Loblaw Companies Limited

Good morning, ladies and gentlemen, and welcome to the Love Law Company's limited second quarter 2022 results conference 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 Wednesday, July 27, 2022. I would now like to turn the conference over to Roy McDonald. Please go ahead, sir.

Thank you very much, Michelle, and good morning, everybody. Welcome to the Loblaw Company's limited second quarter 2022 results conference call. As always, I'm joined here this morning by Galen Weston, our chairman, and by Richard Dufresne, 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 with respect to Loblaw's anticipated future results and the impacts 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 uncertainties that could cause actual results or events to differ materially from our expectations. These results and uncertainties are discussed in the company's materials filed with the Canadian Securities Regulator. So any forward-looking statements speak only as of the date they're made, and the company disclaims any intention or obligation to update or revise any forward-looking statement 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 Regulator 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. I'm pleased to report that our performance in the second quarter continued to build on our positive momentum. Our business mix as well positioned for the current environment and our focus on retail excellence is delivering steady and consistent operational and financial performance. During the quarter, we delivered solid top and bottom line performance. We continue to focus on delivering value to consumers and carefully managing our expenses all part of retail excellence. On a consolidated basis, revenue grew by 2.9%, adjusted EBITDA increased by 9.3%, and adjusted earnings per share grew by 25.2% to $1.69 a share. Our gap earnings reflect a charge of $111 million associated with a recent tax court ruling relating to the deductibility of certain loyalty-related expenses over the last 13 years. We are planning to appeal the ruling. In drug retail, absolute sales increased 7%. Same-store sales were strong, up 5.6%, lapping an increase of 9.6% last year. Front-store same-store sales grew by 5.2%. We continue to see an acceleration in sales growth in our higher-margin categories led by OTC and cosmetics. Sales in beauty and cosmetics are essentially back to pre-pandemic levels. Pharmacy same-store sales grew 6.1%. Although we are seeing an acceleration in both acute and chronic prescription volumes, we have not yet caught up to normal levels. Once again, growth in our pharmacy services business was strong, with all major categories showing double-digit growth. Pharmacy services now include our LifeMark business, which closed on May 10th, contributing $40 million in sales. In food retail, absolute sales increased 1.2% and same-store sales grew 0.9%. Performance in our discount banners continue to strengthen, reflecting an ongoing shift in favor of discounts. As part of our store network optimization initiative, we now have five stores that have been converted from market to discount and have downsized one market store. We are pleased to report that all such projects are performing ahead of plans on sales and therefore are contributing to earnings. Our market banners remain strong and continue to perform well. A great in-store offer enhanced by optimized promotion using our data have led to positive traffic trends and solid sales. Online sales in the quarter decreased by 17.5%. However, our online business continues to operate at penetration levels well above pre-COVID rates. We are seeing consistent, stable operational performance in pickup and growth in delivery. We are delighted with our launch of PC Express Rapid Delivery through a collaboration with DoorDash. The service will launch in Q3 and will not represent a headwind to earnings. Retail gross margin in Q2 was 31.4%, up 50 basis points compared to last year, driven by our drug retail business. Higher margin front store categories, particularly cosmetics, grew substantially as customers returned to offices and social settings. Margins also benefited from growth in pharmacy services, with COVID-related services remaining strong. Growth margin performance in food retail was stable. Our unique data lets our merchants set more strategic pricing and promotion levels. With grocery inflation as it is, this is an important balancing act. As our results today and for the last quarter show, our businesses are doing well and remain profitable. They also show that this improved performance has resulted from the return of customers to our higher margin beauty and drug businesses, and the fact that increased pandemic costs are slowly going away. Retail SG&E as a percentage of sales was 19.9%, an improvement of 30 basis points compared to last year. We lapped higher COVID costs in the prior year and continued to benefit from sales leverage, food to drug sales mix, and operating efficiencies. This was partially offset by higher labor costs across the network. Adjusted retail EBITDA increased by $129 million, or 9.8% in the quarter, yielding a margin of 11.4%. We were pleased with PC Financial's performance in the quarter. Revenue was up $25 million, driven by higher interchange and interest income, with a broad-based increase in customer spending. Contribution to adjusted EBITDA from the bank was flat as we lapped last year's gain related to reversal and expected credit losses reserves and saw higher point costs due to higher PC point redemption. On a consolidated basis, adjusted EBITDA margin was 11.7% in the quarter, up 70 basis points compared to last year. In Q2, we repurchased $607 million worth of common shares representing 5.4 million shares. This brings year-to-date purchases to $755 million. Looking ahead, macro factors continue to make forecasting challenging. We are seeing signs that inflation as or will soon peak. As such, we expect inflation to moderate in the second half of the year as we begin to lap higher levels from last year. Commodity prices are coming off their highs, some freight costs are coming down, and supply chain issues are normalizing other than fuel costs which remain high but down from their peaks of last March. Finally, central banks are taking aggressive actions to tame inflation. Today, we announced an increase in our full-year outlook. Based on our year-to-date operating and financial performance and momentum exiting the second quarter, we now expect full-year adjusted earnings per share growth in the mid to high teens. We have just cycled the first quarter of our 2021 strategic reset Delivering growth of 25% in EPS this quarter on top of 88% in the same quarter last year is beginning to demonstrate that our plan is working. Our focus on retail excellence is delivering strong and consistent financial results. While the environment remains volatile, Loblaw is well positioned for what is expected going forward. I will now turn the call over to Galen.