Larry Rossy - CEO Michael Ross - CFO and Secretary Neil Rossy - Chief Merchandising Officer

Perry Caicco - CIBC World Markets Irene Nattel - RBC Capital Markets Jim Durran - Barclays Derek Dley - Canaccord Genuity Peter Sklar - BMO Capital Markets Keith Howlett - Desjardins Patricia Baker - Scotia Bank David Hartley - Credit Suisse Chris Li - Bank of America Kenric Tyghe - Raymond James

Good morning and welcome to the Dollarama Conference Call for the Third Quarter Results of Fiscal Year 2015. Today's call will be led by Mr. Larry Rossy, Chief Executive Officer. Also with Mr. Rossy on the phone today is, Mr. Michael Ross, Chief Financial Officer and Secretary. Furthermore, during the question period, Mr. Neil Rossy, Chief Merchandise Officer will also be available for questions. They will begin with a short presentation followed by a question-and-answer period open exclusively to investors and financial analysts. For your convenience, the press release along with the second quarter financial statements and Management's Discussion and Analysis are available on the Investor Relations section of the web site at dollarama.com. They are also available on SEDAR. Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. I would like to remind everyone that Dollarama's remarks today may contain forward-looking statements about its current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Several assumptions were made by Dollarama in preparing these forward-looking statements and many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, Dollarama cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on such assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in Dollarama's MD&A dated December 4, 2014, available at www.sedar.com. Forward-looking statements represent Dollarama's expectations as of December 4, 2014, and except as may be required by applicable securities laws, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. I would now like to turn the conference call over to Mr. Rossy.

Thank you, operator. A very eloquent operator today and good morning everyone. This morning, we reported financial and operating results for the third quarter of fiscal year 2015. We are very pleased with the strong same store sales and strong financial and operating results. I will let Michael provide you with the details relating to the financial results and our operating initiatives for the quarter. From my perspective, this quarter was defined by strong same store sales of 5.9%, as we increase the number of transactions by 1.1% in the stores and benefited from the growing demand for our higher price point items as evidenced by the 4.8% increase in the average basket size. Overall, we are very satisfied with our current price mix, as it continues to stimulate sales and drive traffic to our stores. Our sales this quarter were fueled also by very strong Halloween season sales, as our customers responded positively to our compelling range of Halloween products. The Halloween season was also benefited from ideal sales conditions, including the fact that weather was very favorable, compared to the prior year and the fact that Halloween fell on a Friday. Our sales also continued to rise as we grow our business organically through the opening of 11 net new stores across Canada. Although the pace was slightly lower than in recent quarters, due to the timing of new store deliveries, you can rest assure that we can still anticipate the opening of 75 to 80 net new stores in fiscal 2015. These stores continue to be opened in quality retail locations across Canada, with the majority of the new stores located in Ontario, British Columbia and Alberta, which are markets that continue to be underpenetrated with dollar stores. We continue to focus our efforts on densifying core urban centers in these markets, as well as other markets across Canada. Following the success of the Halloween season, we are now focused on offering a great assortment to our customers for the upcoming Christmas season. Having experienced very challenging weather conditions in December 2013, especially in the two weeks leading up to Christmas, we are now hoping that Mother Nature will be more cooperative this year. Let me now turn the cal over to Michael. Michael?

Thank you, Larry and good morning everyone. So during the third quarter, we increased our sales by 12.4% to $588 million, from $522.9 million in the prior year. The increase in sales was fueled by the opening of 81 net new stores over the past 12 months, and a same store sales increase of 5.9%, over and above a 4.8% increase reported for Q3 in the prior year. Same store sales increase in Q3 consisted of 4.8% increase in basket size, which reflects the consumer demand for our higher price point items, and a 1.1% increase in the number of transaction, which was boosted by strong Halloween sales. In the third quarter, our gross margin was 36.8% of sales compared to 37.1% of sales in Q3 last year. This decrease is partly attributable to slightly lower product margins, as we absorbed some of the cost increases in order to maintain the compelling value of our products. As we stated earlier this year, we have been managing our gross margin by continually reinvesting in the value proposition offered to our customers. We expect this trend to continue as we target a range between 36% and 37% in fiscal 2015 in order to stimulate continued sales growth. Our Q3 SG&A as a percentage of sales was 17.2% compared to 18.1% last year. This progression is a result of improved labor productivity achieved through initiatives implemented at store level, including refined labor scheduling and reduction of the number of manual inventory counts. We expect the SG&A to be between 17.1% and 17.5% for the full 2015 fiscal year. Our depreciation and amortization expense decreased by $2.5 million this year as a result of change in estimated useful life of our leasehold improvements and our store and warehouse equipment that was made effective in the first quarter of fiscal 2015. As announced last quarter, the company completed a two for one share split by way of share dividends made on November 17, 2014. The share of split ensures that our common shares remained accessible to individual shareholders, potentially increasing and broadening our shareholder base and improving market liquidity for our common shares. Note that all share information and earnings per share data reported for third quarter ended November 2, 2014 have been retrospectively restated to reflect the two for one share split. Our Q3 net earnings increased to $73 million or $0.55 per diluted share, taking into consideration the share split, compared to $61.7 million or $0.43 per diluted share in the third quarter of fiscal 2014. During the quarter, we also repurchased for cancellation, 1,233,590 shares on a post split basis under our normal course issuer bid for a consideration of $58.4 million, at a weighted average price of $47.32 per common share. In terms of our productivity initiatives, we continue to leverage off the benefits of several and measured initiatives rolled out in the stores over the past year, including the Kronos scheduling solution and new point of sales terminal in all of our stores. The Kronos advanced scheduling solution has contributed to the improved labor productivity at store level by more efficiently allocating hours based on the volume and seasonality of sales in each store. This ensures that we have enough employees in stores to handle peak sale periods, while reducing hours and lower sales periods. We are also increasing our reliance on scanned data for replenishment purposes, thereby reducing the number of labor hours related to manual daily counts at store level. Additional projects are being evaluated that could further leverage the investments previously made in the stores, this includes the use of new functionalities available on the point-of-sale terminals to streamline the cash management processes and use of the scanning technology to further reduce manual tasks in the store. Overall, we are very pleased with the performance of the company this quarter and the progress made on our key initiatives. This ends our formal remarks, and we can now take questions. So operator, I will turn the call over to you.

[Operator Instructions]. The first question is from Perry Caicco from CIBC World Markets. Please go ahead.

Thank you. The increase in percentage of items over a dollar was obviously the driver of the basket size increase. Just wondering if there were other drivers, have you seen for instance more items in the basket or has the mix of categories changed in the basket?

Not from my perspective. Michael?

There is no change, whether in the category or its higher price point items, penetration increase.

Okay. And on the gross margin side, given the level of the Canadian dollar and where rents have been trading, do you have a feel for the range of gross margins for next fiscal year, is there any reason to believe that it should be different from the 36% to 37% range that you're currently running at?

Yes. For the moment, we still believe it's within 36% to 37%.

I think that in spite of the Canadian dollar, we can manage and give the value we want to give, between 36% and 37%.

Will rents pressure that at all?

No.

And just my last question, could you -- you've survived several minimum wage increases by improving labor productivity. Is there more labor productivity improvement available to the business?

Yes there is, certainly. And you're right, just in Q3, we have five provinces that implemented minimum wage increases, averaging about 2.5%. But we do strive to improve efficiency and reduce cost over time, and I believe that there is still room to improve. How much, we won't go there, we have got obviously our own estimates, but for the purpose of this call, we are certainly working to continue improving the G&A ratio.

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

Thank you, Perry.

Thank you. The next question is from Irene Nattel from RBC Capital Markets. Please go ahead.

Thanks and good morning everyone. Sticking to the drivers of the basket growth, was there a higher number of items at higher price points, or really is it that sort of the normal maturation process, of just getting better at understanding, which products are going to sell through at that price?

It's just normal. There's nothing special that happened, and we don't comment obviously on the details as to the unit content in the basket, but I would say its just normal progression, its high price point items penetration, but nothing special occurring at this point.

I think I have to agree with that. We are not doing anything special, so our customers seem go be doing that for us.

Yes they are. Thank you. And just again, thinking ahead to the Q4 season, if I am researching correctly. In the past, there is a reasonable proportion of seasonal items that are still at the lower range of those price points in Q4. Are you changing the mix of the Q4 price points for this year?

Tricky. You will see some of the lower price points. We are not doing it on purpose. I think -- Neil, do you have anything to say on this subject? No. We react according to the products that are put in front of us, the value we can give, and evaluate the assortment that should be offered. There is nothing extraordinary about what's happening and certain lower price points, let's say dollar items may have to go to 1.25, but we measure that very carefully and study that very carefully, because we are still a dollar store and from my perspective, and like to stay at that -- to have certainly an assortment of items at that price point. So nothing special.

Thank you. And just one final question if I may, clearly, the decline in oil prices is highly topical at this time. I am just wondering, if prices stay in and around current level, whether that would have a meaningful and material impact on your transportation costs, recognizing that you do not [indiscernible] by rail?

Right. So we will see if we can benefit from lower costs, so be it. But again, that will help us in the savings and hopefully, if there are savings, we can transfer that into the value proposition.

I don't expect that to happen. As you know, when prices of oil goes up, transportation costs go up because they use that as the reason for increased prices. When they go down, you hear nothing from them, and that's life, it’s the same as negotiating prices in the [indiscernible]. We are hearing about even price increases on incoming -- inbound freight from the Orient, and we are fighting that with the normal logic that should be used; prices are down, oil is down, etc, etc, but they used to come back and say well volume is up and this and that. So there is always that discussion, to put it that way. So I don't expect huge savings coming from the reduction in oil prices.

Very helpful. Too bad, but yes, very helpful. Thank you.

Okay.

Thank you. The next question is from Jim Durran from Barclays. Please go ahead.

Yeah, we are all going to stay focused on the same issue I am sure, but can you give us any idea as to what role the exchange rate played in the average basket inflation, and what impact it might have had on gross margin?

It's hard to measure it directly Jim, but obviously, as we said, the more we manage the margin, the better chances we have at -- for taking that top line or stimulating the top line growth. So we did absorb part of that, that additional costs. But to say specifically what the impact is --

Look, the Canadian dollar will create inflation here in Canada, the reduction in its value, no question. So it's invariably creating some inflation in our prices, and that's to be expected. To what extent, how much, its hard to measure and we don't measure it, so we are just trying to work on certain margins, certain value, and -- but if your question is, is this creating some inflation in our concept as opposed to others. Yes it is -- not as opposed to others, but it is within ours, and I would think that it's causing inflation throughout the retail market industry.

We'd be all on the same level playing field.

So would you have seen your average basket in Q3 being up versus Q2 or sequentially?

It is up compared to Q2.

I don't know if that's normal, if you went back in history, if those two Qs are -- I don't know that.

Yeah we don't have the -- your question Jim is what part of the currency management had an impact on the basket size in Q3 compared to Q2 for example.

Much better worded than my question, yes.

Well, the answer is the same though.

I appreciate that. I appreciate the color.

It's hard.

Looking out on your buyback activity, I think you made a comment last quarter, that in terms of leverage, ideally you'd like to maintain your current debt rating, and so adding more debt leverage is not necessarily a conscious intent at this time. How do you see the use of your free cash flow? I mean, obviously you are generating a decent amount, when you look into next year do you see allocating more free cash flow to the buyback, or sort of maintaining current course of buyback intensity?

Right. Well we continue to favor buybacks. So we do -- especially in Q4, that's a period where you do generate most of the cash flow, free cash flow. But as the EBITDA continues growing, that opens up more leverage opportunity if you want, and the idea is to remain within BBB stable range. But over time, we will be able to continue leveraging up, given the increase in EBITDA also.

And I know its early, but CapEx 2015-2016, you still expect 70 to 80 stores a year, and the majority of your CapEx being skewed to that, and again -- but the infamous question you always get asked about, what about BC and Western Canada?

Not yet. I can't see that for the next few years.

And just to be clear, for this year Larry, we are talking about 70 to 80 stores, and next year for F 16, also 70 to 80 stores.

This year -- 2015, 75 to 80 stores next year. Well it's hard to put in exact number, but certainly 70 to 80 stores. Hopefully closer to 80, but 70 to 80.

And no extraordinary other items that would affect CapEx spend then?

No. The average CapEx intensity ratio excluding the growth CapEx is pretty stable, and should be expected for the years to come, unless we would announce something special, which we don't see right now. And no; so nothing special next year.

Great. Thank you very much.

Thank you, Jim.

Thank you. The next question is from Derek Dley from Canaccord Genuity. Please go ahead.

Hi thanks. Can you guys comment on some of your SG&A initiatives, the Kronos labor management system, implementation of the POS and how the -- your sort of data analytics surrounding that, are really driving -- or are they really driving this impressive SG&A leverage that we have seen in the last few quarters?

Yeah we can comment, but I mean it’s the same answers -- really, it's with the same system. Its just that we are -- as we have stated in the past and I have mentioned to you in the past is that, we continue to leverage our POS turning on functionality, just getting better and better at scheduling, working in stores. There is a speed at which you roll out initiatives. There is so much that our employees can absorb at a time; and we do it cautiously and we take our time to do it correctly. And hopefully, we can sustain, just on the labor scheduling tool, hopefully continue to generate savings in the future. We got other initiatives going on. Johanne is very involved in the stores, and looking at and bringing ideas for new initiatives. So hopefully we will see that coming into the future, but for the time being, it's more or less the same tools that generate the savings that you've seen, and that hopefully we can continue seeing in the future.

Okay. Thank you very much.

Thank you.

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

Michael, have you done any more work on what the impact is going to be on your procurement when Canada changes its trade status with China? I think that's effective January 1st, so duty is going to go up on a lot of the items that you bring in? I mean you've said I think in the past, when we talked about this on the call, you said you haven't been able to quantify it yet, so I am just wondering if you've done any work in what you can talk about?

Yeah what we were able to quantify, we didn't want to disclose it. We know and we told you it wasn't material. What you can anticipate in Q4 will be a slight non-material increase in inventory, because we will be or have been pre-buying just to -- before the rates kick in. But after that, for the rest of the business as usual. Nothing special going on, no worries to have with that. I mean, the currency has been -- had a much larger impact and the duties would halve.

It's just simply another headwind like foreign exchange, and we manage them in the same way. So there is not -- we don't manage those duty increases in any different way. The buyers are well aware of them, well aware of what they have to factor in for next year, and that's what they do.

And do you think that, the imposition of the duties will cause your category mix to change at all?

Zero.

Okay. That's all I had. Thank you.

Okay. Thank you.

Thank you. The next question is from Keith Howlett from Desjardins. Please go ahead.

Good morning. I was wondering in terms of your suppliers in China, whether you're noticing any difference, or whether they are being impacted by excess capacity or lack of capacity. What the situation is there?

Well I could give a very long answer to a very short one, zero. We notice zero. No impact, no change, no difference, absolutely not. Neil? None.

And then just in terms of the freight situation, some people have been mentioning tight situation on the West Coast. You've pretty much already brought in all your inventory and so there is no issue?

I am not aware of any issue that was brought up to my attention this week by someone. We are having problems getting merchandise through Vancouver because of the problems they are having apparently in the state; and the answer is none. We are having zero impact.

Then just on the Christmas season, is the gift card program, is that a significant part of your business, or is it sort of steady state?

No it's steady. It's nothing major.

I'd agree.

And then just on the --

Okay, last question Keith please.

Okay. Just on the competitive landscape, are you noticing anything different on the party side of the business, you see some activity there by party city and others? Are you feeling any change there in your sales pattern?

I will answer that one. We haven't and I have spoken to our party people, and they haven't. So I guess the answer is no. Should we be? That's the question Keith.

Well I don't think so.

Okay, no. The answer is no.

Great. Thank you.

Thank you, Keith.

Thank you. The next question is from Patricia Baker from Scotia Bank. Please go ahead.

Hi there. Just a quick question for you Michael, and I appreciate Larry clarifying for us that we would still have store openings this year, 75 to 80. Is there something that happened in the third quarter that saw you with a slight slowing of the openings, or there was nothing unusual?

Yeah you can speak to all the landlords that deal with and -- that's the answer, as simple as that.

Okay. That -- good clarification. Excellent.

Thank you, Patricia.

Okay.

Thank you. The next question is from David Hartley from Credit Suisse. Please go ahead.

Hi thanks. And Larry you can ask me questions and make my job easier if you want. New store contribution, I don't know if its covered in the few questions of the call, but I am just wondering if you can characterize what we are seeing in terms of new store contributions, if its fairly steady and is that on a per store basis, per square foot basis, because I do know that some of your new stores are maybe a bit smaller?

They were last year. This year happens not to be, and its just not by design, its just by opportunity and I think we are back to more or less normal size this years, and we are close to 10,000 foot average. Last year may have been a little less, because we got a bunch of stores in the metropolitan areas of Toronto and we took the -- I think that answers your question, I am not sure if there was something. And as far as new stores, the pace was a little slower this year. We will have a lot of stores in the fourth quarter, because that's the -- I just answered that question to the previous caller. But I think that the return on investment or --

Is more or less the same.

More or less the same, as it has been. I think it would be enough.

Pretty steady state. So beautifully boring goes the story, and then just beyond this existing growth story, could you talk a little bit about maybe what the company thinks in terms of stepping out and looking for other growth opportunities? Obviously in Central America, there is something you're looking at working on, maybe you can update us on that, and then have you thought about other retail formats or importing/exporting opportunity, where you can use some of your core strengths and leverage them.

Is this where you want me to ask you the question? Michael, you want to make the comment on it?

Yeah, okay. So again there are two -- the answer is boringly the same. So it's steady as she goes. Central America, again still not material. We continue to work our way there. Things are looking very good, in line with our expectations. So hopefully we can sustain that over time. And for the rest, we do a lot of homework on a lot of stuff, but nothing to discuss at this time.

Yeah. Central America basically was concentrated in El Salvador. I think we are about to go into Guatemala. So if you want to come with me on the next trip, that would be fine David.

I know. I know.

You'd rather not, I understand.

I will check the budget. So you're at 15 stores as I recall before, is that correct? Is this number 16?

We don't comment on that. But you can assume its going to go up obviously, but we are not going to comment on details.

No detail. Okay. Thank you very much.

I told you it would be boring.

Thank you. The next question is from Chris Li from Bank of America. Please go ahead.

Oh yeah, good morning. I think I read somewhere that your company has recently joined the United Grocer Buying Group. Just wondering what type of benefits, or if you can help us understand the rationale behind that and maybe quantify any substantial savings you expect from that group?

Sure. Chris, its Neil. We joined UGI basically for one reason alone, which was to take advantage of the greater buying power of the buying group. None of our costs are shared, we have not intentions of changing our product mix or price point, and as you know, I like the balance of our assortment. Food operating, they are sold only up to $2 as opposed to $3. So we just joined for that and only that reason. If there are other benefits over time, then that will be icing on the cake.

Okay, that's helpful. And my second question is, I know in the past you said that as your company gets bigger, you have more clouts with the national suppliers. Are you able to share with us, what is your national brand penetration currently versus say 12 months ago? And I guess my question is really trying to understand, is no question you're getting more national products into your stores. Is that having a material benefit with respect to attracting more traffic into your stores?

No we haven't seen that. We basically have kept the same buying philosophy, which is we have a sprinkling of national brands across as many categories as we can to add that option for our customer that has the luxury to pay the slightly higher costs that are associated with the national brand, even if they are at competitive prices within our stores. And we continue to buy them, when the opportunities make sense. But there is no [indiscernible] strategy.

Okay. And my last question is, can you comment on how your mature stores, say older than five or seven years, how are those stores performing from a same store sales growth perspective versus your overall average? Are they comping positive and so are they closer -- similar to your average for the company?

Yes, its more or less similar.

Thank you.

All right Chris.

Thank you. The next question is from Kenric Tyghe from Raymond James. Please go ahead.

Thank you and good morning. If I could Michael, given your success of navigating some of the wage inflation headwinds, the amount of runway you've highlighted by way of initiatives or other, could you help me understand or walk us through what's stopping you or should stop us from thinking of your SG&A margins and more of a, perhaps the 16% to 17% or the 17% to the 18% sort of range? I just looked at the amount of runway you have to have, and the ease with -- and I use the term cautiously, you appear to navigate the headwinds today? And I am trying to reconcile what would stop us, thinking of the business as something of a -- a further improvement even on your G&A leverage from where we are today, or where you are sort of guiding to or thinking about today?

The key word there is cautious, and you used it.

I think that, obviously, there is a minimum of hours that you need to work in stores. So there are some limits, but hopefully, we haven't reached that. We believe that there is still room to continue improving, and again depending on headwinds. But there is also another element is that, as we implement new initiatives to sustain the efficiency in the future, these are costs that we have to record. Over time, these are new initiatives, and the timing of the recording of those might impact some quarters more than others. So there is -- its not just that we have finished spending money on initiatives, and now we are just reaping the benefits of those in the future. We need to make future further investments to continue improving over time. There is a store level that's also on the logistics side, that we are thinking about and doing homework on.

Yeah. Let me add to that please. You have to appreciate that the dollar store business is a labor intensive business. We are placing items on our stores between one and three dollars, on our counters in our stores. And that's a lot of labor that is required. So there are only so many initiatives that we can do, before -- unless you're working on some robotic replenishment system. We still have to open boxes, put the merchandise on the counters and then pass that through the cash and that's all labor that cannot be eliminated. Again, I don't know where technology is going, but its unlikely. So to get this labor SG&A down, its going to get harder and harder, and we have to be more and more careful and cautious that we have to check out our customers more rapidly, given more satisfaction. Make it easier to shop at Dollarama than it is at the competition for example, and that will take more technology that we are working on. But that may not decrease the amount of labor, it just may increase our efficiency. So it will come out to zero at the end. That's all I can say on the labor question, Kenric.

Much appreciated, makes a lot of sense. Just a quick follow-up with respect to the competitive landscape and you touched on your relative experience. Is it safe to assume that at this point, the competitive landscape is such, that there wouldn't be any need in the foreseeable future for increased spend by way of some of the more traditional options, marketing spend on flyers or otherwise? I mean, that proposition to my mind is still -- is that compelling relative to anything I see on the market that I don't believe that will be the case, but is that a reasonable basis to be looking at sort of at least the next couple of years?

Not looking at it. We don't think so. In two years, what can happen in the two years after that, we are up to four years now, I don't know. But I don't particularly like the idea. It brings the whole bureaucracy to the system, and dissatisfaction created for our customers, because you can't advertise and not have, and that seems to be the history of advertising. So I think we are going to keep it as long as possible, nice and simple and boring.

Great. Good to hear. Thanks very much. I will leave it there.

Thank you.

Thank you.

Thank you. This concludes question-and-answer period as well as the conference call for today. We ask that you please disconnect your lines at this time, and we thank you for your participation.