Albertsons Companies, Inc.

Ladies and gentlemen, welcome to the Albertsons Company's second quarter 2020 conference call, and thank you for standing by. All participants will be in the listen-only mode until the Q&A session. This call is being recorded. If you have any objections, please disconnect at this time. I would like to turn the call over to Melissa Plaisance, GVP of Treasury and Investor Relations. Thank you, and we now begin.

Good morning, and thank you for joining us for the Albertsons Company's second quarter 2020 earnings conference call. With me today from the company are Vivek Shankaran, our President and CEO, and Bob Diamond, our CFO. Today, Vivek will start with some opening remarks, share insight into our strong results, and outline recent progress against our strategic priorities. Bob will then provide the financial details of our second quarter and full year outlook before handing it back over to Vivek for some closing remarks. After management comments, we will conduct a question and answer session. I'd like to remind you that management may make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts but contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. These risks and uncertainties include those related to COVID-19 pandemic, about which there are still many unknowns, including the duration of the pandemic and the extent of its impact. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are and will be contained from time to time in our SEC filings, including on Form 10Q, 10K, 8K, and our Rule 424 prospectus, dated June 25, 2020. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise. Please keep in mind that included in the financial statements and management's prepared remarks are certain non-GAAP measures, and the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA. And with that, I'll hand the call over to Vivek.

Hey, thanks, Melissa, and good morning, everyone. Thanks for joining us. Across the Albertsons companies, we are focused on winning, which starts with executing consistently against our strategic priorities. I am pleased to say that our strategy is working, as demonstrated by our results this quarter, that by all measures were outstanding. Our identical sales came in at 13.8%, with adjusted EPS growth of 253% versus the prior year. Adjusted EBITDA increased 67% to $948 million, with robust flow-through of approximately 20% excluding fuel. Our digital sales also grew 243% year-over-year. And importantly, we continued to gain significant market share versus both food and MULO in both dollars and units. Our team remains focused on our customers, working hard to deliver an excellent shopping experience, whether they're new to Albertsons or have been shopping with us for years. To our associates, thank you. Thank you for working through the daily challenges and striving to give our customers an easy, exciting, friendly, and safe experience. Many customers have shifted their shopping habits during the pandemic, and we've adapted quickly. In general, we are seeing customers continue to come to our stores less often but are buying much larger baskets, including new categories, as we fill their one-stop shopping needs. And many have chosen to use our e-commerce offerings, both home delivery and drive-up and go, and overall have increased their household spending with us. This enduring secular shift in shopping habits is confirmed daily, despite the economy opening in most parts of the country. Importantly, all income segments have increased their spend with us. We watched the impact of the recession closely, and we are increasing our traction even with lower-income shoppers who generally come a bit more often and spend less per trip. We're able to provide high-quality, fresh, and great value to them through our opening price points in own brands and just for your personalized offers to make concentrating trips with us more attractive to the segment. With that as a backdrop, let me share with you some of the actions we've taken that led to our strong results this quarter. and will drive continued performance going forward. Our first strategic priority is to maintain in-store excellence. Throughout this pandemic, our frontline teams have been nothing short of amazing, and we couldn't be more appreciative of their efforts. We have remained relentless in our focus on being in stock and maintaining a nimble supply chain, and on customer and associate safety while at the same time reducing the costs of managing the pandemic. We have made material improvements quarter over quarter to efficiency and innovations. One example is our new health screening kiosks for associate temperature checks that we're deploying in our facilities, which will reduce associate contact, reduce labor, and improve the accuracy of screening. Strengthening the breadth of our product assortment and mix has been a critical driver of results. Our focus on fresh continues to pay off during the pandemic, and has been a key differentiator for us while people spend more time at home. One example is in our seafood category, where sales are up 46% in the second quarter compared to a year ago, as well as in other categories like floral, where sales are up over 20% year-over-year in Q2. While these departments are relatively small, the growth we are seeing highlights how our sourcing team has helped us stand out with a supply of high-quality products an assortment breadth that meets our customers' needs with a one-stop shop. Our own brand's portfolio is an important element in the assortment of products our customers look for. The portfolio is comprised of nine brands and over 12,000 unique items. Remember that on average, our own brands drive a 1,000 basis point gross margin advantage compared to national brands. We continue to innovate and introduce new items to the portfolio, launching over 650 items so far this year as we expand into new categories. We're also driving further growth with these products in under-penetrated markets. We continue to expand our own brand's portfolio to include offerings at different price points and to address varying lifestyle needs. For example, our Value Corner brand is available to our customers at a lower opening price point. Given higher price sensitivity in certain segments, We have leaned in and offered prices lower than the prior year on several value corner items, including milk and paper products, and have experienced large increases in sales on those items. We're also introducing additional family packs and new items to capture incremental demand for our value-seeking customers. Our mainstream brand Signature, which includes Signature Select, Signature Pet, and Signature Farms, is outpacing total store growth up over 15% in Q2, as consumers continue to cook at home and seek out high-quality ingredients. We also continue to expand the portfolio and innovate in our lifestyle brands, O Organics and Open Nature, for those customers wanting better-for-you and more eco-friendly options. Together, they posted growth of 13.1% in Q2, and we launched 39 exciting new SKUs this quarter in these two brands in the second quarter. A true testament to the Own Brands team's dedication and hard work, the team was recently honored by Store Brands Magazine as the Retailer of the Year. Finally, we continue to invest in our stores. We have completed 132 upgrade and remodel projects that continue to produce positive returns, and we've opened two new stores year-to-date. Since Albertsons and Safeway came together in 2015, we have remodeled approximately half our store base and plan to continue remodeling at least 10% of the store base annually. Our second strategic priority is the rapid acceleration of our digital and e-commerce offerings. We continue to make exceptional progress in e-commerce, both pickup and delivery. Digital sales grew 243% year-over-year in Q2, driven by new customer acquisition facilitated in part by the addition of over 200 drive-up and go stores, which we call DUCK. bringing the total number of dug locations to 950. We remain on track to have 1,400 dug locations by the end of this fiscal year. We are also accelerating our plans for 2021 and now expect to be in at least 1,800 locations by the end of fiscal year 21, up from our prior goal of 1,600. In each of our e-commerce locations, we offer a broad assortment of fresh produce, meat, bakery items, and central store products that can ship same day. We are committed to providing the high-quality selection our customers love in our stores at the same price to our e-commerce customers, while increasing the convenience and speed of our service. For example, we have launched a pilot program offering two-hour click-to-deliver services in order to give customers a more convenient option. This e-commerce growth is often incremental to overall household spend, across all customer segments, and on average, we see a 27% increase when in-store customers engage in e-commerce. It is even more incremental with our less engaged customers who increase their spend with us 2.7 times when they use our e-commerce solutions. This incremental spend increases our overall profit per customer. Doug is the fastest growing digital segment for us, growing over 1,000% year over year during the quarter, and it is overall accretive to earnings. We are also very pleased with our progress with micro-fulfillment centers. In fact, this quarter we saw an increase of over 25% in labor productivity in our two MFCs as we optimized this capability. We have line of sight to profit improvement as we enhance the productivity of our MFCs. In addition to our existing MFCs, we have already started construction of four new locations and are planning six more in the next 18 months. And yesterday, we announced that we are piloting pickup lockers as an additional method of e-commerce fulfillment for our customers, which are located inside or outside the store and can be accessed using a unique pickup code. We also continued our efforts to engage our customers in our loyalty program, Just For You, with 23.5 million registered users, an increase of almost 5 million versus last year, approximately 27%. We're finding that our customers love the personalized coupons. and this approach is driving broader and deeper engagement as well as incremental purchases. We saw an increase in our engaged households by nearly 11.3% quarter over quarter. This is important, as on average, the loyalty-engaged households spend nearly 3.5 times more per week than an unengaged loyalty household. Our third strategic priority, driving productivity, remains in full swing, and savings will help offset inflation and be used to reinvest in innovation to fuel growth. I'm pleased to report that we have fully launched Vision Pro for production planning and are in the process of moving to a tablet-based solution to further enhance data capture, shrink savings, and labor efficiencies. We're also pleased with our progress in launching FAR, our end-to-end demand planning system. To date, we have over 800 stores launching on this system, which has not only helped us reduce excess inventory, but it's also allowed us to save or reallocate over 30,000 hours in the second quarter. Furthermore, we've rolled out our promotions technology, which is designed to drive efficiency in our promotional plans and are beginning to see the benefits as our teams are able to proactively optimize promotional tactics and price points. In addition, we've continued to build our strategic sourcing capabilities. For example, we have numerous ongoing energy efficiency projects that helped us save $11 million in Q2 and reduced our carbon footprint. We've also been redesigning our circulars in response to shifts in consumer shopping patterns, which have been accelerated by COVID, resulting in a $25 million savings annually. We're very excited about the role technology is playing in transforming our company to be a modern retailer. We're focused on creating easy and exciting customer experiences across our stores and digital channels. For example, As we announced yesterday, the launch of an integrated loyalty and contactless payment application will allow our customers to easily access their discounts and provide them with greater choice on how they pay in a safe and easy process from the convenience of their phone. We're also on track to launch self-checkout in 481 stores this year, which will bring our total stores with self-checkout to over 1,600. In parallel, we're accelerating our investments to modernize our core technology platform. Last quarter, we completed the migration of our enterprise data to the public cloud, which is already being used for machine learning models and digital catalog for our e-commerce channels. We're also refactoring major applications on legacy platforms to be cloud-native while leveraging SaaS offerings for our finance and human resource platforms. Through all these efforts and our focus on cost management, We remain on track to deliver on our goal of $1 billion in productivity savings over the next three years. Let me now turn to our fourth strategic priority, strengthening our talent and culture. We continue to hire talent to bolster our strong leadership team. We're actively involved in our communities and have been raising funds to provide support. Since mid-March, we've donated $48 million to the Nourishing Neighbors Program to help feed 10 million people across 34 states. We've also established a million-dollar fund for our associates impacted by the fires in the West. We also remain focused on improving our sustainable business practices. I'm pleased to report that we recently joined the Pacific Coast Collaborative Voluntary Agreement, whose goal is to reduce food waste by 50 percent by 2030, which will have benefits that include reduction of greenhouse gas emissions, conserving water and land resources, and supporting those facing food insecurity. We also recently announced that our O-Organics coffee is now 100% certified sustainable by Fair Trade USA, which means that the coffee farmers that supply us are earning fair wages and working in safe conditions. In addition, a part of the cost of the product goes directly back to the farmers and their communities through a community development fund, which to date has generated $2.5 million in support of farming communities. Finally, we recently announced that 100% of our seafood in our Waterfront Bistro and Open Nature brands will soon display the Responsible Choice logo for sustainable sourcing. Finally, I'm proud that we have a strong presence with minority-owned suppliers in both women-owned businesses and minority-owned firms, which is a competitive market. And now I would like to ask Bob to cover the details for second quarter results.