Loblaw Companies Limited

Good morning, ladies and gentlemen, and welcome to the Loblaw Companies Limited second quarter 2023 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 on Wednesday, July 26, 2023. I would now like to turn the conference over to Roy McDonald. Please go ahead.

Thank you, Michelle. Good morning, everybody. Welcome to the Loblaw Company's limited second quarter 2023 results call. As always, I'm joined this morning in the room with Galen Weston, our chairman and president, and with 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 Lovelace anticipated future results. These statements are based on assumptions and reflect management's current expectations and 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 this morning. 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 results, 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 gap 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 we continue to deliver consistent operational and financial results with solid top-line performance and strong earnings growth. We remain focused on delivering value to consumers and carefully managing our expenses, all part of retail excellence. On a consolidated basis, revenue grew by 6.9% and EBITDA increased by 9.4%. Adjusted earnings per share grew by 14.8% to $1.94 a share. On a gap basis, our earnings per share reflected a 36% increase. This was unusually high as we lapped a $100 million one-time charge last year, specifically related to PC Bank. In drug retail, absolute sales increased 7.4%, and same-store sales grew 5.7%. Front-store same-store sales grew by 5% on continued strength in cosmetics and health and beauty. OTC performance remained strong, but off its peak levels. Similarly, growth in our drug business has moderated as it lapsed last year's post-pandemic reopening. Pharmacy same-store sales grew 6.3%, driven by growth in acute and chronic scripts, partially offset by lower COVID vaccines and testing. At the same time, we're pleased with the growth of services related to expanded scope of practice. In food retail, absolute sales increased 6.4%, and same-store sales grew 6.1%. In Q2, our internal food inflation number was generally in line with the CPI. However, shoppers in our grocery stores actually beat inflation by taking advantage of our pricing, private brands, and hard discount stores. That means that our Loblaw shoppers experience a lower rate of inflation than CPI. As we battle inflation, we remain highly concerned about ongoing cost increases. And I wanted to offer some facts. This year, suppliers have raised the price we pay for products by more than $1 billion. This is double what we would expect normally. We have received double-digit increases from the same suppliers who gave us double-digit increases last year. That's why you see products that are noticeably more expensive than they were just a couple of years ago. While cost increases are coming in from all tiers of our supplier base, the largest global brands stand out. Let me give you an example. Since inflation began, one of our largest vendors submitted price increases totaling 50% or a quarter billion dollars. That's just one supplier. Here's another good illustration. In Q2, the average price for meat, fruit and vegetable purchased in our stores were up in the mid single digits. But the average purchase in the center of store where you find the biggest brands was up in the double digits. At the same time, our food profit margins have declined as our costs have grown faster than our prices. The math is very simple. Cost increases from big brands were well above Canada's food inflation and our food margin declined. Suggestions of grosser profitability just don't add up. Food inflation is a global problem. The causes range from climate change to war. We know that some cost increases are justified, but many are not. The price of transportation, wheat, flour, paper, and plastic are all well off 2022 highs. Our teams are actively reaching out to our largest suppliers, pressing for cost decreases based on these facts. With lowered costs, we will lower prices. Returning to our performance, our ability to deliver value was reflected across our food business. Our hard discount banners continue to outperform the overall discount channel. delivering strong traffic and item count growth as customers continue to focus on value offerings. And in Quebec, our discount position continues to grow. We converted 10 Prodigal stores to Maxi in the quarter, and we will convert another 10 stores in Q3. We continue to be very pleased with the sale growth being generated from these converted stores. Our market banners remain healthy despite the ongoing shift to discount stores. Having the right customer offer in all our stores remains a key focus. Right-hand side posted a solid quarter with all major categories delivering positive same-store sale and apparel outpacing food same-store sale. That said, net-net, it remains a drag on our same-store sale performance to the 260 basis points in the quarter. We remain comfortable with our inventory levels. Online sales in the quarter increased 13.9%, reflecting the strength of our digital businesses as we lap our first post-COVID quarter. Growth was led by PCX delivery and online pharmacy. We continue to enhance our customer experience and differentiate ourselves by offering more choice and flexibility. Retail gross margin was 31.1%, down 30 basis points compared to last year. The driving factor was higher shrink in drug, where we also saw pressure from lower services revenue. In food, we controlled costs well, investing our savings into lower prices. Across our retail segment, another quarter of careful cost management resulted in an improvement of 60 basis points in our SG&E rate as a percentage of sales. Adjusted retail EBITDA increased by $142 million, or 9.8% in the quarter, yielding a margin of 11.8%, up 40 basis points compared to last year. BC Financial adjusted earnings before tax declined by $22 million, largely a function of increased net credit losses and loss provisions and higher interest rates this year. The top-line business performance remains in line with our expectations, with revenue up $51 million driven by higher interest income and an increase in consumer spending. On a consolidated basis, adjusted EBITDA margin was 11.9% in the quarter, up 20 basis points compared to last year. Our retail pre-cash flow was $600 million in Q2, reflecting higher capex spend and lapping one-time tax recoveries from last year. In the quarter, we repurchased $500 million worth of common shares. Looking ahead, our second half same-store sale will reflect comparisons against our very strong sales performance last year in both food and drugs. At the bank, we expect continued revenue growth from the growth in our portfolio, and we expect to see ongoing pressure on credit loss provisions given current economic forecasts. However, we remain confident in our ability to deliver our full-year outlook. I will now turn the call over to Galen.