Loblaw Companies Limited

Ladies and gentlemen, thank you for standing by and welcome to the Loblaw Company's limited Q4 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 will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Roy McDonald. Thank you. Please go ahead.

Thanks very much, and good morning, everybody. Welcome to the Loblaw Company's limited fourth quarter and full year 2020 results conference call. I'm joined this morning, as usual, by Galen Weston, our executive chairman, Sarah Davis, our president, and Darren Myers, our chief financial officer. And 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 made 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 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 the 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 fourth quarter represented a continued improvement in our results. Our fourth quarter included an extra week this year. The 53rd week came in a little stronger than expected, contributing approximately 10 cents to our fourth quarter earnings per share. My remarks today will focus on the comparable 12-week period. On an adjusted consolidated basis, our reported revenue grew by 7.1%. Adjusted EBITDA was up 5%. Adjusted net earnings were up 3.8%, and adjusted earnings per share increased by 6.4%. Our same-store sales in drug retail increased 3.7%. Front-store same-store sales grew 2.8%, while pharmacy same-store sales grew by 5%. Front store sales mix was driven by strong performance and convenience categories, food, household, products, and HAVA. We continue to experience pressure to cosmetics and over-the-counter sales. Food retail same-store sales grew 8.6% in the quarter. Demand across our formats increased, with market growth of 10.6% and discount growth of 7.4%. Food retail sales continue to benefit from strong demand for essential food categories. Our food retail average article price was 3.9% for the quarter, down from 5.3% in the third quarter. Similar to the third quarter, the average article price increase is not reflective of inflation, but rather a change in our sales mix, including consumers buying larger format items. Using CPI of 1.5% as a reference, our comparable basket inflation would have been closer to CPI for the quarter. Our food retail basket size remained elevated, while traffic continued to show a year-over-year decline in the fourth quarter. Total retail gross margin was 27%, excluding the consolidation of franchises, decreasing 70 basis points compared to last year. In food, our rate of decline improved from the third quarter, but was negatively impacted by sales mix and continued focus on a relative pricing position. In drug, our margin continued to be under pressure from mix. Retail SG&A has a percentage of sales with 17.3%, excluding the benefit from franchise consolidation. It improved by 30 basis points. The improvement reflects sales leverage and process efficiency gains, which are partially offset by COVID-19 related costs and incremental costs related to the growth in e-commerce. During the quarter, COVID-related costs increased our spending by an estimated $42 million. Retail EBITDA, excluding the benefit from franchise consolidation, increased $40 million, and EBITDA margin came in at 9.9%, a decrease of 10 basis points compared to last year. Moving to PC Financial, revenue was $320 million, down $17 million from last year, driven primarily by lower credit card spending. Adjusted EBITDA contributions were $62 million, down $8 million from last year, primarily driven by lower credit card spending, partially offset by lower credit losses, lower customer acquisition costs, and a reduction, in the credit loss provision. Adjusted consolidated EBITDA margin was 10.2% in the quarter. Normalized for the consolidation of franchises, EBITDA margin declined 40 basis points compared to last year. In the quarter, on a 13-week basis, IFRS net earnings available to common shareholders was $345 million, and fully diluted IFRS earnings per share were 98 cents. On a comparable basis to last year, after excluding 10 cents from the 53rd week, Fully diluted IFRS earnings per share were $0.88, an increase of approximately 25.7% year over year. Moving to cash flow, the company generated $606 million of free cash flow and repurchased 5.5 million common shares during the fourth quarter. Turning to the full year, on a 52-week basis, revenue grew 7.9%. We delivered same-store sales of 8.6% in food and 4.9% in drugs. Our adjusted net earnings declined by 1.6%, and fully diluted earnings per share grew by 1.2%. Net capital expenditures came in just under $1.15 billion, and free cash flow was $2.25 billion, including $1.7 billion from our retail business, and we repurchased just under $900 billion of common shares. In 2020, Loblaw's performance reflected higher costs and changes to consumer behavior driven by the COVID-19 pandemic. Overall sales increased, but profitability was negatively impacted by company-wide sales mix, growth in e-commerce, elevated COVID costs, and the decision to keep prices low during the pandemic. We invested to meet the incredible demand in the marketplace for digital services, quickly scaling to meet consumers' needs, ending the year with $2.8 billion of e-commerce business. The growth in e-commerce represented a headwind of approximately $100 million or 20 cents of VPS in the year. Looking ahead, as we transition from year one to year two of the COVID-19 pandemic, there continues to be a high degree of uncertainty about the duration and the impact of the pandemic on the Canadian economy. As a result, we expect continued volatility in our business as shopping behaviors and demand for products and services continue to evolve. However, We believe our businesses are strong and are well positioned to meet the changing consumer trends. In 2021, on a full-year comparative basis, we expect our retail business to grow earnings faster than sales and to grow year-over-year profitability at PC Financial. We expect earnings per share growth in the low double digits and to invest approximately $1.2 billion in capital expenditures and to return capital to shareholders by allocating a significant portion of free cash flow to share repurchases. In the four weeks following the end of the quarter, food retail same-store sales growth remained elevated and drug retail same-store sales growth slowed in front store while remaining consistent in pharmacy. For the balance of the first quarter, both food and drug same-store sales will lap consumer stockpiling that began in the first quarter of 2020. COVID-related costs are trending in the range of $40 to $50 million for the quarter. In conclusion, our performance in 2020 reflected higher costs, and changes to consumer behavior driven by the pandemic. Following the challenges of Q2, we have delivered steady improvements in performance and profitability. We are pleased with our positioning as we enter 2021. As a matter of housekeeping, starting the first quarter of 2021, we have made changes to our non-GAAP financial measures policy to simplify and improve peer consistency of our adjusting entries. Refer to the financials for details and a restatement of our 2020 adjusting entries to align with the new policy. I will now turn the call over to Sarah.