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Edited Transcript of WN.TO earnings conference call or presentation 26-Feb-19 2:00pm GMT

Q4 2018 George Weston Ltd Earnings Call

Toronto Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of George Weston Ltd earnings conference call or presentation Tuesday, February 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Galen G. Weston

George Weston Limited - Chairman & CEO

* Geoffrey Victor Herbert Wilson

George Weston Limited - SVP of Financial Control & IR

* 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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* Irene Ora Nattel

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

* James G. Allison

Barclays Bank PLC, Research Division - Research Analyst

* Keith Howlett

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

* Krishna Ruthnum

CIBC Capital Markets, Research Division - Associate

* 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 Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the George Weston Limited Fourth Quarter Results Conference Call. (Operator Instructions) Roy MacDonald, VP of 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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Great. Thanks very much, Casey. Good morning, everybody, and welcome to the George Weston Limited 2018 Fourth Quarter Conference Call. I'm joined in the room here this morning by Galen Weston, our Chairman and CEO; Richard Dufresne, our President and CFO; and Luc Mongeau, President of Weston Foods.

Before we begin today's call, I want to remind you that the discussion will focus on 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 certain assumptions and reflect management's current expectations and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These risks and uncertainties are discussed in the company's materials filed with the Canadian securities regulators, including the company's fourth quarter news release.

Any forward-looking statements speak only as of the date they are made. And 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. And certain non-GAAP financial measures may be discussed and are referred to today. Please refer to our news release and other materials for a reconciliation of each of these measures to the most directly comparable GAAP results. An archive of this call will be available on our website. And since Loblaw Companies Limited and Choice Properties have both released their fourth quarter results, we will focus today's call on the performance of our Weston Foods segment.

And I would like to now 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 fourth quarter results for George Weston Limited. On November 1, we completed the reorganization where Choice Properties was spun-out from Loblaw to George Weston Limited. As such, Choice Properties became a reportable operating segment of George Weston Limited.

In the fourth quarter, George Weston Limited reported adjusted diluted net earnings per share of $1.59 compared to $1.76 for the same period last year, a decline of $0.17 per share. Normalized for the impact on the share issuance associated with [their reyar], adjusted diluted EPS increased by $0.06 per share, which reflects the favorable operating performance of Loblaw and Choice, partially offset by the operating performance of Weston Foods.

In the fourth quarter, Weston Foods sales totaled $507 million, a decline of $20 million over the same period of 2017. Sales continue to be impacted by the loss of business from key customers in the third quarter and product rationalization. Weston Foods adjusted EBITDA in the quarter was $55 million, a decrease of $6 million compared to the same period in 2017. Excluding the impact of a $10 million net gain on the sale of a property, adjusted EBITDA was negatively impacted by higher input and distribution costs and the decline in sales, partially offset by productivity improvements and cost benefits realized from the transformation program.

Looking ahead to 2019, Weston Foods will focus on growing its core business, selectively innovating in new segments and markets and strengthening key processes. In 2019, on a full year comparative basis, Weston Foods expects sales to be lower when compared to 2018, as growth in key categories and pricing are more than offset by the lapping of sales loss from key customers last year and the impact of product rationalization. Adjusted EBITDA to be slightly lower than last year, excluding the prior year gains on sale [of] leaseback of properties. Improvements driven from productivity and the transformation program will be offset by headwinds from higher input and distribution costs and an inflationary environment and by sales trends as described above. Capital expenditures to decrease to approximately $200 million and depreciation to increase compared to 2018.

Weston Foods has begun to stabilize. We delivered on our plan in the quarter. The transformation program is delivering cost savings, and we are seeing improvements in our operational metrics. More importantly, we have improved on how we [show up] to our customers and this has resulted in the company earnings and new business in its growth categories.

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

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

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Thank you, Richard, and good morning. As we reflect on a very busy 2018, we find George Weston Limited ending the year in a position of strength. Loblaw is well positioned to meet the evolving everyday needs of Canadians. Choice Properties is now a core part of our organization, comprising a solid third pillar of our strategy that is set to grow over the long term. And Weston Foods is stabilizing its business, improving its sales pipeline and its operational execution.

Loblaw ended the year with another quarter of strong operational and financial results and met its full year target of delivering essentially flat adjusted net earnings growth in a year where it [phased into] more than $440 million in expected incremental cost headwinds. The company's focus on stable trading and driving cost savings through process and efficiencies initiatives are fueling the acceleration of investments in its strategic growth areas: everyday digital retail, payments and rewards and connected health care.

Choice Properties delivered another solid financial and operational results for the fourth quarter and for the full year of 2018. With the acquisition of the CREIT, the integration of the 2 businesses has gone well. We are building the business for stability and growth through the ownership of a high-quality income-producing real estate portfolio, with an extensive development pipeline. Choice Properties is set to pursue a strong development agenda that will tap into our country's most prized real estate, delivering value to our shareholders over a long-term investment horizon.

Weston Foods completed the first year of its transformation plan. As you've heard from Richard, we've made good progress. However, our efforts to realize efficiencies and increase sales in our key growth areas was offset by sales slowing back more slowly than expected following our assortment rationalization efforts. In response, management slowed down the transformation to focus on restoring our sales growth trajectory and further embedded operational consistency. We are seeing results that suggest we're on the right path. We are committed to seeing Weston Foods secure its place as North America's premier bakery.

As we enter 2019, George Weston is now better balanced with 3 strong and well-positioned pillars in retail, food and real estate. From here, we see a compelling future for our company.

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Geoffrey Victor Herbert Wilson, George Weston Limited - SVP of Financial Control & IR [5]

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Thank you, Galen. Operator, could you introduce the protocol for asking questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And 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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Given the way 2018 unfolded for Weston Foods and the outlook for 2019, can you please tell us at this point whether you're still confident in your ability to add $100 million to EBITDA? And if so, over what time period? And $100 million over what base?

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

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Irene, we're clearly disappointed by our 2018 performance. The benefits of our transformation program are flowing through. We're seeing them in our results this year and we are planning for them on the future. As to how it, ultimately, will show up in our results. We'll defer that to later. We don't want to comment on that right now.

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

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Okay. Fair enough. Can then -- can you please just talk about some of the new business that we're gaining? And I guess, more specifically, where are you seeing the benefits show up? And how you expect that to unfold in 2019?

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Galen G. Weston, George Weston Limited - Chairman & CEO [5]

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Yes. Irene, as we're stabilizing the business, we're in -- getting by the -- a position to have positive discussion with key customers. In the back half, in Q4 of 2018, we were able to secure significant piece of business and now we're doing that business with a key retailer in the U.S.

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

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And perhaps your plans for 2019?

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Galen G. Weston, George Weston Limited - Chairman & CEO [7]

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I mean, we continue to build our pipeline. We've got promising discussion on pies and donuts and on artisan business. That being said, in 2019, we're going to still face a lapping impact of significant business loss in 2018.

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Richard Dufresne, George Weston Limited - President & CFO [8]

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Yes, what I would add, Irene, the way we're looking at the business now, as we said in Q4, we hit our forecast. If you look at our Q4 sales performance versus Q3, we are sequentially improving. We are definitely starting to see improvements in some of our operating metrics. And we see very encouraging results on our sales net pipeline, just by the nature and the quality of the discussion that we're having with our key customers. So that is what we're seeing right now.

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Operator [9]

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Your next question comes from James Allison with Barclays.

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James G. Allison, Barclays Bank PLC, Research Division - Research Analyst [10]

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Just looking at the gross margin contraction in the quarter, it was the highest we've seen in over a year. I assume that the loss of the Fresh business was the key driver to that. But were there any other nuances we should be aware of? Like, was there an acceleration in input cost inflation that had to be absorbed?

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Richard Dufresne, George Weston Limited - President & CFO [11]

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Some of -- both the points you mentioned, like some of the sale of Fresh and some of the increase in input cost inflation more specifically.

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James G. Allison, Barclays Bank PLC, Research Division - Research Analyst [12]

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Okay. And so just following up from that then, with retail price inflation continue to accelerate in the Canadian market, are you beginning to see a more optimistic in your ability to push through pricing in 2019 to perhaps offset some of the input cost inflation?

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Galen G. Weston, George Weston Limited - Chairman & CEO [13]

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We were successful in implementing a price increase across the U.S. and Canada across our -- amongst our retail business and food service business. We continue to see that more inflation coming in 2019, and we're going to continue to put significant efforts in driving productivity and efficiency to mitigate the impact of that inflation.

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Operator [14]

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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 [15]

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Just 2 very quick questions. I think I don't know if it was Galen or Richard. I'm sorry that I can't remember. But one of you pointed to the fact that you had improved operational metrics in Q4. If you could just address what those were getting at the stabilization of the business? And then secondly, on the SKU rationalization, are you fully through the SKU rationalization? And at what point do we cycle against that?

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Galen G. Weston, George Weston Limited - Chairman & CEO [16]

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Yes. So the first part of the question is, we saw positive trends on our service levels and quality levels in Q4 as well as a reduction of our [rates] in our bakeries. So we're very encouraged about that. We're about 80% of the way through on our SKU reduction initiative. We're still going to do some in 2019.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [17]

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Okay. And just close, if I may, just following up on the pricing question because you indicated in the outlook that you would see some pricing in 2019. Does that reflect pricing that you've already taken? Or you're looking for further price increases as we move through the year?

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Galen G. Weston, George Weston Limited - Chairman & CEO [18]

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Oh, we don't comment on forward pricing, but that would reflect pricing that we've already successfully announced and implemented.

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Operator [19]

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Your next question comes from Mark Petrie from CIBC.

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Krishna Ruthnum, CIBC Capital Markets, Research Division - Associate [20]

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This is actually Krishna Ruthnum on for Mark. First question, I just wanted to follow up on an earlier question just around your expectation around price increases for 2019. Are these increases really just to pass on higher costs? Are you able to sort of engineer sales growth in [certain] products through pricing?

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

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Essentially, it's more to offset the cost increase that we've experienced.

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Krishna Ruthnum, CIBC Capital Markets, Research Division - Associate [22]

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Okay. And just curious also on your outlook for Fresh or potentially any other category that tend to be higher margin for 2019?

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Galen G. Weston, George Weston Limited - Chairman & CEO [23]

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Yes, outside of the last business loss from 2018, we see these 2 businesses stabilizing. And we're -- we think we're seeing signs in these businesses.

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Operator [24]

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Your next question comes from Keith Howlett with Desjardins Securities.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [25]

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Yes, I had a question about your ownership and governance of Weston. I'm wondering whether you preferred to have wholly owned businesses or partially owned businesses? Or what percentage ownership you target amongst the assets that you're overseeing? And I was wondering, in terms of any policies you have on sort of what sort of board positions you like to have on your invested companies?

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

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Yes. So no specific guidelines around ownership positions beyond what you know and has been a clear and essential objective for us at George Weston and from a family point of view for many years, which is that we aspire to a 51% ownership position at a minimum, so that we consolidate and have full control of the assets that we invest in. We don't see any change in that philosophy coming forward. There are obviously pros and cons about being 100% owned versus having a public company vehicle. And depending on the circumstances, we would be comfortable with either. And then in terms of board positions, I think, I've said on a couple of occasions, I actually think that control public company is a very attractive governance model. It has the benefits of a controlling shareholder that allows the company to think in long-term terms for value creation. And yet, the independent director and the independent shareholder also has an important voice that gets listened to, and we have a public stock price, which essentially measures how successful our performance is. And the combination of those 2 disciplines, long-term and short-term accountability, I think, makes sense.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [27]

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And just in terms of operational metrics on the baking side, I know you're the -- you obviously a very large player in Canada and the U.S. Is there any useful benchmarking that you can do against somebody in North America or somebody in Europe? Or is it really creating your own benchmarks?

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Richard Dufresne, George Weston Limited - President & CFO [28]

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No, we look at all the other public bakeries that are -- that exist in both North America and Europe to benchmark ourselves, and we do that regularly.

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Keith Howlett, Desjardins Securities Inc., Research Division - VP, Consumer Products & Merchandising Analyst and Retail Analyst [29]

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And in terms of your exercise here, I mean, are you already amongst the most efficient? Or is there a substantial room for improvement?

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

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No, we believe there is room for improvement, definitely based on the makeup of our business. But we do perform relatively well compared to other peers globally.

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Operator [31]

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Your next 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 [32]

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I was just wondering if you could quantify the magnitude of the price increases that you put through and also tell us when you put them through?

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Galen G. Weston, George Weston Limited - Chairman & CEO [33]

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Yes, we don't comment on the specifics of that.

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Operator [34]

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And there are no further questions in the queue at this time. I will turn the call back over to Roy McDonald for any closing remarks.

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Roy MacDonald, George Weston Limited - Group VP of IR [35]

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Thank you, Casey. Thanks, everybody, for joining us today. If you have any follow-up questions, you know where to reach me. And mark your calendars for May 7 for our first quarter results. Thanks, very much.

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Operator [36]

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And ladies and gentlemen, this concludes today's conference call. You may now disconnect.