Loblaw Companies Limited

Good morning, ladies and gentlemen, and welcome to the Law of Law Company's limited third quarter 2022 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we'll 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 16, 2022. I would now like to turn the conference over to Roy McDonald. Please go ahead.

Great. Thank you very much, Colin, and good morning, everybody. Welcome to our third quarter 2022 conference call. I'm joined in the room this morning by Galen Weston, our chairman of president, and by Richard Dufresne, our chief financial officer. And before we begin the call, I'll 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. 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 expectation. 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. 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 is required by law. Also, certain non-GAAP financial measures may be discussed and referred to today. Please refer to our annual report and other financial materials filed with the 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. In Q3, we delivered another quarter of steady operational and financial performance, reflecting our focus on our core retail businesses. Our strong value offering, best-in-class loyalty program, and leading food and drug retail businesses continue to position us well in a challenging marketplace. On a consolidated basis, revenue grew by 8.3%, adjusted EBITDA increased by 10.3%, and adjusted earnings per share grew by 26.4% to $2.01 a share. In drug retail, absolute sales increased 10.3%, and same-store sales grew 7.7%, lapping an increase of 4.4% last year. Front-store same-store sales grew by 10.7%. We continue to see strong growth in margin accretive categories like cosmetics and OTC, which are both showing double-digit growth. Again, this quarter, front store sales drove Loblaw's gross margin improvement. Pharmacy same-store sales grew 4.7%. Acute and chronic prescription volumes are continuing to show steady growth and are approaching pre-pandemic levels. Pharmacy services have seen demand for COVID vaccines and testing slow versus last year, while core pharmacy services like med reviews have rebounded. All in all, services are on track to deliver similar performance to last year's record sales. In food retail, absolute sales increased 7.4% and same-store sales grew 6.9%, led by the strength of our discount banners. in fact we are pleased with our performance across all our banners and our market share improved over the quarter performance in our discount banners continued to strengthen as market share and traffic improved year over year we continue to see a larger share of wallets spent in our discount banners although not included in our same store sale numbers we are very excited about the performance of the seven stores that have been converted from market to discount in quebec four more are opening over the next few weeks Having the right customer offer in each trading area remains a key priority. The macro environment is favoring our discount banners, but our market banners are also delivering strong results and outperforming their conventional peer group. This is evidence that our value proposition is resonating. In fruit retail, our right-hand side had a negative impact on same-store sales of 120 basis points. Having said that, our inventory levels in those categories remain healthy. Online sales in the quarter increased 3%, lapping flat growth last year and 175% sales growth in Q3 of 2020. We are pleased with our online penetration rates, which are trending well above pre-pandemic levels, even as customers return to in-store shopping. Retail growth margin in Q3 was 30.8%, up 10 basis points compared to last year, driven by continued strength in the higher margin mix of cosmetics and OTC categories in our drug retail businesses. Gross margin performance in food retail was flat. A strong private label offering and promotional effectiveness enabled us to balance value and deliver sustainable performance. In light of our strong bottom line result this quarter, I thought it might be helpful if I commented in a bit more detail on how inflation has impacted our performance. First and foremost, the pressure on cost is more significant than anything I've seen in my career. and it's translating to increased prices everywhere, particularly in food. This is a global issue facing all countries and all sectors, and policymakers around the world are doing what they can to bring it under control. When it comes to food prices, we know Canada is doing better than most with some of the lowest inflation in the G7, but that is no comfort for customers who are paying over 10% more for their essentials than they were just 12 months ago. At Loblaw, we're taking active measures to combat the pressure on behalf of our customers. And it's important to keep in mind that the levers available to us are limited. We are a food distributor. We buy goods from suppliers and then sell them to customers. So we are largely dependent on what suppliers ask us to pay for their products. Suppliers determine the cost and we determine the retail prices. We have seen unprecedented cost increases from our suppliers this year, this year and we continue to receive new cost increases. Part of our job is to evaluate these and push back where they do not make sense. We have done that vigorously over the last two years and will continue to do so going forward. Our objective is to make sure that our price on the shelf do not rise faster than supplier costs. Gross margin is an important measure we track to ensure we are delivering on that goal. We watch it very closely. In every quarter since inflation took off last summer, gross margins in food have been essentially flat. This gives us the confidence to say categorically that retail prices are not growing faster than cost and the company is not taking advantage of inflation to drive profit. In fact, we remain focused on finding ways to provide the best value to Canadians and continue to make investments in lower prices. We measure our success every day at the checkout counter. And our strong sales and market share performance this quarter are a clear indication that our efforts are resonating with customers. Retail at G&E as a percentage of sales was 20.3%, an improvement of 20 basis points compared to last year. Adjusted retail EBITDA increased by $175 million, or 10.8% in the quarter, yielding a margin of 10.5%. We were pleased with PC's financial performance. Revenue was up $53 million, driven by higher interchange and interest income that resulted from a broad-based increase in customer spending. Contribution to adjusted EBITDA from the bank was flat. In addition to operating costs increasing on an improvement in consumer activity, we continue to see credit losses normalized through our pre-pandemic levels, and we increased our credit loss provision to reflect the macroeconomic outlook. On a consolidated basis, adjusted EBITDA margin was 10.6% in the quarter, up 20 basis points compared to last year. In Q3, we repurchased $403 million worth of common shares, representing 3.4 million shares. This brings year-to-date purchases to $1.2 billion. We are confirming our full year outlook at the higher end of the range we provided last quarter. I'm pleased with our performance again this quarter. With our focus on retail excellence, we continue to deliver consistent operational and financial performance. I will now turn the call over to Galen.