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Edited Transcript of WN.TO earnings conference call or presentation 26-Jul-19 1:00pm GMT

Q2 2019 George Weston Ltd Earnings Call

Toronto Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of George Weston Ltd earnings conference call or presentation Friday, July 26, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Galen G. Weston

George Weston Limited - Chairman & CEO

* Luc Mongeau

Weston Foods (Canada) Inc. - President

* Richard Dufresne

George Weston Limited - President & CFO

* Tara Speers

George Weston Limited - Senior Director of IR

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Conference Call Participants

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* Irene Ora Nattel

RBC Capital Markets, LLC, Research Division - MD of Global Equity Research

* James G. Allison

Barclays Bank PLC, Research Division - Research Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Patricia A. Baker

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the George Weston Limited 2019 Second Quarter Results Conference Call. (Operator Instructions) Thank you.

Tara Speers, Senior Director, Investor Relations, you may begin your conference.

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Tara Speers, George Weston Limited - Senior Director of IR [2]

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Thank you, Denise, and good morning, everyone. Welcome to the George Weston Limited Second Quarter 2019 Results Conference Call. This morning, I'm joined by Galen Weston, our Chairman and CEO; Richard Dufresne, our President and CFO; Luc Mongeau, President of Weston Foods; and Roy MacDonald, Vice President of Investor Relations.

Before we begin today's call, I want to remind you that today's discussion will include forward-looking statements such as the company's beliefs and expectations regarding certain aspects of its financial performance in 2019 and future years. 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 risks and uncertainties are discussed in the company's materials filed with the Canadian regulators. Any forward-looking statements speak only as of the date they are 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 is required by law. Also certain non-GAAP financial measures may be discussed or referred to today. 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 GAAP financial measures.

And since Loblaw Companies Limited and Choice Properties have both released their second quarter results, we will focus today's call on the performance of our Weston Foods segment.

With that, I would like to turn the call over to Richard.

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Richard Dufresne, George Weston Limited - President & CFO [3]

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Thank you, and good morning, everyone. Before I begin, I would like to welcome Tara to her first call with George Weston Limited. Tara joins our group as Senior Director of Investor Relations and will be working closely with Roy, whom you all know well. Tara brings a depth of experience, most recently with OPTrust and before that, at Brookfield Asset Management. We are delighted to have her as part of our team. Welcome, Tara.

Now let me turn to the second quarter results for George Weston Limited, which we released earlier today. In the second quarter, on a consolidated basis, George Weston Limited reported revenues of $11.6 billion, an increase of 3.2% compared to last year. Net earnings available to common shareholders were $184 million compared to net earnings of $28 million last year, an increase of $156 million. The increase was mainly attributable to the improvements of $53 million in the underlying operating performance of the company and the favorable year-over-year net impact of adjusting items to remain just north of $100 million.

Adjusted net earnings available to common shareholders increased by $53 million or 25% to $263 million mainly driven by improvements in operating performance at Loblaw and Choice Properties and from the positive contribution of the company's direct ownership in Choice Properties and the increased ownership in Loblaw as a result of share repurchases.

We reported adjusted diluted net earnings per share of $1.70, an increase of $0.07 per share or 4.3% compared to last year. Net earnings per share include the dilutive impact of the company's issuance of common shares relating to the spinout of Loblaw's interest in Choice Properties. IFRS 16 had a nominal impact on net earnings and net earnings per share.

Loblaw delivered on its financial framework and continued to invest in innovation during the quarter. The drug retail business had a strong quarter, while the food retail business sales performance was below expectation. Management is very committed to its strategy using data-driven insights to make targeted and measured investments to improve the growth rate of its food business. The company continued to deliver gains from its process and efficiency initiatives and continued to accelerate its investment in strategic growth pillars. For its buyback program, Loblaw repurchased approximately 3.6 million shares at a cost of $250 million.

Choice Properties delivered solid operating and financial results. Some of the key themes of Choice's strategy include a focus on high-quality assets, a strong balance sheet and development as a source of long-term growth. As such, in the quarter, Choice capitalized on the opportunity to raise equity as its unit price is trading above NAV. Proceeds were used to pay down some debt and further strengthen its balance sheet. In addition, Choice refinanced $750 million of debt through the issuance of secured debentures -- unsecured debentures.

Weston Foods performed in line with expectations during the quarter. Sales totaled $479 million, up 2.4% versus last year despite the continued impact of product rationalization and the lapping of sales loss from key customers in 2018. Weston Foods' adjusted EBITDA in the quarter was $49 million, an increase of $2 million compared with the same period in 2018. Normalized for the $3 million positive impact of IFRS 16, adjusted EBITDA increased by $1 million. Adjusted EBITDA is negatively impacted by higher input and distribution costs, partially offset by productivity improvements and the net benefits realized from Weston Foods' transformation program.

During the quarter, Weston Foods delivered on its plan as it continues to stabilize. Weston Foods demonstrated momentum as the quarter marked positive sales growth year-over-year. Management is delivering cost savings and improving operational metrics. In the first half of 2019, Weston Foods completed the first phase of the rollout of SAP to ACE without disruption to the business or its customers. Across Weston Foods, the team continues to improve operations, meeting sales forecasts and earning new business in growth categories.

Our 2019 full year outlook for Weston Foods remains unchanged. We are encouraged by the progress to date, but there's still work to be done. As we look at the second half of the year, we are confident that narrowing our intrinsic value gap at George Weston and driving shareholder returns will be based on the continued strong performance of Loblaw and Choice and the return to prominence at Weston Foods. The 3 pillars of George Weston Limited and the long-term strategies of each business remain very compelling.

I would now like to turn the call over to Galen.

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Galen G. Weston, George Weston Limited - Chairman & CEO [4]

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Thank you, Richard. Q2 was another solid quarter for George Weston Limited. Each of our businesses delivered against its financial plan as we continued to work in close partnership with each of them to create shareholder value over the long term. Loblaw delivered good results and continued to invest in innovation despite lower-than-expected same-store sales growth in its grocery business. We're pleased with the excellent progress the company made on each of its 3 growth strategies in the quarter.

In real estate, Choice Properties' operating and financial results were also in line. At the same time, management made significant improvements to its balance sheet during the quarter as part of a deliberate strategy to establish the right foundation for future growth.

And finally, Weston Foods continue to stabilize. The strategy is working as management delivers on the transformation program and continues to build sales momentum. Looking forward, our outlook for the balance of the year is unchanged.

I'll now ask the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Irene Nattel with RBC Capital Markets.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [2]

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Just looking at Weston Foods, nice to see positive sales. Can you talk a little bit more -- give us more color around where you're seeing that momentum being rebuilt? What we should kind of be expecting as we move through the back half of the year? And really what the key elements are to just sort of finally see actual positive growth momentum being sustained?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [3]

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The momentum that we're seeing is beyond our investment areas. So doughnuts are doing very well. Our frozen breads, our alternatives, mainly tortillas and bagel, are doing well behind strengthened relationships with key retailers across Canada and U.S. and the continued development of our foodservice business with leading players across Canada and the U.S.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [4]

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And in terms of the doughnuts, is that primarily in retail? Or are you starting to see some more traction in foodservice?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [5]

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Yes, it's across both actually.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [6]

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And in terms of the pursuit of innovation, particularly on the doughnut side, where are you in that trajectory?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [7]

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Yes. We're a leading player in this area in North America. We work very closely with retailers and foodservice operators to ensure we bring the best doughnuts to the consumers across North America. As you know, the -- when we kicked off our transformation program 2 years ago, there was a cost saving component to this, but it was as well an investment area -- investment focus in key areas. One of these areas was the formation of a leading R&D capability, which now allows us to work on innovation in key areas of investment.

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Irene Ora Nattel, RBC Capital Markets, LLC, Research Division - MD of Global Equity Research [8]

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And presumably, this is a key differentiator and is enabling you to gain some volume?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [9]

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Yes. Definitely. That combined with investment and superior consumer shopper insights and a strengthened sales team.

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Operator [10]

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Your next question comes from Mark Petrie with CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [11]

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You're calling out higher input costs again. We are seeing accelerating inflation in the bread category in Canada without maybe as much move on the cost of goods side. So I know you took price around the end of 2018, but can you just sort of speak to the dynamics in the market today regarding pricing and relative competition? And where has there been opportunities to take price? And where might it still be a bit more competitive?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [12]

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Yes. You're right on both counts. So we did take pricing successfully in 2018. We took some pricing as well successfully in early 2019. There is inflation across all input costs that continues. We're seeing a lot of inflation in foods and in packaging as well. But as always, we work very closely with both suppliers and customers to ensure we can drive as much productivity across the board to ensure we mitigate any potential inflation.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [13]

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And so would it be your expectation then that you're going to be able to have a better balance just in -- cost relative to price in the second half? Or is that a 2020 sort of target? Or how are you looking at that?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [14]

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Yes. We don't comment in any pricing action. As I mentioned, we continue to work very aggressively on productivity initiatives.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [15]

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Okay. And could you just contrast the dynamics in the U.S. with Canada?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [16]

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Inflation is very similar on both side of the border.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [17]

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And then the pricing dynamics?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [18]

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Very similar as well.

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Operator [19]

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Your next question comes from Patricia Baker with Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Richard, in your opening remarks, you referred to addressing the intrinsic value gap at Weston Foods. I find that intriguing. Can you talk a little bit more about what -- how you define that and how big that gap is and what we could be looking for there?

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Richard Dufresne, George Weston Limited - President & CFO [21]

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Yes. Actually, I was referring to the intrinsic value gap in George Weston Limited stock.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Oh, then I misheard you. So I think I know the complete answer to that question. But is there a value gap on the Weston Foods side?

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Richard Dufresne, George Weston Limited - President & CFO [23]

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There is, like it's pure math, Patricia, like you just take out Loblaw and try to figure out what the number is. But like the way you're looking at it, we look at the sum of the parts of all of our pieces, and we look at where our stock trades, and that's what we are focused on. And so our view is as our businesses continue to drive performance and that -- especially like when people is going to believe that we're getting traction in our bakery business, that ultimately we see the value gap shrink. And so that's what we're working hard on.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [24]

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Okay. So let's talk about getting traction in the baking business, and I know you don't give specific guidance. But can you talk just generally or more broadly about when that baking business is optimized, what kind of margin level could we certainly be looking at? I mean obviously we'd be looking at higher double-digit margins in the baking business ultimately.

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Richard Dufresne, George Weston Limited - President & CFO [25]

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So Patricia, like the way we're looking at this is 2019 is a year where we want to stabilize the business. And there's a lot of work to do to get that done, and we feel we're getting traction on that. Like obviously, we have plans for the upcoming years but for now, focus is on stabilizing the business. Once we've done that, management will start to sort of build plans to drive growth for the upcoming years. But we remain really focused on the plan that we have now, and we will talk about the future when we get there.

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Operator [26]

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(Operator Instructions) Your next question comes from James Allison with Barclays.

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James G. Allison, Barclays Bank PLC, Research Division - Research Analyst [27]

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Did the shift of Easter later into Q2 have a material impact on volumes in the quarter? And if so can you quantify that for us?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [28]

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No.

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James G. Allison, Barclays Bank PLC, Research Division - Research Analyst [29]

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Okay. Great. And do you have a sense on when you expect to complete the balance of your SKU rationalization that you put on hold at the end of last year?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [30]

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Yes. We'll complete the SKU discontinuation over the course of the next 18 months.

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James G. Allison, Barclays Bank PLC, Research Division - Research Analyst [31]

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Okay. And just finally, have you now fully lapped the impact of the loss of a key customer last year? Or do you expect to see kind of the trailing headwinds into the second half of this year?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [32]

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We just lapped the lost business.

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Operator [33]

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There are no further questions at this time. I'll turn the call back over to Tara Speers.

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Tara Speers, George Weston Limited - Senior Director of IR [34]

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Thank you, Denise, and thank you, everyone, for joining us this morning. If you have any follow-up questions, please don't hesitate to contact Roy or myself. And please mark your calendars for November 19 when we will report our Q3 2019 results.

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Operator [35]

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This concludes today's conference call. You may now disconnect.