Q2 2006 Jean Coutu Group (PJC) Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: (translated) Good morning, ladies and gentlemen. Welcome to the Jean Coutu Group conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Michael Murray. Go ahead, Mr. Murray.

MICHAEL MURRAY, IR, JEAN COUTU GROUP: Good morning, ladies and gentlemen. Welcome to the Jean Coutu Group second-quarter 2006 conference call. Our earnings release was put on the wire earlier this morning at 6:30 AM Eastern time and was then posted on our website. The press release is accompanied by additional financial information and we will refer to the quarterly results slide presentation and the MD&A during this call. The press release and MD&A are also being made available on SEDAR and EDGAR.

Here with me are Mr. Jean Coutu, Chairman, President and CEO; Francois Coutu, President of Canadian Operations and Vice Chairman of the Company; Pierre Legault, Executive Vice President; Michel Coutu, President of U.S. Operations; Andre Belzile, Senior VP Finance and Corporate Affairs and Helene Bisson, Director of Public Relations.

Mr. Jean Coutu will present the Company's consolidated financial results and discuss key operating highlights. Francois Coutu will present the Canadian results and review of operations followed by Michel Coutu who will present the U.S. results and a review of operations. Andre Belzile will then discuss financial issues. This will be followed by a question-and-answer period for analysts only. I would ask the analysts to limit yourself to only one question and any related follow-up at a time so as to allow us time to address as many different questions as possible. Media are invited to contact Madame Bisson for comment or interview purposes.

All reported numbers in this conference are denominated in U.S. dollars unless specified otherwise. Also we would like to remind listeners that the Company's forward-looking statement disclaimer applies to all our communications. Now Mr. Coutue will begin his presentation.

JEAN COUTU, CHAIRMAN, PRESIDENT & CEO, JEAN COUTU GROUP: Thank you, Michael. I will now report on our progress in the second-quarter results highlights. But before, I would like to offer to every one of you a very happy new year and fulfill all your desires for 2006 and as we say sometimes in French you know, and paradise at the end of your days. But I know nobody is very anxious to reach there right away.

Let me start with saying that I am pleased report to you this quarter as President and CEO of the Company where Francois's President of our Canadian operation and Vice Chairman of the Group Jean Coutu and Michael and my son Michel as President of the U.S. operation. At the same time, I welcome Mr. Pierre Legault, Executive Vice President who is participating in our quarterly conference call for the first time.

I consider our second-quarter results a marked improvement over the results of the first quarter. Here are some highlights. First, we closed the sale of 30 Canadian commercial strip malls during the quarter generating 94 million in proceeds, which was used to repay a portion of our senior secured indebtedness. A pre-tax gain on the disposal of 20.9 million has been recorded and even though only 41% of the leasable area sold represents a leaseback portion, the gain is deferred over the average life of the new leases of 16 years as per GAAP.

Second, the last quarter was the first comparable quarter with Eckerd operations since last year's acquisition. We are pleased to report earlier in December that November same-store sales growth improved in our U.S. network.

Finally, the supply chain issues we faced in our U.S. network during the quarter continued to be addressed and we have made significant progress toward achieving historical service levels to the store.

Turning to the next slide, revenues for this second quarter at a little over 2.7 billion means an increase of 13 million over Q2 2005 and an increase of 26 million over Q1 2006. We operated the Eckerd drugstore for the full quarter in all of these periods. First, [net] revenue increased to 5.4 billion from 4 billion exactly in fiscal 2005. The increase reflects the fact that we operated Eckerd for the full first half this year compared to only four months last year.

Our gross margin continued to progress at 23.5 in Q2 compared to 23.4 in the previous quarter and 22.6 in Q2 of fiscal year 2005. Our operating income before amortization has also improved at 125 million compared to 117 million for the same quarter last year and 104 million in the first quarter this year. The second-quarter 2006 net earnings were 30.8 million or $0.12 per share compared with a loss of 4 million or -$0.02 per share for the same period last year and net earnings of 11.1 million or $0.04 per share in the first quarter of fiscal 2006. First-half net earnings were 41.9 million or $0.16 per share compared to 18.3 million or $0.07 per share for the same period last year.

Looking at the table on the next page you can see that second-quarter OIBA from our franchising operation in Canada amounted to 43 million. Whereas it amounted to 82.1 million for our retail sales operation in the United States. These segment results show good improvement over last year and the first quarter of this year.

The next slide shows the various components in second-quarter OIBA year-over-year. The decline in revenues at last year gross margin had a 5.6 million impact on OIBA in the last quarter. Bear in mind that there was a 2.5 decrease in our store count this year. Over the past year, we have managed gross margin will increase to 23.5 this quarter from 22.6 in quarter two of 2005 resulting in 30.3 million increase in quarterly OIBA.

On the other hand, our operating expenses increased by 18.7 million compared to the same quarter of last year but it actually declined significantly in the U.S. from the first quarter of this year. Michel will talk about it a little later during this call.

The strengthening of the Canadian dollar by 5.5% since last year had also a favorable impact of 2.1 million on the contribution from our Canadian operation. Now I am pleased to let Francois continue and present to you the Canadian results and review of operations. Thank you.

FRANCOIS COUTU, PRESIDENT OF CANADIAN OPERATIONS, VICE CHAIRMAN, JEAN COUTU GROUP: Thank you and good morning, everyone. In the last quarter, we inaugurated our new Ontario warehouse operation with the distribution of cosmetic products. As previously announced, we intend also to manage imports from this new distribution center in the future. Also, we will be the first Canadian retailer to offer instant in-store air miles reward redemption later this month. Our customers will be able to exchange their rewards for PJC Jean Coutu gift cards at our drugstores. We see this as a great opportunity to increase sales in our network of franchise stores while strengthening customer loyalty. We continue to invest in the PJC network with several new relocated, renovated and expanded drugstores already opened to date and more to come for the balance of fiscal 2006.

On the next slide you'll note that our revenues denominated in Canadian dollars increased from 456 million in the second quarter of last year to 488 million this year. The OIBA margin improved from 10.2% in quarter two of fiscal 2005 to 10.4 this year.

Next slide shows that our Canadian distribution center sales are up year-over-year from 407 million to 437 million while our margins are slightly lower when compared with Q2 of last year.

The following slide is a graphic summary of sales growth for the PJC network. We had a good quarter on the sales front in Canada. Our pharmacy sales increased 6.9% while front-end sales increased 1.2%. Overall, same-store sales increased 4.8% in the second quarter of fiscal 2006. For the first half of fiscal 2006, pharmacy sales increased 6.2% while front-end sales increased 1.3%. Overall, same-store sales increased 4.2 in the first half.

In conclusion, we have made good progress in Canada this quarter and during the first half of this year. Thank you and Michel will now discuss U.S. results and the review of operations.

MICHEL COUTU, PRESIDENT OF U.S. OPERATIONS, JEAN COUTU GROUP: Thank you, Francois. Here are some Q2 highlights for the U.S. network. Total sales for the quarter on a same-store basis decreased by 0.4% driven by a 0.4% increase in pharmacy sales and a 2.8% decrease in the front end. However, November same-store sales increased 2% with pharmacy up 1.7% and the front end up 2.8%. December same-store sales figure will be released early next week.

We have said to you that we want to grow our sales profitably. …