Loblaw Companies Limited

Ladies and gentlemen, thank you for standing by and welcome to Loblaw Company's limited Q1 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Roy McDonald, Vice President, Investor Relations. Thank you. Please go ahead, sir.

Great. Thank you very much, Julianne, and we apologize for the brief delay getting moving this morning, but I'd like to welcome you to Loblaw Company's limited first quarter 2020 results conference call. I'm joined in the room today by our executive chairman, Galen Weston, Sarah Davis, our president, and Darren Myers, our chief financial officer. Before we begin the call, I want to remind you that today's discussion will include forward-looking statements, which may include but are not limited to statements with respect to Loblaw's anticipated future results and the impact of the COVID-19 pandemic. These statements are based on assumptions and reflect management's current expectations and are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from our expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators. Any forward-looking statements speak only to as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than what's required by law. Also, certain non-GAAP financial measures may be discussed or referred to today, so please refer to our annual report and other materials filed with the Canadian Securities Regulator for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. And with that, I will turn the call over to Darren.

Thank you, Roy, and good morning, everyone. It's certainly a different world from a little over two months ago when we reported our fourth quarter results. Before I get into the numbers, let me begin by expressing my gratitude to all our colleagues for their incredible dedication throughout this crisis. Our frontline teams and the supporting organization adapted swiftly and with compassion to ensure we continue to deliver the services that Canadians count on in a safe and secure environment. Moving to the quarter, on an adjusted consolidated basis, our reported revenue grew by 10.7%, adjusted EBITDA increased 12.4%, adjusted net earnings increased by 21.4%, and adjusted earnings per share grew by 24.4% in the quarter. Our sales were positively impacted towards the end of the quarter by COVID-19, and an unprecedented increase in the purchase of essentials. As a reminder, our quarter ended on March 21st. In the final two weeks of the quarter, our grocery stores saw an incredible traffic spike, with sales growth of approximately 44%. Our pharmacy saw similar levels of growth, with front store up 42% and pharmacy up 26% in the final two weeks. The significant and quick increase in volumes delivered positive leverage for the business, which were only partially offset by COVID-related costs. Those costs started ramping as the quarter closed. We estimate that COVID-19 generated an incremental $751 million in revenue in the quarter, with a corresponding increase in adjusted diluted earnings per share of 14 cents. Our same-store sales in drug retail grew 10.7%. Front-store same-store sales grew 10.7%, while pharmacy same-store sales grew 10.6%. For front-store, we saw significant growth in all categories except PubMedics. Pharmacy also saw strong growth with prescription count growth of 5.5% and a 4.8% higher average script value, driven mainly by early fills and shifts to higher days of supply of prescriptions due to COVID-19. Food retail same-store sales grew 9.6% in the quarter. Our average article price was 1.5% for the quarter. The quarter saw very strong comps in both basket and traffic. Total retail gross margin was 29.8%. Excluding the consolidation of franchises, retail gross margin declined 30 basis points compared to last year. Food margins were stable, offset by pressure on the drug side, largely driven by mix. Retail SG&A's percentage of sales was 19.8%. Excluding the benefit from franchise consolidation, retail SG&A improved by 70 basis points as we benefited from favorable sales leverage. Retail EBITDA increased 17.9% and EBITDA margin came in at 10%, an increase of 60 basis points compared to last year. Moving to PC Financial, revenue was approximately flat on the quarter while adjusted EBITDA contribution declined $47 million year-over-year, primarily as a result of increased provisions for the potential credit losses associated with COVID-19. Adjusted consolidated EBITDA margin was 9.9% in the quarter. Normalized for the consolidation of franchises, EBITDA margin was flat compared to last year. In the quarter, IFRS net earnings available to common shareholders was $240 million, up 21.2%, and fully diluted earnings per share were 66 cents, an increase of 24.5%. Free cash flow was strong with $1.19 billion generated in the quarter, as we benefited from the increase in demand towards the end of the quarter. In the quarter, we repurchased 2.8 million common shares at a total cost of $188 million. Now let me spend a little bit of time talking about what we're seeing as we look ahead. As noted in our April 9th press release, there remains a high degree of uncertainty about the duration and the impacts of the COVID-19 pandemic on the Canadian economy. We expect continued volatility in our business as shopping behaviors continue to evolve, as does the demand for the types of products and services we provide. In light of these uncertainties, we withdrew our 2020 outlook. Our focus as we continue to navigate through the COVID crisis is to do the right things to protect our colleagues and customers while taking all the necessary actions to meet the needs of consumers. These actions include enhancing customer convenience, supporting our colleagues in our stores and distribution centers with temporary pay premiums and pay protection safeguards, securing our operations, and providing financial support to our communities and customers. These investments are significant but we believe they are necessary and the right thing to do. As we look more closely at the second quarter, it is very difficult to predict how sales will evolve. We expect potential reductions in some discretionary spend categories, as we expect the current social distancing requirements will also impact our sales trajectory. Since the beginning of the second quarter, we've experienced a pronounced change in the trajectory of our sales. For the first five weeks, food sales growth was approximately 10% while drug sales declined approximately 6%. This combined with an estimated $90 million per month of incremental COVID investments to keep our stores safe for our customers and our colleagues will put financial pressure on our business. Both our process and efficiency initiatives and our CapEx program continue with some adjustments necessary to ensure that our retail operations are not impacted during this busy and critical period. We continue to invest in our long-term strategic initiatives. Our liquidity remains strong, supported by a strong balance sheet and the ability to generate significant cash flow from our operations. As of Q1, Wabla's consolidated cash and short-term investments balance was $2.2 billion. This includes $350 million, which we drew in the quarter from our committed credit facility to backstop a $350 million bond maturing on June 18, 2020. With our strong investment grade credit rating and good standing in the credit markets, we intend to access the bond market to refinance the maturing debt. PC Bank has also increased its funding activity both prior and subsequent to the balance sheet date to maintain a surplus liquidity position relative to regulatory requirements. Overall, we feel confident in our liquidity position. Also note that we are very pleased to have received the Court of Appeal ruling in our favor, overturning the 2018 lower court decision related to Glen Huron Bank. In conclusion, this is certainly a challenging time. We believe we are doing the right thing to protect our colleagues and customers while taking all the necessary actions to meet the needs of consumers. While we expect short-term challenges, we are well positioned to continue to help Canadians navigate through today's extremely challenging time and to continue to build on a foundation that positions us well for the future. I will now turn the call over to Sarah.