Loblaw Companies Limited

Ladies and gentlemen, thank you for standing by and welcome to the Loblaw Company's limited Q2 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require further assistance, please press star 0. I would now like to hand the call over to your speaker today, Roy McDonald. Thank you. Please go ahead.

Thank you, Megan, and good morning, everybody. Welcome to the Loblaw Companies Limited second quarter 2020 results conference call. Joining me this morning is Galen Weston, our executive chairman, Sarah Davis, our president, and Darren Myers, our chief financial officer. Now, before we begin the call, I would like 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 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 security regulators 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. I'd like to start again by thanking our frontline teams and the broader organization who continue to ensure we deliver the services Canadians rely on in a safe and secure environment. For the quarter, we continue to see elevated sales with a continued shift in food to conventional formats and significant growth in our e-commerce platforms. The pandemic has changed consumer behavior, impacting our mix of sales, which combined with our elevated investments in COVID-related costs has put pressure on our financial model in the second quarter. On an adjusted consolidated basis, our reported revenue grew by 7.4%, adjusted EBITDA declined 13.5%, adjusted net earnings decreased by 28.7%, and adjusted earnings per share decreased by 26.7%. Our same-store sales and drug retail decreased 1.1%. Front-store same-store sales grew 3.3%, while pharmacy same-store sales were negative, declining by 6.2%. For the front-store, the mix of sales changed as we delivered strong growth in food and HABA while we experienced pressure in cosmetics and OTC. In pharmacy, revenue was impacted by stockpiling in the first quarter and certain COVID-related changes that negatively impacted sales. Food retail same-store sales grew 10% in the quarter. Food sales growth included significant changes within the category mix and the benefit from strong demand for essential food categories. Consumers purchased fewer non-essential products and demand shifted towards conventional formats, with our market division delivering strong same-store sales growth of 18.8% and our discount division growing 4.9%. Our average article price was 4.6% for the quarter. The average article price increase reflected a change in sales mix in the quarter related to the pandemic. Food retail basket size continued to show an increase during the quarter, while traffic continued to be negative. Total gross margin was 29.6% in the quarter. Excluding the consolidation of franchises, retail gross margins declined 90 basis points compared to last year. Our margins were negatively impacted by the change in our mix of food and drug sales and declines in both our food and drug rates. In food, our grocery trading margins were flat while our rate was negatively impacted by lower sales in right-hand side categories. Drug gross margins were impacted primarily by front store mix driven by lower cosmetics and OTC sales. Retail SG&A as a percentage of sales is 21.3%. Excluding the benefit from franchise consolidation, our retail SG&A rate increased 90 basis points primarily driven by higher operating costs related to COVID and costs to support the accelerated growth in e-commerce, partially offset by the sales lift in food, benefits from our ongoing process and efficiency initiatives, and certain timing of expenditures. During the quarter, COVID-related costs increased our spending by an estimated $282 million. The significant and accelerated growth in our e-commerce business has led to an increase in cost to support the rapid scaling of our capacity to meet demand. We continue to focus on meeting the demands of our customers and have a number of initiatives in place to improve the productivity of the model over time. Retail EBITDA decreased $151 million and EBITDA margin came in at 8.3%, a decrease of 200 basis points compared to last year. Moving to PC Financial, revenue was $233 million, down $51 million in the quarter, as credit card spending was lower with less interchange income and credit-related fees, as well as lower sales within mobile due to the partial closure of kiosks. Adjusted EBITDA contributions declined $8 million year-over-year, driven by the revenue decline. Adjusted consolidated EBITDA margin was 8.5% in the quarter. Normalized for the consolidation of franchises, EBITDA margin declined 190 basis points compared to last year. In the quarter, IFRS net earnings available to common shareholders was $169 million, a decrease of 40.9%, and fully diluted earnings per share were 74 cents, a decrease of 26.7%. Free cash flow was strong with $334 million generated in the quarter in line with the previous year. Our liquidity remains strong, supported by a strong balance sheet and the ability to generate significant cash flow from our operations. As of Q2, Wabaugh's consolidated cash and short-term investments balance was $2.6 billion. Note that subsequent to quarter end, we repaid a $350 million note that we had refinanced in the second quarter. The company did not repurchase any common shares during the quarter. Looking ahead, 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 evolve as does the demand for the types of products and services we provide. In the four weeks following the end of the second quarter, sales growth and mix continue to evolve as restaurants began to reopen. Food retail sales have continued at elevated levels, but have experienced a modest tapering of growth rates, and drug retail has experienced continued improvement compared to the second quarter same-store sales growth rates. As we continue to navigate through the COVID crisis, our focus is on doing the right things to protect our colleagues and our customers. In the first four weeks of the third quarter, we saw approximately $20 million in incremental costs related to safety and security in our stores and DCs. Both our process and efficiency initiatives and our CapEx program continue, and we are investing in our long-term strategic initiatives, which in large part have been validated through the pandemic. In conclusion, this remains a challenging and dynamic time. We are confident we are doing the right things to protect our colleagues and customers and to position our business to meet the future 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 the foundation that positions us well for the future. I will now turn the call over to Sarah.