's say, significant. For us, obviously, as a franchiser, the only impact is on the royalties that have been maybe slightly underestimated. And this is not a material amount. It's probably something around $1 million for The Jean Coutu Group as a corporation.

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James Durran, Barclays PLC, Research Division - MD, Head of Canadian Equity Research, and Senior Analyst [4]

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And Pro Doc won't get any of the increased rebate stock?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [5]

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No. Actually, the periodical withdrawals have nothing to do with the professional allowances other than the removal of the ceiling was some kind of compensation for the reduction in professional fees for the pharmacists. So we'll see what's the timing of those professional allowances reduction. As you know, they will be kept from future date to 15%, which date is unknown at this point.

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James Durran, Barclays PLC, Research Division - MD, Head of Canadian Equity Research, and Senior Analyst [6]

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Got you. With this easing of the strains, is it your intention to go back to using the normal course issuer bid more actively?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [7]

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Again, it will depend on the market conditions at this point. There's still some uncertainty around what's left to be announced by the Health Minister in terms of generic drug prices. We don't know whether he will move forward with the bidding process under Bill 81 or not. He made it very clear publicly that if he cannot reach an agreement with the generic drug manufacturers, then he will attempt to reduce price through that process. That for us is a clear indication that he would rather get a better deal directly with the manufacturers, which we believe is very positive. We see it as a reasonable indication that they would rather sit down and agree on a new deal with the manufacturers.

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James Durran, Barclays PLC, Research Division - MD, Head of Canadian Equity Research, and Senior Analyst [8]

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Right, okay. With respect to your square footage growth for 2018 and how 2017 closed, so it looks directionally like the amount of square footage growth that you're trying to grow by is about the same. But in 2017, I guess, store closures caused the net benefit to be slightly less than the 2% I think you were targeting. Is there anything extraordinary going on with respect to store closures that we should be anticipating again in 2018? Or do you think your net square footage growth will be up by that sort of 2% range?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [9]

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Yes, no, that's what's the expectation. Actually in 2017, we didn't close as much acquisition with all the uncertainties going on in the marketplace. Actually, the store closures were not responsible for the discrepancy as compared to our expectations for the last year. Those closures were, for the most part, very small clinics for which the volume has been transferred into another store. And in terms of selling square footage, they are not very large stores, actually.

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Operator [10]

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The following question is from Peter Sklar from BMO Capital Markets.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [11]

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With the elimination of the cap on professional allowances, do you have a view on how high the professional allowances went in the industry over the last few months?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [12]

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Well, now that's something we don't disclose. But obviously, it was higher than the 15% that has been capped. If you look at the margins we disclosed in the numbers for Pro Doc, you can probably do the reverse math assuming that these higher PAs have been in place only for 1 month in the quarter. But as you may expect, these are rebate levels, are very sensitive competition information -- competitive information, so that's why we can't say too much about that.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [13]

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What was the effective date when the cap was lifted?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [14]

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January 28. So the uncap open for free negotiation PAs were in force for the full month in February only, in that quarter.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [15]

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Obviously, since the agreement with the pharmacists will take place minimally earliest in June of this year, maybe after that or in September, you will see the full effect in the next quarter.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [16]

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Right, okay. And just last question, your front store sales were strong on a same-store sales basis. Can you just elaborate a little bit further? Were there any particular promotional programs or flyer programs that worked? Or are there any particular categories that are carrying the comp? I just wonder if you can elaborate a little bit more.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [17]

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Yes. It's an interesting question because this quarter was exceptional because all of our categories showed an increase. And probably the driving force of this is mainly the OTC section. I hate to say it again because you probably heard me now because I've been -- for 20 years or so I've been doing this. And as a pharmacist, I say this, it's too bad that there was a flu season -- an active flu season this year. What I always say to my people, to my patients, that they can find relief with their neighboring pharmacists, and that's what we are. And again, this is a driving force for other categories because it draws more people in the store, and that's probably what we experienced this year. I don’t know if that's what's coming. As you can see in our press release, in the last quarter, OTC sales increased by 5.8% compared actually with a decrease of 2.6% last year. So it was -- it was definitely a key driver in those numbers.

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Operator [18]

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The following question is from Mark Petrie from CIBC.

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Mark Petrie, CIBC World Markets Inc., Research Division - Research Analyst [19]

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I wonder if you could just talk about the acquisition environment that you're seeing today. You mentioned a little bit slower pace last year. What's your expectation for the coming fiscal year? And then maybe more broadly obviously, continues to be larger transactions. Is that something that you think is potentially feasible for Jean Coutu today?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [20]

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What do you mean feasible?

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Mark Petrie, CIBC World Markets Inc., Research Division - Research Analyst [21]

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Or something that you would be allowed from a regulatory perspective and something that you would be interested in?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [22]

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Yes, well, listen, there's still some variables out there. Okay, that's why it's been quiet except for the latest acquisition of Duty Free, which we will not comment, obviously. It's not our transaction.

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Mark Petrie, CIBC World Markets Inc., Research Division - Research Analyst [23]

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And what about the environment for individual pharmacists?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [24]

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Again, if we didn't do too many transactions last quarter, it's because there's a lot of uncertainties still. And people are waiting.

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Mark Petrie, CIBC World Markets Inc., Research Division - Research Analyst [25]

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Okay. And I guess related to -- just circling back on the Bill 81, what's your expectation in terms of time line? I mean, do you have any sense on when the minister would -- if they aren't able to reach an agreement with the manufacturers, would begin to proceed on their own?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [26]

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Again, it's a good question. I mean, this has going on for a couple of years now. We're trying to find the answers to your questions. If I knew, I would be more than glad to share with you. But he has done special moves lately with the pharmacists. I guess next moves will have to be with the generic companies. And as probably the minister understands better what's the dynamics of our industry now, I think he will be -- is in a mood to make a deal. So we are looking forward to this. And -- but I can't tell. I'm not in his shoes, actually.

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Mark Petrie, CIBC World Markets Inc., Research Division - Research Analyst [27]

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Sure, no, I understand. And then sorry, just one other follow-up, housekeeping. In terms of the DC transaction, how much extra cost would you say that, that caused in Q4?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [28]

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Yes, it's around the same numbers we disclosed in the past, about $1 million a month, so slightly more than $3 million in the quarter. We expect -- currently, the only products still shipped from our former distribution center in Longueuil are some generic drugs, including obviously Pro Doc, which is the largest volume manufacturers for us. They are still in Longueuil. All of the branded drugs have been moved into Varennes, and we are gradually transferring all the remaining drugs. We expect actually that process to be fully completed by mid-June. So only about 2 weeks later than initially expected. We have mentioned it should be finished by the end of Q1. Actually, it's going to take a couple of more weeks, but we're quite pleased with these transfers. I think it's going smoothly at this point, and we should be on schedule.

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Operator [29]

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The following question is from Vishal Shreedhar from National Bank Financial.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [30]

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I just want to get your thoughts on royalty rates and where you see those going given the various gyrations in drug reform?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [31]

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As we have mentioned in the past, taking into account the fact that the profitability of the retail stores have been improving, we actually reduced some of the support programs that were in place to help our franchisees that were in difficulty. And for that reason, you will see a gradual increase of the average royalty rate. The fact that professional allowances will be capped at some point should again have an impact. But on the other hand, the pharmacists will not suffer from the reduction in their professional fees as they were for the last few quarters. So all things being equal, this is something that we knew we'll review from time to time, but at this point, you should see an increase in the average royalty rate.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [32]

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So do you see PJC removing the full support?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [33]

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No, there is always going to be a need for experienced pharmacies that are either reinvesting in renovations or are still in a start position, looking for a gradual growth of their customer base. And for that reason, we help them. And we see that as an investment because then we secure a new location for the long term and those will generate royalties and distribution and wholesaler margin in the future.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [34]

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Okay. And did you disclose the EPS impact of the extra week? Is it as simple as just taking the extra 14 over 13 kind of calculation?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [35]

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No, we didn't. But it's slightly below 2% in terms of sales, as you know. So that's probably roughly the number.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [36]

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Okay. The PAs, when they were uncapped in the last month, were they stable? Or do they bounce around? I'm just trying to forecast...

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [37]

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They were growing steadily.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [38]

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Okay. So do you perceive there will be stability? Or is it still growing into this quarter?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [39]

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No, we are pretty much stable throughout the month. They have been adjusted very -- pretty quickly. The pharmacists are good negotiators, I would say, and they want to have the best deal possible. So that's helped. It's natural forces of offer and demand and the competition that provided for a very quick adjustment on those agreements.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [40]

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It's the private sector, and then like I say, all have their own strategies.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [41]

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Okay. And just 2 more quick ones here. The dividend increase of 8%, you have a very strong balance sheet and not as strong as I thought was possible. Just thoughts on capital allocation, how the management intends to use their balance sheet strength there?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [42]

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Again, as we have mentioned in the past, we would rather reinvest in the business to grow what we're best at, doing pharmacy. But if there's no opportunity at some point, we will look in the future in -- efficient ways to return capital to our shareholders. In the meantime, we are growing steadily the quarterly dividend year after years, and we think that's prudent to grow at that pace since we want to make sure that any dividend increase we provide is sustainable for the long term. And if we end up -- obviously, last year, as you know, we financed the investment in the new DC with our cash flows. This year, obviously, we won't spend as much as. So we will have, at some point, I guess, the Board of Directors to take a serious look at ways to return capital to our shareholders in an efficient way again if we unfortunately don't find a nice opportunity to reinvest that cash within the organization.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [43]

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Okay. And this question was hinted at by another. But just on the periodic withdrawals, I know in the past, when they came through, there was a negative impact to the Rx line. And as we forecast it, how do we forecast the actual benefit on the sales line? I know it's not going to be too large of an impact on earnings but just in terms of the OpEx of the same-store lines.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [44]

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Yes, on our sales from the DC, it won't have any impact on the retail sales of our franchisees, which are not our sales. We provide those statistics in terms of sales -- retail sales growth because they are interesting for the financial community to have a view on future trends of our own revenues of our -- of royalties. But actually, those are not our sales. So yes, you will have a onetime impact in Q1 as we had a onetime negative impact in 2015. If you recall, when these periodical withdrawals were implemented, they were announced in September but retroactively to April of the previous quarters. So we had that negative impact as a onetime. We will have this onetime benefit in Q1. And this should be -- if I recall, this should be around 6% or -- 6% or 7%, roughly speaking. We will show that separately if you -- so we have a clear view on that when we show the Q1 number.

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Operator [45]

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The following question is from Patricia Baker from Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [46]

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Just on the script count, I think you said script count in the quarter was up 3.6%. Is that in line with the growth in the market? Or is it -- or are you doing a little better than the overall market?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [47]

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Pretty much in line, Patricia. And it has been said that we've gained a small market share because there is less and less movement towards, I would say, the weekly supply of prescription drugs like they used to be. It's more stabilized, and the growth that you see now is still going to what you call the [PVVA] or the -- what's the term in English, [disfill], okay, but not at the same rate it used to be. So the growth that you will see is both at the counter as well as the disfill , and that's why I think we showed a little bit more increase than the rest of the industry.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [48]

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Okay, that's very helpful. Just I will ask a second one, if it's okay. So you're at the most critical period with Varennes distribution center, with the transfer of the Rx. And you said that you've already started, and that's what will be completed by June. So far, there's been no hiccups with that, it's going smoothly?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [49]

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Smoothly is a big word, I would say. There's always a human capital involvement, okay? That's something that we need to work. That's why it took a little longer than expected, because we want these employees who are leaving the Longueuil facilities into Varennes to find their place, to find their way around. And that's important because it creates -- at the beginning it creates a little bit of inefficiencies and those kinds of things. But like I said, it doesn't show in our sales. It doesn't show -- we're doing everything to maintain the pace. And gradually, our employees will be more efficient. That's for sure. And we expect that to start definitely from now until next year.

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Operator [50]

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The following question is from Michael Van Aelst from TD Securities.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [51]

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Just to clarify, the $1 million per month in extra cost, does that include the inefficiencies of the human capital? Or is that strictly just the duplicate overhead?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [52]

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No, you're right. We should clarify that. That doesn't include the inefficiencies. This is only the direct cost of being on 2 sites, transportation, additional workforce because we cannot benefit from the full usage of the automation equipment since the Rx -- the pharmacy products are the one that will be benefiting the most from that. They will all be handled because most of them are picked in units instead of cases. So those are only additional labor and transportation for the most -- for the most part. And on top of that, obviously, we'll gain from additional efficiencies as we move toward the learning curve of using this equipment.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [53]

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All right. So the $3 million per quarter should fall off mid-June, but then the rest of it should ramp up, I guess, and the other efficiencies should come in gradually?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [54]

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Exactly.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [55]

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All right. And then the -- I guess is there any indication that you have revolving around Bill 81 or the subsequent changes following the reinstatement of the 15% cap once that gets done? Is there any indication as to whether the government is looking at trying to capture all of that PAs, in extra PAs that were being paid or -- and when you mentioned that you thought it was positive that they're looking to get a deal that with manufacturers, I'm just trying to understand what you mean by that/

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [56]

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And I'll let André follow up. It is that it's always best when you have the deal with the players of the industry. Now they have settled with the pharmacists. And it seems like it's done and everybody has agreed because the pharmacists are the ones who are rendering the service. Now it's on the cost of the medication. Obviously, the ministry knows that there is -- the minister knows that there is money to be transferred, and they understand that. They have all of the -- but they still have to make a deal. They still have to make the industry profitable as well and thriving in the future because it's still important for the minister to have a strong generic company market. It's also positive because it means that they will this way secure a better supply of drugs and not putting the whole market at risk of getting into a shortage situation because they rely only on a few players. It's always better to have as much manufacturers involved on the formulary, and that's always what we've said and we hope we end up with.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [57]

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Any sense as to how quickly that deal can come versus -- relative to the timing of the reinstatement of the 15% cap?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [58]

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You know what, I'll ask you to give a call to the minister. I would like to know as well.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [59]

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All right. All right. And then just finally, a small thing. When you look at the pharmacy same-store sales, they were growing faster than the same-store volumes despite the generic deflation. So are you seeing price increases on the branded side? Or is that mix? Or what is causing that at this time?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [60]

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It's a combination of all -- what you mentioned. But if you notice, it's probably the first time this quarter in a long time that the generic drug penetration rate in terms of script count has [table] stabilized. It's obviously higher than last year, year-over-year. But if you compare to third quarter, it's the exact same penetration rate. So that's probably one of the reasons for that.

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Operator [61]

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The following question is from Keith Howlett from Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - Consumer Products & Merchandising analyst [62]

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Just on the front-end sales performance, can you discuss the traffic basket mix in the same-store sales result?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [63]

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Again, quite a bit strong quarter, obviously, and mainly driven by, like I said, the OTC section. This is -- when you're sick and you come into a drugstore, you're buying your medication to get relief. But also, you buy Kleenex and buy things, everyday needs and so on. And that's why our concept with all of the offer that we have in our stores makes it exciting for someone just for -- not coming for a health need but also for an everyday need. And that's why our reputation is we do give convenience as well as long store hours for the people who are in need of a health solution. And that's why every department were up in the last quarter, and that's something we're extremely proud, and definitely gaining some market share.

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Keith Howlett, Desjardins Securities Inc., Research Division - Consumer Products & Merchandising analyst [64]

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And then I wonder if you could speak to the -- your strategy in beauty and Passion Beauté and just how you're going forward with your cosmetics and beauty assortment.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [65]

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Well, the cosmetics is good. Even though we've had some new competition coming around, especially in the big markets like Montréal and Québec City and so on, we still find ways to improve sales not only because of our service but also our mix. And you'll see there are some good news coming in, in the cosmetic industry, and we'll keep you posted.

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Keith Howlett, Desjardins Securities Inc., Research Division - Consumer Products & Merchandising analyst [66]

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And then just on the franchisee fidelity rate, which I think is at 92%, is there much room to move beyond 92%? Or is that sort of the realistic limit of fidelity?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [67]

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Yes, no. With the new distribution center, obviously, we will benefit from excess capacity. So it's really in our plan to move into our own warehouse some of the products that are being distributed directly to our franchisees. So especially in some cosmetics lines -- cosmetic lines, so yes, we -- I think we definitely can improve that number.

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Keith Howlett, Desjardins Securities Inc., Research Division - Consumer Products & Merchandising analyst [68]

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And just finally, on housekeeping. On the tax rate going forward, what would be a good rate to use?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [69]

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The same rate, no expected changes.

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Operator [70]

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The following question is from Tal Woolley from Eight Capital.

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Tal Woolley, Eight Capital, Research Division - MD of Equity Research [71]

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I just wanted to ask about what steps the company has taken to engage industry peers in generic manufacturing on the solution since the government is now willing to hear one? Do you tend to try and come together as a group or present multiple solutions to the government or wait for the government to come talk to all of you?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [72]

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Well, that's something -- there's different associations that's been dealing with government. So we're waiting to see how effective they will be.

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [73]

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Yes, you're aware that the drug manufacturers are represented through the Association of Canadian Manufacturers, which have been leading those discussions in the past, either directly with each government or with the Canadian coalition of provinces. And that's probably the best entity to deal with those issues with the minister.

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Tal Woolley, Eight Capital, Research Division - MD of Equity Research [74]

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Okay. And then the recent health care funding deal that some of the provinces have signed, that's given the Québec government a little bit more flexibility over its health care budget, I think adding about $2.5 billion. Any expectations that there will be a bigger attempt then to reevaluate how they're spending money in Québec now that, that funding has been secured?

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [75]

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There's many, many needs. You know that health care is something that is on discussion. It's an issue, political issue all the time. The good news is that there's still money -- increased money into the health care system. The way it will be allocated is obviously the way the minister is looking at it. Obviously, the pharmacy side, it's something that obviously the minister and usually all the people involved really look forward to because it keeps the people in their homes, it keeps the people healthy. And we've shown in the past that the pharmacist community is a great asset for the government. It's a great companion, I would say, in making sure that people are staying healthy. And even though it's a private sector, it's something that's been always driving the industry to increase to better service the population. So obviously, I'm speaking for my company, but that's the way it is. The competition makes us even more driven to give additional services to the population. And obviously, the government are taking advantage of that as well.

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Tal Woolley, Eight Capital, Research Division - MD of Equity Research [76]

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Okay. And just my last question. The new billing disclosure that goes into effect late in 2017, I believe, is the government getting information here that they weren't getting previously through this? Or is this stuff that they were -- the information they were largely aware of in terms of the amounts and the disclosures being made? Or is this going to be all new information for them to work with?

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [77]

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Yes, you know what, this is a pretty transparent process already. The only difference will be that the patient himself that the insurers -- the insured patients will have a clear view on it even though they pay only a portion of the bill. But the insurers already know exactly what is the formulary price of each drug, what are the wholesaler margins, which is also regulated. And they are fully aware, obviously, of the total price of each prescription. So they can deduct by themselves what's the margin being taken by the pharmacist. So actually, there will be absolutely no new information disclosed on those invoice. And we already see a lot of interest capping the amount of the profit allocated to the pharmacists. So the patients end up with some excess to be covered by themselves on top of the normal co-pay. So there's actually nothing new there. So we will see what's the impact of that. That again translates into a lot of the efforts from each of the buyers and the drugstore chains involved in programming the system. So we can do all that, but we'll deal with that.

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Operator [78]

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There are no further questions registered at this time. I would like to return the meeting to Ms. Bisson.

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Helene Bisson, The Jean Coutu Group (PJC) Inc. - VP of Communications [79]

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Thank you very much, 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 reporting our first quarter results of fiscal 2018 on July 11, 2017. Thank you very much, and have a nice day.

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Francois Jean Coutu, The Jean Coutu Group (PJC) Inc. - CEO, President and Non-Independent Director [80]

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Thank you.

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André Belzile, The Jean Coutu Group (PJC) Inc. - SVP of Finance & Corporate Affairs [81]

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Thank you.

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Operator [82]

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Thank you. That concludes today's conference call. Please disconnect your lines at this time. And we thank you for your participation. (foreign language)