Loblaw Companies Limited

at this time or in listening 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 Thursday, February 24th, 2022. I would now like to turn the call over to Mr. Roy McDonald. Please go ahead.

Great. Thank you very much, Kelsey, and good morning, everybody. Welcome to the Loblaw Company's limited fourth quarter and full year 2021 results conference call. As usual, I'm joined here this morning by Galen Weston, our chairman and president, and by Richard Dufresne, our chief financial officer. And before we begin the call today, 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 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. And any forward-looking statements speak only as of the date they're made, 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, and good morning, everyone. Our Q4 results continue in the path of consistency we have been working towards in 2021. Stability in our gross margin coupled with solid sales performance, focus on market share, and careful management of our expenses are our daily focus. Our strong food and drug retail platforms coupled with our main strategic initiatives, namely loyalty, and e-commerce are adding to our financial performance. The pandemic continues to impact our year-over-year comparison. As such, we will continue to share some two-year average data points to help provide further insight into our operating performance. I also want to remind everyone that Q4 last year included an extra week versus this year. To make a more meaningful comparison to last year's performance, financial highlights will be presented on a comparable 12-week basis. Our reported results include a one-time gain of some $300 million related to the resolution of the Lenuron Bank matter. I highlight this fact as we will recover some $300 million in cash over the coming months. The strong performance of our fourth quarter built on the momentum we saw in the previous two quarters. We began Q4 with restrictions loosening and customers preparing to celebrate their holidays with family and friends. We ended the quarter with another round of lockdowns. Across our mix of assets, our stores and our supply chain network rose to the challenge, and our businesses performed very well. On a consolidated basis, revenue for the fourth quarter grew by 2.8% to $12.8 billion, adjusted EBITDA increased by 6.3% to $1.32 billion, and adjusted earnings per share grew by 35.7% to $1.52. On a two-year basis, we saw average annualized growth in revenue of 4.9%, adjusted EBITDA growth of 9.1%, and adjusted earnings per share growth of 30.1%. Again this quarter, our results outperformed our financial framework. Drug retail delivered another strong quarter. Absolute sales increased 6.8%, with same-store sales increased by 7.9% in the fourth quarter, lapping a softer quarter of growth of 3.7% last year. We saw strong performance across both front store and Rx. Front-store same-store sales were better by 6.1%, led by double-digit growth in cosmetics and OTC, benefiting from lighter social restrictions throughout most of the quarter. Pharmacy same-store sales grew 10.2%, benefiting from the strength of pharmacy services, which grew by over 100% in the quarter as we supported the government COVID vaccine and testing programs. On a two-year average, drug same-store sales have grown 5.8%, with front-store at 4.5% and RX at 7.6%. In food retail, same-store sales saw growth of 1.1%, lapping a strong quarter of 8.6% last year. Although we saw eat-at-home trends coming off last year's levels, we continue to experience strong demand. Our market banners continue to outperform and post share gains. Discounts began to benefit from the return of price-sensitive customers gaining momentum towards the end of the quarter. Traffic momentum continued, improving again in Q4, and is showing signs of beginning to normalize to pre-pandemic levels. On a two-year average, food-same-store sales reflected average growth of 4.9%. Performance in the quarter was against a backdrop of rising cost inflation and ongoing supply chain disruptions. Supply chains are facing unprecedented challenges around the world. This is leading to high inflation in every industry, and it continues to be volatile. We are monitoring the supply chain situation very closely. With the largest distribution network in the country, our scale and experience has allowed us to navigate these challenges relatively well. Our teams are doing a great job prioritizing and adapting to these situations as they unfold. Our shelf price is the tail end of a chain of costs. shipping containers, fuel, farming, ingredients, labor, weather, to name a few. We watch this very carefully and focus on ensuring that our retail prices are competitive. During the quarter, we saw high rates of input inflation across the board. Our job every day is to ensure that any proposed cost increases are appropriate, keep items on the shelf, and deliver the best value to our customers. Leading the way with our discount banners, leveraging the price investments that we made last year, and driving loyalty offers that really matter personally, we work to deliver value. In 2021, our online business generated more than $3.1 billion in sales, an increase of 14% over last year. In Q4, online sales decreased by 8.4%, lapping last year's 158% growth rate. Our digital platform is now deployed and available throughout Canada. Q4 2021 was a quarter with less COVID restrictions than in 2020. We are pleased with our omnichannel performance as it continues to operate at penetration levels well above pre-COVID rates. Omnichannel is a key pillar of our service offering. We continue to enhance our customer shopping experience through our digital platform while offsetting its costs through optimizing operational efficiencies, deploying new technology, refining our delivery offering and seeking out promotional and advertising opportunities. Retail gross margin in Q4 was 30.9%, up 150 basis points compared to last year. We continue to see traction leveraging our unique data to deliver effective food pricing and promotional strategies. Both our food and drug retail businesses benefited from a continued rebound of higher margin categories consistent with performance from the previous quarter. Pharmacy services were a key contributor to gross margin growth as COVID vaccines and testing peaked during the holiday season. Comparing to 2019, we have recovered from the challenges of 2020. Gross margin have improved by 80 basis points with similar improvements in both our food and drug businesses. Focus on stability of our gross margin while driving our sales performance is a priority. We remain confident regarding our gross margin performance going forward. Retail SG&E as a percentage of sales was 20.9%, with the rate higher by 120 basis points compared to last year. The increase was driven by corporate one-time items, lapping austerity measures such as lower store hours in shoppers, and increased labor costs associated with growth in RX services. Corporate items included a $19 million charge related to the optimization of our store network that we discussed on our last call, which was not considered an adjusting item. Also, note that COVID costs came in at $8 million in the quarter, in line with our expectation. When we exclude our one-time costs, we are pleased with our performance in the quarter. Compared to 2019, our Q4 retail SG&E rate increased by 20 basis points, driven by higher labor costs to support growth in Rx services and some COVID costs. Adjusted retail EBITDA increased by $60 million, or 5.1% in the quarter. At PC Financial, revenue was up $40 million, driven by higher interchange income, as we are benefiting from increased spending on PC MasterCard. Adjusted EBITDA, the bank increased $18 million year-over-year, primarily driven by favorability in interchange income and lower credit losses, and included a $27 million gain related to the reversal of prior year commodity tax remittance. This was partially offset by higher points cost for redemptions, more normal marketing spend compared to last year, and an ECL provision release of $11 million last year. On a consolidated basis, adjusted EBITDA margin was 10.4% in the quarter, up 40 basis points compared to last year. In the quarter, IFRS net earnings available to common shareholders was $744 million, up $434 million, and fully diluted earnings per share were $2.20. This includes the $301 million recovery related to the Glen Huron Bank income tax return. Retail free cash flow was at $460 million in the quarter. For the full year, we increased retail free cash flow by over $400 million. Our cash flow generation is strong. Our cash balance is high and increasing. In Q4, we repurchased $200 million of common shares finishing the year at $1.2 billion, representing 15.6 million shares. Looking ahead to 2022, volatility will remain. We expect inflationary pressures to continue and supply chains to remain challenging. The pandemic will continue to impact sales trends and year-over-year comparison. That said, we are very pleased with the mix and positioning of our businesses, and our focus on retail excellence will continue to generate positive operational and financial performance. So for full year 2022, we expect our retail business to grow earnings faster than sales, earnings per share growth in the low double digits with higher growth in the first half of the year. We plan to invest approximately $1.4 billion in capital expenditures, net of proceeds from property disposals, reflecting incremental store and distribution network investments, and to continue to return capital to shareholders by allocating a significant portion of our free cash flow to share repurchases. In the fourth quarter, we again demonstrated steady, consistent performance. As we continue our focus on retail excellence and on a few key strategic initiatives, our unique set of assets positions us very well for the future. I'll now turn over the call to Galen.