Loblaw Companies Limited

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Pueblo Companies Limited third 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, November 15, 2023. I would now like to turn the conference over to Roy McDonald. Please go ahead.

Great. Thanks very much, and good morning, everybody. I apologize for the late start, but we have quite a few people texting these things. They're waiting to get on the line, but it looks like we're all here now. So welcome to Lovelace Company Limited's third quarter 2023 results conference call. I'm joined in the room this morning by Galen Weston, our chairman, and Richard Dufresne, our chief financial officer. 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 made with respect to LABLA'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 expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian Securities Regulator. And 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 community 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. I'm very pleased to report that we continue to deliver consistent operational and financial results with both strong top-line performance and earnings growth. Our business performance continues to be very healthy and our financials in line with our financial framework. This is notable given that we are lapping an extremely strong second half last year where EBITDA grew by double digits in both Q3 and Q4. That period was also characterized by high double-digit margin and earnings growth and record sales level in both our food and drug retail businesses. We accomplished this by remaining focused on delivering value to consumers, carefully managing our expenses, and investing for the future. On a consolidated basis, revenue grew by 5% and EBITDA increased by 4.3%. Adjusted earnings per share grew by 12.4% to $2.26 a share. In drug retail, absolute sales increased 4.7% and same-store sales grew 4.6%. Front-store same-store sales grew by 1.8% on continued strength in cosmetics and health and beauty. OTC sales remained strong, but were off from peak levels. Overall growth in our front-store moderated as we lapped the strength experienced last year. Pharmacy same-store sales grew 7.4%, driven by growth in acute and chronic prescriptions, including strong growth in specialty drugs. At the same time, we're pleased with the growth of services related to expanded scope of practice. These services doubled in the quarter compared to last year, helping to offset lower COVID vaccines and testing. In food retail, absolute sales increased 5.1%, and same-store sales grew 4.5%. Customers are finding value in our stores demonstrated by higher traffic, unit growth, and positive market share momentum. We delivered positive tonnage growth in the quarter. Our internal food inflation number was lower than food CPI. In fact, our actual inflation on food items as measured at our checkouts was significantly lower than food CPI, clearly demonstrating the role we are playing to help stabilize food prices for our customers. Since January, food inflation in Canada has been falling rapidly and consistently. While Canada continues to see lower food inflation than most of the world, we know that rising food prices have a real impact on Canadians and their families. Loblaw continues to invest to keep prices lower in our stores. The decrease in our food margin is evidence that our costs continue to grow faster than our prices. As we continue to do our part to fight inflation, we remain concerned about the level of commitment to this cause from some of our suppliers. Without the support of suppliers, it will be difficult for the industry to sustain the current momentum of falling food inflation. With lower supplier costs, we can lower prices on the shelf for customers. Unfortunately, several large global suppliers are still coming with higher than expected cost increases for next year. Returning to our performance, our ability to deliver value was reflected across our food business. Our hard discount banners continue to outperform, delivering higher traffic, increased tonnage, and market share growth. The strength of our discount offering across the country is evident as consumers continue to migrate their shop to hard discount stores. In Quebec, our discount position continues to grow. We converted seven Prodigo stores to Maxi in the quarter, bringing our total to 18 so far this year, and we'll add six more in Q4. We continue to be very pleased with the higher-than-expected sales growth being generated from these converted stores. We believe the outperformance of our discount stores will continue as Canadians continue to seek value to help manage through the challenges of this extended period of high inflation and economic uncertainty. Our market banners remain healthy, despite the ongoing shift to discount stores. Within the conventional market, our market banners gain share against their peers. Having the right customer offer in all our stores remains a key focus. A great example is our home meal replacement offering, where sales grew into double digits as customers continued to look for more affordable alternatives to eating out. Right-hand side was a drag on our same-store sale performance to the tune of 80 basis points this quarter. These categories remain accretive to our gross margin, and we continue to carefully manage inventory levels. Online sales in the quarter increased 13.6%, reflecting the strength of our digital businesses. 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. Total retail gross margin was 30.6%, down 20 basis points compared to last year. Gross margin was down in both food and drugs, but the driving factor was higher shrink in drugs. We are taking steps to address shrink across our businesses, and it's working. As expected, we saw sequential improvements in shrink from the second quarter. That said, we continue to invest in stores and in labor, and work with law enforcement to help reduce the impact of organized crime on our colleagues and customers. This surge in organized retail crime remains a significant problem for the retail industry. These are sophisticated organizations that are increasingly using violent tactics and complex networks to steal and sell stolen goods for profit. Turning to SG&E, our spend rate as a percentage of sales was flat compared to last year, driven by investment decisions we are making for the future. Positive operating leverage in our retail business offset our importer investments in store conversions and efficiency initiatives that will benefit us next year. These costs total approximately $50 million and a quarter. Adjusted retail EBITDA increased by $61 million, yielding a margin of 10.3%, down 20 basis points compared to last year. The quarter saw solid performance at the bank. PC Financial's revenue increased 8.3%, driven by growth in the credit card portfolio. Earnings before tax increased 15.8% on higher interest income, which was partially offset by higher credit losses and loss provisions. Our effective tax rate was positively impacted by the expiry of prior tax reassessment periods that allowed us to reverse certain tax provisions. On a consolidated basis, adjusted EBITDA margin was 10.5% in the quarter, down 10 basis points compared to last year. Our retail free cash flow was $663 million, and we repurchased $341 million worth of shares in the quarter. The bottom line is that last year in Q3, we delivered 8% of top-line growth, 10% of EBITDA growth, and 26% of EPS growth. This year, we invested $50 million to drive future performance, gain share, and still grew EPS 12%. All of our businesses are healthy, and we remain confident in our ability to deliver our full-year outlook. I'll now turn the call over to Galen.