Loblaw Companies Limited

Good morning, ladies and gentlemen, and welcome to the Loblaw Companies Limited second quarter 2021 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Wednesday, the 28th of July, 2021. And I would now like to turn the conference over to Roy McDonald. Please go ahead.

Good morning. Thank you, Michelle. And welcome, everybody, to the Loblaw Company's limited second quarter 2021 results conference call. I'm joined in the room this morning by Galen Weston, our chairman and president, and by Richard Dufresne, our Chief Financial Officer. And before we begin the call, I'd 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. As such, They are subject to a number of risks and opportunities that could cause actual results or events to differ materially from our expectation. And these risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators. 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 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 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 Richard.

Thank you, Roy. Good morning, everyone. I'm very excited to be back at Loblaw and I'm pleased to share some details around what was a good second quarter for us. The quarter reflected continued improvement in our businesses while lapping tougher performance last year. The environment remains dynamic and still difficult to forecast. As we report on our second year of the pandemic, comparable numbers do not tell the entire story. As such, I will include commentary and two-year data points to provide further context on our operating performance. On a consolidated basis, our revenue for the second quarter grew by over $500 million. EBITDA increased 36%, and earnings per share grew by 87.5%. On a two-year basis, we saw average annualized growth in revenue of 5.9%, adjusted EBITDA of 8.1%, and adjusted earnings per share growth of 15%. These figures are well ahead of our financial framework. Food retail same-store sales were flat in the quarter. Market declined slightly against same-store sales growth of 19% last year, while discount same-store sales were positive. Our average article price was up 1.4% for the quarter, a decline from 3.9% in Q1. The increase in average article price compared to last year was mainly driven by sales mix. Loblaw's CPI comparable inflation rate was less than 1% in the first half of 2021. Traffic improved in Q2, recording growth for the first time since the beginning of the pandemic. On a two-year rate, food same-store sales reflected average growth of 5.6%. Same-store sales in drug retail increased by 9.6% in the second quarter, trending positively compared to a decline of 1.1% last year. Front-store same-store sales were better by 3.6%, while pharmacy same-store sales grew 17.2%. Front-store sales saw some sales momentum from cosmetics and OTC categories as restrictions loosened, recording strong growth compared to last year. Pharmacy performance was strong, lapping volatility of date supply restriction in the prior year. On a two-year average rate, drugstore sales have grown 5.7%, with front store at 4.6% and RX at 6.9%. Our online business continues to operate at penetration levels well above pre-COVID rates. After record growth of 280% in Q2 last year, sales declined 0.5% versus Q2 of last year. That said, online sales increased in the mid-single digits versus Q1. We remain focused on driving customer metrics and deliver sequential improvements in both customer-facing metrics and profitability. Retail gross margin was 30.9%, an improvement of 40 basis points compared to the second quarter of 2019. While gross margin improved 130 basis points versus Q2 of 2020, we are hankering our financial performance to 2019. This is our second consecutive quarter of gross margin stability, and we feel comfortable about our gross margin performance going forward. Improvement in MIPS versus second quarter of 2020 at a positive impact on margin. Retail SG&E as a percentage of sales was 20.2%, with the rate improving by 120 basis points compared to the first quarter of 2020. The improvement was primarily due to lapping of high COVID costs in 2020, sales leverage from strong prescription growth, and efficiencies achieved in our e-commerce labor model. COVID costs came in at $70 million in the quarter, in line with our expectations. Compared to Q2 of 2019, our retail SG&E improved by 30 basis points, despite COVID costs and headwinds from our online growth. Strong sales performance is definitely a factor in driving rate. Adjusted retail EBITDA improved by $347 million in the quarter. This compared to last year when we recorded a decline of $151 million, driven by margin and COVID cost-related pressure. At PC Financial, revenue was up $39 million in the quarter, driven by higher mobile shop revenue and interchange income as we lacked a period of low sales volume from prior year. Adjusted EBITDA at the bank increased $16 million year-over-year, primarily driven by changes in the expected credit loss provision and lower credit losses, offsetting the lower impact of lower interest income as payment rates remain elevated. On a consolidated basis, adjusted EBITDA margin was 11% in the quarter, up 260 basis points compared to last year. In the quarter, IFRS net earnings available to common shareholders was $464 million, up 78.5%, and fully diluted net earnings per share were $1.35. Free cash flow was $953 million in the quarter, but free cash flow in our retail business was $1 billion in the quarter. In Q2, we repurchased $350 million of common shares for a total of $700 million year-to-date. Today, we announced a 3 cents or 9% increase in our quarterly dividends. This marks our 10th consecutive increase of our dividends. As we look ahead, a great deal of uncertainty remains as the course of the pandemic, the reopening of the economy, and the resulting impact on consumer behavior remains dynamic. Sales trajectory remains difficult to forecast. We are pleased with the financial performance of our second quarter. As such, we have updated our outlook to include the expectation of EPS growth for the full year 2021 of the low to mid-20s, excluding the impact of the 53rd week of 2020. In the first four weeks of the third quarter, food-same-store sales declined by 1% compared to the same period last year. Over the same period, COVID costs are estimated at around $9 million. As for inflation expectations, while inflation was low in the first half, proposed cost increases from vendors have been coming in rapidly over the last while, so it is reasonable to expect more inflation going forward. Having said that, manageable level of inflation has positive impacts on our business. Before I hand over the call to Galen, I would like to reiterate my excitement in being back in the business. Together with Galen and Robert, we look to the future with confidence as we reflect on the scale and strength of our food and drug retail businesses, our strong brands, our loyalty assets, and our already sizable online business. I will now turn the call over to Galen.