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Edited Transcript of WN.TO earnings conference call or presentation 7-May-19 1:00pm GMT

Q1 2019 George Weston Ltd Earnings Call

Toronto May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of George Weston Ltd earnings conference call or presentation Tuesday, May 7, 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

* Roy MacDonald

George Weston Limited - Group VP of IR

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Conference Call Participants

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* James Durran

Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst

* Keith Howlett

Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail 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

* Peter Sklar

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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

Roy MacDonald, VP Investor Relations, you may begin your conference.

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Roy MacDonald, George Weston Limited - Group VP of IR [2]

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Thank you, Kenzie, and good morning, everybody. Welcome to the George Weston Limited First Quarter 2019 Results Call. I'm joined in the room this morning, by Galen Weston, our Chairman and CEO; Richard Dufresne, our President and CFO; and Luc Mongeau, our President of Weston Foods.

Before I 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 in 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's 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 regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. And since Loblaw Companies Limited and Choice Properties have both released their first quarter results, we will focus today's call on the performance of our Weston Foods segment.

And with that, I'll turn the call over to Richard.

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

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Thank you, Roy, and good morning, everyone. Earlier today, we released our first quarter results for George Weston Limited. In the first quarter, on a consolidated basis, George Weston Limited reported revenues of $11.2 billion, an increase of 4% compared to the same period of the prior year. The increase was largely due to growth in Loblaw's retail business and the inclusion of revenue generated from the acquisition of CREIT last year.

On an IFRS reported basis, first quarter net loss available to common shareholders was $488 million compared to net earnings of $180 million last year. The reason we've reported such a loss from an IFRS perspective is because of the price of Choice's units went up over 20% in the quarter. Specifically, we booked a loss of $600 million, which represents the increase in fair market value adjustments of the Trust Unit Liability.

On an adjusted basis, net earnings available to common shareholders were $201 million in the first quarter. Normalized for the unfavorable impact of IFRS 16, adjusted net earnings available to common shareholders increased by 14.6%. We reported an adjusted diluted net earnings per share of $1.30 compared to $1.38 for the same period last year, a decline of $0.08 per share. While net earnings were up 14%, adjusted diluted EPS decreased by $0.06 per share or 4.3% due to the issuance of shares related to the spin out of Loblaw's interest in Choice Properties last year.

Loblaw delivered strong financial and operational results in the first quarter. Their retail business delivered sales, tonnage and gross margin performance in line with its stable-trading commitment. The company continued to deliver gains from its Process and Efficiency initiatives and continued to accelerate its investment in its strategic growth pillars.

For its buybacks program, Loblaw repurchased approximately 3.7 million shares and announced a 6.8% increase in its dividends. At Choice Properties, (inaudible) net operating income on a cash basis increased by 2.4% compared to last year and occupancy remained strong. Choice Properties continues to focus on building the business for stability and growth for the ownership of a high-quality income-producing real estate portfolio with an extensive development pipeline.

The integration of the CREIT and Choice Properties is going well. As announced, Stephen Johnson retired on May 1, and Rael Diamond has now succeeded him as CEO. We look forward to working with Rael to continue to enhance long-term value of Choice.

Just last week, Choice completed a $350 million offering of Trust Units. George Weston is subscribed for $50 million of such units. We are very pleased with the market's reaction and closing is expected on May 9. Proceeds will be used to delever the balance sheet and create additional capacity for growth.

Turning to Weston Foods. Management continued to make progress stabilizing the business as performance improved compared to the previous quarter. Sales totaled $560 million, essentially flat compared to last year. Excluding the foreign exchange benefits, sales declined by 3.1%, mainly driven by the impact of product rationalization and the lapping of sales lost from key customers in 2018.

Weston Foods adjusted EBITDA in the quarter was $46 million, an increase of $1 million compared to the same period in 2018. Normalized for the $3 million positive impact of IFRS 16, adjusted EBITDA decreased by $2 million. Adjusted EBITDA was negatively impacted by higher input and distribution cost and the decline in sales partially offset by productivity improvements and cost benefits realized from Weston Foods transformation program.

Weston Foods has begun to stabilize. Management delivered on their plan in the quarter, the transformation program is delivering cost savings, and we are seeing improvements in operational metrics. More importantly, the team has improved on how it shows up to customers, and this has resulted in the company earnings some new business in its growth category.

Our 2019 outlook for Weston Foods remains unchanged. As we look at 2019 for George Weston as a whole, the single largest opportunity for narrowing our value gap and driving shareholder returns rests with the continued strong performance of Loblaw and Choice, the stabilization at Weston Foods and the compelling long-term strategies of each.

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. Q1 was another solid quarter for George Weston Limited following a truly transformational year for the company in 2018. Loblaw continues to build strategic momentum, Weston Foods is stabilizing, and with the recent equity issue at Choice, our real estate business is even better positioned to realize the long-term benefits of its merger with CREIT.

George Weston is now nicely balanced and diversified with 3 distinct pillars in retail, real estate and consumer goods. Loblaw, as Canada's leading retailer, serves more Canadians than any other food and pharmacy and beauty business. Choice Property is Canada's pre-eminent REIT with a diversified portfolio and deep development pipeline. And Weston Foods, as North America's premier frozen bakery, with a strong foundation in packaged bread and alternatives.

Looking forward, we will continue to partner with our portfolio of businesses to develop and execute long-term strategic plans and deliver a shared service model that supports them with world-class expertise in strategy, M&A, capital allocation and talent development.

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) Our first question comes from the line of Mark Petrie with CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [2]

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In the past, you've spoken about some of the organizational and structural changes you made in terms of serving your customers and you've highlighted progress, I guess, in the last couple of quarters, could you just give us some additional color about that progress and what the means for the pipeline to rebuild revenues in 2019?

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

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Yes. We've -- as mentioned before, we've invested in consuming sites and sales strategy efforts into -- and into R&D capabilities. This has allowed us to really further cement our relationship with key retail business partners and foodservice operators across Canada and the U.S. In the last few quarters, this has resulted in us winning significant pieces of business in our Frozen business mostly in donuts and in pies.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [4]

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Okay. And so you mentioned sort of retail food service, both Canada and the U.S., can you give us a sense of sort of materiality of each of those 4, sort of, parts of your business? And when it comes to the revenue growth in 2019, which of those buckets would sort of be the biggest opportunity?

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

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We continue to see our investments -- to see our investment categories to growth. So donuts, artisan, bread, we continue to see growth there. I won't share any specific details about specific customers, but we see strength in both food service and retail with major North American players.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [6]

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Okay. And then could you just give us a bit more color in terms of the volume performance by category for Q1?

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Richard Dufresne, George Weston Limited - President & CFO [7]

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No. like -- I think what you should focus on, if you look at our quarter-over-quarter sales performance, you'll notice that the trend is positive. And so we're working hard to maintain that trend going forward.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [8]

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Okay. And it's donuts and artisan bread, that's in growth?

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Richard Dufresne, George Weston Limited - President & CFO [9]

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Yes. But we're also winning businesses in other categories in the Frozen business.

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Operator [10]

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Your next question comes from the line of Peter Sklar with BMO.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [11]

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Just given the consumer trends towards healthier eatings, issues with sugars and diabetes, I just want to get a better understanding of the donut category and pie category that you're pursuing? Are those -- is there -- are those categories that are growing in the U.S. or is it rather that you think you can take market share in those categories?

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

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Yes. Both categories are growing in Canada and U.S. We see 2 major trends in the market. The trends of better for you that we serve extremely well with our artisan product and a trend of growth and indulgence, where we performed well with our donuts business, for example.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [13]

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Right. Okay. And Richard, just switching topics. Now that you've closed the -- obviously, the Choice transaction, that's under your belt for a period of time now. Can you please update us with Weston's thinking in terms of M&A? And what the -- how it's going to unfold in terms of the portfolio of companies, say, over the next 3- to 5-year time horizon?

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Richard Dufresne, George Weston Limited - President & CFO [14]

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Okay. Peter, as we've said, like, for us the single largest opportunity to drive shareholder value in George Weston rests with the strong performance of Loblaw and Choice and a return to strong performance in Weston Foods. So that's what you should be focused on. Like, yes, we remain receptive, and we're always looking at additional opportunities, deliver our expertise in the portfolio, but you should not anticipate that anything is imminent. So you should not see us doing anything in short order, but yes, we're looking -- we're always looking at the ways to drive further value for the goods.

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Operator [15]

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Your next question comes from the line of Jim Durran with Barclays.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [16]

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Yes. I just want to go back to the sequential improvement in the volumes. So are we seeing that driven mostly by growth now in some of the key categories as opposed to an elimination of the SKU rationalization drain?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [17]

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There's improvement in the key categories that's driving the bulk of improvement.

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Richard Dufresne, George Weston Limited - President & CFO [18]

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And Jim, we're winning net new business.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [19]

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And so when you look at the capacity expansion that you introduced, are you nearing a level of capacity utilization that you're hoping for a year or 2 ago?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [20]

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Yes. Roughly, right now, we're at 70% utilization. Those numbers are a bit higher in our growth category. And we're confident that our investment -- capital investment plan will allow us to deliver our objective for 2019.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [21]

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And the SKU rationalization is that now done or largely done? Like, where does it stand?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [22]

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We're about 80% completed. Now we're focused on building flowback before we do any more discontinuation.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [23]

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And do you see a need to consider more capacity being added on in certain buckets over the next year or 2? Or steady state?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [24]

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It's -- I mean we continue to investment behind our growth category, and we're confident that our plans will allow us to meet that demand.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [25]

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And what's the pricing environment like in Canada and the U.S.?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [26]

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Well, as you know we're facing a lot of inflations, both in inputs and transportation. As mentioned, one of the previous calls, we were able to take pricing at the end of 2018. Most importantly, we continue to focus a lot of efforts on driving productivity, so we can mitigate the impact of that inflation.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [27]

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And how much of a role can favorable mix play in either top line or as well on profitability?

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

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Part of our transformation is we have a goal of improving our margins. So mix can play a key role in improving our performance.

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James Durran, Barclays Bank PLC, Research Division - MD, Head of Canadian Equity Research & Senior Analyst [29]

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And given the equity investment that George Weston has now made in Choice Properties, like, do you foresee any change in the rate of growth that Choice is going to pursue?

And secondly, just -- you were obviously, at some point, contemplating a capital investment in a reasonably sized M&A trade to create a fourth leg. What's your thinking now about the use of that capital that could be available to either -- whether it's balance sheet or free cash flow?

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Richard Dufresne, George Weston Limited - President & CFO [30]

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On the first aspect of your question, like, Choice's growth will go along the lines of growth in its rental income and, ultimately, when we start to develop the portfolio with our land that we own. And that's why we raised this equity last week because we wanted to strengthen the balance sheet ahead of doing that.

As for a fourth pillar, as I mentioned, like, we're always looking at opportunities. But there is nothing imminent that we're planning. So it's probably more in the future that you can expect to see stuff from us. But yes, having, now, Choice under us gives us flexibility to contemplate things that we couldn't do in the past.

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Operator [31]

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(Operator Instructions) Our next question comes from the line of Keith Howlett with Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [32]

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Yes. So I was wondering how many business unit heads report to the head of Weston Foods?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [33]

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We have -- as announced last year, we went from 4 business -- 4 distinct business to a category structure. So now we manage the business by categories. We have 9 categories under donuts, pies, cakes and so on and so forth.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [34]

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And is there -- I was just wondering about, say, grow guide or wafer. I'm just trying to figure out how integrated the various businesses are, one to another?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [35]

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Yes. We function as one business entity. And each category is managed separately from a product and portfolio standpoint. So cones and wafers, for example, would be one category. Biscuits would be another category.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [36]

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I see. And is it the same sales force for all products?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [37]

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Yes. We went from 4 sales teams to 1 sales team as well.

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Operator [38]

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Our next question comes from the line of Patricia Baker with Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [39]

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I had 2 questions. My first one, Richard, you mentioned that you emphasize that you're winning net new business, which is really nice to hear. Can you talk about, maybe, what you think drove you to get the net new business? Was it a change in the marketing? Was it product? Was it -- how long does it take you typically to get new business? Can you just talk a little bit about the process?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [40]

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Yes. The -- one of the key drivers was the stabilization of the business. If you look at our service levels, they're up significantly in the last few quarters. The quality of our products has been improving.

And if you combine that with what I mentioned earlier, stronger consumer insights, more insights in sales strategy and better products has allowed us to build much stronger partnership with key retailers.

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Richard Dufresne, George Weston Limited - President & CFO [41]

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Patricia, I would add that, like, if you look at the amount of investments that we've put in our business over the last 5 years, if you were to travel our network of plants, like, we've got many, now, of our facilities that are state-of-the-art. And so that is also making a difference when you are having discussion with key customers because they know that we can deliver the best products at the lowest cost.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [42]

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And you feel confident that over -- I won't tie you to a timeframe, but the capacity utilization will get closer to an optimal level?

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Richard Dufresne, George Weston Limited - President & CFO [43]

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Yes.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [44]

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Okay. And then just lastly, and this one is for you, Richard. And I just want to clarify something. So you've made it very clear that there is absolutely nothing imminent on the M&A front or with respect to that proverbial fourth pillar.

I just wanted to double-check something. So if I was talking to you a year ago or 18 months ago, you would've been a bit more aggressive in your discussion on the potential for fourth pillar and M&A, but something's changed?

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Richard Dufresne, George Weston Limited - President & CFO [45]

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Good point, Patricia. Yes. To be very candid with you is, there was something that we were looking at. And so that's probably why you got this body language from all of us. But we assessed that opportunity in more details and decided that it would not be an opportunity that would be adding value to you as our shareholder. So we decided to pass.

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Operator [46]

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There are no further questions at this time. I'll turn the call back to our presenters.

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Roy MacDonald, George Weston Limited - Group VP of IR [47]

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Great. Thanks, Kenzie, and thanks, everybody, for your time this money. If you have any follow-up questions, please give me a shout offline and mark your calendars for July 26, when we will be online to discuss our Q2 results. Thank you very much.

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Operator [48]

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