Loblaw Companies Limited

Ladies and gentlemen, thank you for standing by and welcome to the Loblaw Company's limited Q3 2020 earnings 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. Thank you. It's now my pleasure to hand the conference over to your moderator for today, Roy McDonald, Vice President, Investor Relations. Please go ahead.

Good morning, everybody. Thank you, Jack. Welcome to the Love Law Limited third quarter 2020 results conference call. This morning, I'm joined by Galen Weston, our Executive Chairman, Sarah Davis, our President, and Darren Myers, our Chief Financial Officer. And before we begin the call, I'll 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, and any forward-looking statements speak only as of the date that they are made. The company disclaims any intention or obligation to update or revise any of the 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. Please refer to our annual report and other materials filed with the Canadian securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. And with that, I'll turn the call over to Darren.

Thank you, Roy, and good morning, everyone. The third quarter represented an improvement in our results in what continues to be a challenging and dynamic time. The pandemic continues to influence consumer behavior, impacting sales mix and elevating associated costs. On an adjusted consolidated basis, our reported revenue grew by 6.9%, adjusted EBITDA was up 2.1%, adjusted net earnings were up 1.3%, and adjusted earnings per share increased by 4%. Our same-store sales in drug retail increased 6.1%, front-store same-store sales grew 2.4%, While pharmacy same-store sales grew by 10.3%. Front-store sales mix was driven by strong performance in food, habit, and household products. While we continued to experience pressure in cosmetics and OTC, cosmetics showed an improvement in the rate of decline relative to our second quarter. In pharmacy, we delivered strong sales in part due to the demand for 90-day prescription refills following the lift of government restrictions. We expect some negative impact from the timing of these changes on our Q4 prescription business. Food retail same-store sales grew 6.9% in the quarter. Food sales growth included changes within the category mix and the benefit from strong demand for essential food categories. Demand across our formats remained strong with 9.7% growth in our market division and 4.7% in our discount division. Our average article price was 5.3% for the quarter. The average article price increase reflects a change in our sales mix, including consumers buying larger format items. The increase is not indicative of inflation, which using CPI as a reference would have been closer to the 1.8% for the quarter. For the quarter, our food retail basket size remained elevated, while traffic continued to be negative. We did see traffic starting to improve and the basket not quite as high. However, we remain well outside pre-COVID rates. Total retail gross margin was 26.7%, excluding the consolidation of franchises, a decline of 60 basis points compared to last year. Our margins were negatively impacted by declines in food and drug rates. In food, our rate was negatively impacted by sales mix and targeted pricing investments. In drug, we were negatively impacted by mix. Retail SG&A as a percentage of sales was 17.2%, excluding the benefit from franchise consolidation, an improvement of 10 basis points. The improvement reflects the benefit of sales leverage, process efficiencies, and continuing to delay discretionary spending. This was partially offset by higher COVID-related costs and higher costs associated with the growth in e-commerce. During the quarter, COVID-related costs increased our spending by an estimated $85 million. Retail EBITDA increased $22 million, and EBITDA margin came in at 9.5%, a decrease of 60 basis points compared to last year. Moving to PC Financial, revenue was $278 million, down $31 million in the quarter, driven primarily by lower credit card spending, partially offset by strength in our mobile sales. Adjusted EBITDA contributions increased by $10 million year-over-year as a result of timing of investments and adjustments to our ECL provision. Adjusted consolidated EBITDA margin was 9.7% in the quarter. Normalized for the consolidation of franchises, EBITDA margin declined 40 basis points compared to last year. In the quarter, IFRS net earnings available to common shareholders was $345 million, an increase of 3.3% in fully diluted earnings per share, or $1.30, an increase of 4%. Moving to cash flow, the company generated $121 million of free cash flow in the quarter. We repurchased 5 million common shares during the quarter, and today we announced a 2 cent or 6.3% increase in our quarterly dividend. This marks our ninth consecutive annual increase. In September, we received an upgrade by DBRS to BBB High. This reflects the strength and stability of our business and the ability to continue to generate strong cash flows. Looking ahead, there continues to be 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 the four weeks following the end of the third quarter, volatility continued. Food retail sales and COVID-related costs have continued on a similar trajectory to Q3, while drug retail sales have seen a deceleration of growth, primarily due to the impact of the timing of the prescription volumes related to the change in fill rate. Given the volatility and continued uncertainty, it is too early to extrapolate a trend. In conclusion, we are focused on delivering value to our customers. Incremental sales volumes and ongoing benefits from our process and efficiency initiatives allowed us to offset cost inflation and invest in our strategic initiatives while generating earnings growth. I will now turn the call over to Sarah.