Loblaw Companies Limited

Good morning, ladies and gentlemen, and welcome to the Loblaw Companies Limited Third Quarter 2021 Earnings Conference Call. At this time, all lines are in listen-only mode, and 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 on November 17, 2021. And I would now like to turn the conference call over to Mr. Roy McDonald. Please go ahead, sir.

Great. Thank you very much, Kelsey, and good morning, everybody. Welcome to the Loblaw Company's limited third quarter 2021 results conference call. I'm joined this morning as usual by Galen Weston, our chairman and president, and Richard Dufresne, our chief financial officer. And before we begin, 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 ongoing COVID-19 pandemic. These statements are based on assumptions and reflect management's current expectations. As such, 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 as of the date they're 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. The performance of our third quarter continued the trends of the last quarter characterized by a steady improvement across our businesses. Year-over-year comparable numbers do not tell the entire story given the volatility caused by the pandemic. For that reason, using some two-year average data points help provide further insight into our operating performance. On a consolidated basis, revenue for the third quarter grew by 2.4% to over $16 billion, EBITDA increased by 10.3% to $1.67 billion, and earnings per share grew by 24% to $1.59 a share. On a two-year basis, we saw average annualized growth in revenue of 4.7%, adjusted EBITDA growth of 6.2%, and adjusted earnings per share growth of 14.1%. These results exceeded our financial framework despite the more moderate sales growth. Our drug retail business delivered most of our sales growth in the quarter. Absolute sales increased 4.7%, reflecting strong RX and growth in all major front store categories, led by cosmetics and OTC. Same store sales in drug retail increased by 4.4% in the third quarter, lapping strong third quarter growth of 6.1% last year. Front store same store sales were better by 4.1%, while pharmacy same-store sales grew 4.8%, benefiting from a 270% growth in pharmacy services, which includes COVID vaccines, testing, and medication reviews. On a two-year average, drug same-store sales have grown 5.3%, with front store at 3.3% and RX at 7.6%. In food retail, same-store sales improved as the quarter progressed, up 0.2%. Lapping a strong quarter, same-store sales benefited from continuing eat-at-home trends. Our pricing position remained strong, and we are pleased with our market share performance. Eat-at-home trends remain elevated despite the easing of restrictions. Compared to last year's results that were driven by extended lockdowns and few social events or celebrations, this year saw strong sales in the back-to-school season and for Thanksgiving. Halloween was also strong. More generally, entertaining at home is helping drive sales in food retail. On a two-year average, food same-store sales reflected average growth of 3.6%. Traffic continued to improve in Q3 and is showing signs of beginning to normalize to pre-pandemic levels. We are paying a lot of attention to cost inflation. In midsummer, inflation materialized in both fresh and grocery. In produce, prices have remained more or less flat to down as we've been sourcing locally and in the U.S. Meat prices have gone up but have stabilized recently. Grocery remains the area with the most activity. The number and size of cost increases requested by vendors has been elevated since the summer. Our team uses a thorough process to vet pricing requests. We work hard to negotiate those increases down so that we offer our customers the best value. Our internal measures of inflation are trending slightly higher than CPI. Our online business continues to operate at penetration levels well above pre-COVID rates, albeit lower than the peak of last spring. In Q3, online sales were flat to last year, but we know that last year was up 175% compared to 2019. Online grocery sales in the quarter were down slightly to last year. Online pharmacy continued to grow nicely and covered the slight gap generated by food. Within grocery, we have a strong and loyal base of online customers, but as lockdowns eased, some customers shifted back to in-store shopping. Online is here to stay. Although penetration in growth free has eased since the peak driven by lockdowns, customers expect us to offer a seamless experience whether in store or online. We are confident that online will play an important part in the future of our business. Speed and convenience are the way to win and I'm confident that over time we'll be able to improve the profitability gap as technology and new way of doing things will reduce the cost structure of this channel. Retail gross margin in Q3 was 30.7%, up 140 basis points compared to last year. Improved merchandising initiatives and traction using our data are key drivers of our margin improvement in food retail. Drug retail margins benefited from improved mix, higher pharmacy services, and a slow return of acute prescription volumes. Pharmacy service growth is driving both margin and SG&E. This category has a high labor component that increases SG&A, but its contribution is in line with the overall EBITDA pharmacy margin. Growth margin in our front of store business also improved with a steady recovery in higher margin categories such as beauty and OTC that were negatively affected by COVID lockdowns. Anchoring to 2019, we have recovered from the challenges of last year. Gross margins have improved by 80 basis points, with similar improvements in both our food and drug business. This is an improvement over Q2, where our drug business dragged down our gross margin versus in Q3, where it lifted it. We remain confident about our gross margin performance going forward. Retail SG&A as a percentage of sales was 20.5%, with the rate higher by 70 basis points compared to last year. The increase was primarily due to a return to normal levels of spend. This after much lower level last year because of COVID. For example, returning pharmacies to their pre-pandemic operating hours and supporting the growth in Rx services. COVID costs came in at $19 million in the quarter in line with our expectations. Anchoring to 2019, our Q3 retail SG&A rate increased by 60 basis points driven by higher labor costs to support the growth in Rx services, e-commerce fulfillment labor associated with higher digital penetration and COVID costs. Retail EBITDA improved by $149 million in the quarter. At PC Financial, revenue was up $19 million in the quarter, driven by higher interchange income as we are benefiting from increased spending on PC MasterCard. EBITDA at the bank increased $7 million year-over-year, primarily driven by favorability in interchange income and lower credit losses, partially offset by higher point costs for redemption and increased marketing spend compared to low spend in the prior year. On a consolidated basis, adjusted EBITDA margin was 10.4% in the quarter, up 70 basis points compared to last year. In the quarter, IFRS net earnings available to common shareholders were $500 million, up 17.6%, and fully diluted earnings per share were $1.59. Consolidated free cash flow was $455 million in the quarter, but retail free cash flow was $498 million in the quarter. In Q3, we repurchased $300 million worth of common shares for a total of $1 billion year-to-date. So far, we have repurchased 13.6 million common shares. Today, we have announced some details regarding our store network optimization initiative. We have reviewed our network of stores and have finalized plans to address approximately 20 of our most unprofitable stores. In almost all cases, this involves reformatting the store to better serve the local market. Most of these stores will convert to our discount banners. Some will be downsized, but only three will be closed. We expect to record a charge of $25 to $35 million, most of which in Q4. These projects should substantially be completed by the end of next year. We expect to realize approximately $25 million in annualized EBITDA run rate once these projects are completed. We are pleased with our financial performance in the third quarter and year to date. As we approach year end, we have updated our outlook for 2021. We expect EPS for the full year to be up in the low to mid 30% range, excluding the impact of the 53rd week of 2020 and charges associated with our new network optimization initiative. Finally, in the first four weeks of the fourth quarter, COVID-related costs are estimated at $4 million. Q3 demonstrated steady, consistent performance. As we continue our focus on retail execution and maintain our attention on a fewer number of strategic initiatives, We feel our business is well positioned for the long term. I will now turn the call over to Galen.