Albertsons Companies, Inc.

Good morning. Welcome to Albertson Company's third quarter 2020 earnings conference call, and thank you for standing by. All participants will be in a listen-only mode until the Q&A session. Please note this call is being recorded. I would now like to hand the call over to Melissa Plaisance, GVP, Treasury, and Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Albertson Company's third 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 share insight into our third quarter results and recent progress against our strategic priorities. Bob will then provide the financial details of our third quarter and share our 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 would 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 the COVID-19 pandemic. 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 Form 10Q, 10K, 8K, and our 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 will hand the call over to Vivek.

Thank you, Melissa, and good morning, everyone, and thank you for joining us today. At Albertsons, we continue to be focused on taking care of our customers, our associates, and the communities we serve. As a result of this, I am pleased to report another quarter of robust results. Our Q3 identical sales came in at 12.3%, with adjusted EPS growth of 275%, which is the prior year, to 66 cents per share. Adjusted EBITDA increased 53% to $968 million with robust flow-through. Our digital sales also grew 225% year-over-year. During the quarter, we continued to gain significant market share within both food and MULO in both dollars and units and experienced strong growth across geographies, regardless of the level of COVID restrictions in place. This gives us confidence in the sustainability of our competitiveness in the future. We had over 6 million new households shopping with us this quarter, and we are retaining existing customers. Those who shopped with us last quarter have returned this quarter at a higher rate than in Q2. Customers continue to consolidate trips, and we continue to see fewer trips per household but larger baskets, and these households are spending more with us compared to last year. Our loyalty program continues to show strong growth. We now have 24.3 million registered users, an increase of 23.5% year-over-year, and these customers are spending 2.5 times more on average than non-registered customers. In addition, actively engaged households in our loyalty programs have increased 17.5% year-over-year and encompass nearly 40% of transactions and 50% of sales. These customers spend 4.1 times more than non-active customers. The strong ID sales and EBITDA results year-to-date are also generating robust free cash flow, and we are delivering on our capital allocation priorities. We are continuing to reinvest in the business for growth in high-return projects. We have continued to pay down debt. We are returning cash to shareholders through our quarterly dividend and an active share repurchase program. The foundation of our four strategic priorities and the way we drive growth is guided by our constant focus on providing an excellent shopping experience to all our customers. This is anchored in the strength of our product assortment, our ability to engage and serve our customers across different platforms, our use of technology to enhance the customer experience, and the speed and flexibility of our nimble, locally focused operations. Our first priority is in-store excellence. Our stores remain the core of our business, and we are proud of our convenient locations and the broad assortment of products we offer to create a one-stop shopping experience for our customers. The quality, variety, and depth of our fresh and own brands offerings have been a key differentiator throughout the pandemic and will continue to be an advantage for us going forward. In fresh, we continue to see ID sales that are higher than our average, notably in seafood, driven by service seafood and shrimp, as well as in meat, driven by items such as bacon, beef, and chicken, and in floral, as customers who are spending more time at home are enjoying fresh flowers more often. We are encouraged that customers who are spending more time at home are looking to us for the high-quality fresh product we offer. We believe that purchases of fresh product drives trips, as our loyal customers often stock up on shelf-stabled items in one trip but come back frequently for fresh products. In Q3, our most loyal shoppers increased their average spend on fresh 200 basis points compared to the average in-store total spend the prior year and continued to visit our stores over two times a week, with nearly three out of four trips including fresh. Fresh has also been a catalyst in Omnichannel, as fresh items, including our high-quality meat and produce, have increased in the basket compared to pre-pandemic levels. And to further capitalize on the strength we see in Fresh, we're expanding our portfolio with meal solutions, ready to eat, ready to heat, and ready to cook, that are growing in popularity as alternatives to cooking from scratch, with plans to introduce these solutions more broadly in the weeks and months ahead. Our own branch portfolio also remains a competitive advantage for us, with $14 billion in sales across nine primary brands, four of which have over $1 billion in sales, and with over 12,000 items across over 500 categories, our broad product portfolio fits all customer segments and styles. We have recently seen improving trends in penetration of own brand sales as temporary supply issues have been abating. Our own brand's penetration exceeded 25% in the last four-week period of the third quarter, and we remain on track to reach 30% penetration in the next few years. We're driving growth by expanding these products in underpenetrated markets and continue to have substantial opportunity in markets such as Jewel, Shaw's, Southern, and Southern California. In Q3, we also saw strong growth in categories that have been popular while customers are spending more time and cooking at home, such as ingredient cheese, convenience salads, baking items, and nuts. We're also continuing to innovate and expand the portfolios. We've launched over 1,000 new items through Q3, exceeding our stated goal of 800-plus new items this fiscal year. Our innovation is tailored to contemporary customer needs. In addition to our Value Corner brand at a lower opening price point, we've expanded the selection of family packs with items such as Waterfront Bistro Frozen Fish line that help stretch the family budget. In mainstream items, which include our Signature Select line, We continue to innovate to save time for our customers and recently introduced Signature Select Frozen Egg Bites that provide a quick and healthy breakfast ready in just over a minute. And we continue to expand the portfolio and innovate in the premium category and recently introduced Signature Reserve Sparkling Brook Wine in time for the holidays. Our lifestyle brands, all organics and open nature, which appeal to customers looking for organic and better for your brands, saw continued growth. strong growth of 12% on a combined basis this quarter. Finally, we continue to invest in our stores. In October, we allocated an incremental $200 million of store-related capital to accelerate and pull forward priority projects. In addition to remodels, we are using some of the additional capital to accelerate the rollout of our module program, which are discrete high-return initiatives focused on customer checkout and new merchandising offerings. and we're accelerating replacement of unproductive self-serve features such as salad bars with additional refrigerated cases in preparation for the rollout of our meals program. Moving to our second priority, the rapid acceleration of our digital and omnichannel capability. We continue to provide our customers with an easy and convenient customer experience, whether that is shopping in our stores, using curbside pickup, or deliveries. Digital continues to be a key growth driver for us as we achieved our third straight quarter of over 200% sales growth, up 225% in Q3. DriveUp and Groove grow over 800% as we launched 231 new Doug locations during the quarter. Doug is now available in 1,181 stores. This puts us ahead of our schedule, and we expect to have Doug in more than 1,400 locations by the end of this fiscal year, as well as more than 1,800 locations at the end of fiscal year 2021. We firmly believe some consumer behaviors adopted during the pandemic will continue post-pandemic, and we believe increased use of digital offerings will be one of the key behaviors that sticks. To capitalize on this trend, we are investing over $300 million in CapEx and OpEx to accelerate our offerings in this area during fiscal year 2020 to launch new capabilities that build on our strengths, as well as drive scale and profitability. For instance, we rolled out zero-touch payments capabilities to all our stores in October, allowing in-store customers to enter their loyalty credentials for discounts and rewards and pay for their groceries from their phone without touching the pin pad. We also set up the ability to accept SNAP for online payment on dug orders in 199 stores and plan to expand to additional stores and to delivery orders in early fiscal 2021. From a customer experience and convenience perspective, we've made noticeable improvements to our app, which have resulted in increased usage and are piloting a number of walk-up-and-go options in select stores in Chicago and Northern California, involving walk-up counters, lockers, and standalone kiosks in our parking lots. In addition to improving the customer experience, we've continued to reduce operational costs and improve overall profitability. For instance, we've further reduced picking costs as a result of labor planning and process improvements driven in part by a new software that has simplified workflows. We're also planning on adding seven additional MFCs by the end of fiscal 2021. Finally, we continue to leverage our large and growing customer database to our Just For You loyalty program, an increasingly valuable asset, which allows us to utilize data insights to target customized promotions, such as personalized coupons and offers on new products that can increase basket size and deepen engagement with our customers. Our third strategic priority is driving productivity to help offset inflation that naturally occurs in things such as wages and benefits and to support reinvestment in the business. We remain on track to deliver anticipated savings this year and to achieve our $1 billion in gross savings by the end of fiscal year 2022. We also continue to identify additional opportunities Some examples of savings include aggressively partnering with vendors to reduce both indirect spend and the cost of own brands' goods. For example, by partnering with suppliers and own brands and using comparative data and analysis, we were able to secure substantial savings in the procurement of own brands' deli meat and paper goods in Q3. Expanding our sourcing efforts are on capital procurement, including equipment and items related to store models. and continuing to drive our ongoing energy efficiency projects, which save an estimated $14 million in Q3 while also reducing our carbon footprint. Our fourth priority is strengthening our talent and culture and strengthening the communities we serve. We are guided by diversity and inclusion throughout our operations and recruiting efforts and have continued to add impressive talent to our team. We also continue to put our customers' and associates' first when it comes to safety, and have now completed the implementation of contactless temperature and health screening for our associates across all our facilities. In addition, we continue to value the contribution of our associates on the front lines and awarded another $45 million in discretionary appreciation bonuses during the quarter. We're also partnering with the Department of Health and Human Services to administer free COVID-19 vaccines in the communities in which we operate. We have begun to deliver doses of the vaccine in many of our market areas and plan to hire more than 800 pharmacists and pharmacy technicians to ensure our pharmacies meet the demand for vaccinations. At the same time, we continue to support the communities we serve and are proud that our foundation helped generate record-breaking numbers for childhood hunger relief in September, with $9.3 million in customer donations at our check stands that enabled $37.5 million healthy breakfast for kids in our communities. Year-to-date, our combined company and customer donations have now topped $110 million. And importantly, we continue to focus on sustainability. We are proud to win the Sustained Excellence Award for our commitment to energy efficiency in our Arizona stores from the annual Salt River Project Champions of Energy Efficiency Awards. By leveraging the utilities rebate program, we saved energy and reduced peak demand in this region. And now I would like to ask Bob to cover the details of our third quarter financial results.