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Edited Transcript of WN.TO earnings conference call or presentation 25-Feb-20 2:00pm GMT

Q4 2019 George Weston Ltd Earnings Call

Toronto Mar 7, 2020 (Thomson StreetEvents) -- Edited Transcript of George Weston Ltd earnings conference call or presentation Tuesday, February 25, 2020 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

* 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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* Christopher Li

Desjardins Securities Inc., Research Division - Research Analyst

* Irene Ora Nattel

RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity 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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Ladies and gentlemen, thank you for standing by, and welcome to the George Weston Limited Fourth and Full Year 2019 Earnings Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Tara Speers, Senior Director, Investor Relations. Please go ahead.

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

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Thank you, Kristina, and good morning, everyone. Welcome to the George Weston Limited Fourth Quarter and Full Year 2019 Results Conference Call. I'm joined this morning by Galen Weston, our Chairman and CEO; Richard Dufresne, our President and CFO; Luc Mongeau, President of Western Foods; and Roy MacDonald, Vice President, 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 2020 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, 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 measure. And since Loblaw Companies Limited and Choice Properties have both released their second -- sorry, their fourth quarter and full year results, we will focus today's call on the performance of our Weston Foods segment.

Before I pass the call over to Richard, I would like to highlight the updates we made to the GWL annual report, specifically, the revised front section of the management discussion and analysis. In response to your feedback, we updated the annual report to provide information we believe is helpful in your understanding of George Weston. Our objective for the update was to answer recurring questions, highlight our operating and value creation strategy and provide key performance metrics. We hope you find the update useful. We are excited to share the new document with you and look forward to your feedback.

With that, I will turn the call over to Richard.

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

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Thank you, Tara, and good morning, everyone. We are pleased with the results for the quarter. Our businesses performed well, with solid operating and financial results. On a consolidated basis, George Weston Limited reported revenue of $12.1 billion, an increase of 3.3% compared to last year. For the full year, revenue was $50.1 billion, an increase of 3.2% compared to last year. For the fourth quarter, net earnings were $433 million compared to $271 million last year, an increase of $162 million.

On an adjusted basis, net earnings increased by $30 million or 12.9% to $262 million, preliminary -- primarily due to the improvement in the underlying operating performance of each of our businesses. We reported adjusted diluted net earnings per share of $1.69, an increase of $0.10 per share or 6.3% compared to last year. As Tara mentioned, we have included new metrics in the front section of our MD&A to assist with understanding of our business, including GWL corporate free cash flow. GWL corporate free cash flow is a measure we use to evaluate the cash generated into GWL. It consists of the streams of cash flow received from our operating subsidiaries, which include the dividends from Loblaw, distributions from Choice Properties and the net cash flow contribution from Weston Foods, less corporate costs.

For the year ended 2019, GWL corporate free cash flow was $400 million -- $411 million, an increase of $311 million over last year. When we account for the dividends we pay to our shareholders, interest on our indebtedness and our $50 million equity contribution to Choice's equity offering last spring, GWL added $70 million of cash to its balance sheet in 2019. At year-end, GWL's cash balance stood at around $700 million. Loblaw extended its positive momentum during the quarter with continued improvement in its Food Retail business and strong results in its drug retail business.

Through its buyback program, Loblaw repurchased approximately 2.3 million shares during the quarter for a total cost of $163 million. Our ownership now sits at 52.2%. Loblaw remains committed to its strategy, responding to evolving customer needs and positioning the business for the future. Loblaw seeks to deliver process and efficiency savings to offset cost pressures and enable investments in its strategic growth areas of Everyday Digital Retail, Payments & Rewards, and Connected Health Care. Digital Retail is already contributing to the business, having delivered $1 billion of revenues in 2019.

Choice Properties delivered another quarter of solid results. Choice continues to focus on generating stable income and active development program to add high-quality real estate to the portfolio and balance sheet strength to provide financial flexibility. Choice further strengthened its balance sheet in 2019 following a $400 million equity issuance and $400 million of asset sales. Choice portfolio's occupancy at year-end was 97.7% with same-asset NOI growth of 2.6%.

Weston Foods performed well during the quarter. Sales were $522 million, up $15 million from $507 million in Q4 2018. For the full year, sales were $2.15 billion, up $33 million versus 2018. For the quarter, Weston Foods adjusted EBITDA was up $5 million, excluding the positive impact of IFRS 16 and the prior year net gain on the sale leaseback of a property.

Adjusted EBITDA was positively impacted by improved gross margin through productivity improvements and the net benefits realized from Weston Foods' transformation program, partially offset by higher input costs and an increase in performance-related compensation accruals.

For the full year, Weston Foods adjusted EBITDA was $211 million, up $2 million versus 2018, excluding the positive impact of IFRS 16 and the prior year net gain on the sale leaseback of properties. Adjusted EBITDA was positively impacted by improved gross margin through productivity and the transformation program, partially offset by higher input and distribution costs and an increase in performance-related compensation accruals.

We are pleased with the momentum observed at Weston Foods throughout 2019. Management's focus was on stabilizing the business through a return to top line growth, financial scrutiny and strengthening its organizational capabilities. The business achieved these objectives. By focusing on winning new business from new and existing customers, the business was able to deliver sales growth through cost savings initiatives and process improvements, the business improved its financial metrics. And through the first wave of SAP deployment and improved processes, the business improved its organizational capabilities and delivered improvement in service metrics.

Weston Foods has stabilized and is now positioned for growth. However, there's still lots of work to be done. The SAP deployment accelerates in 2020, and we are in the last year of our transformation program. Further, new capacities coming online in donuts and bagels, and we remain focused on the successful start-up of this new capacity, which is well underway.

Looking ahead to 2020. Weston Foods remain committed to its strategy with a focus on winning new business in key categories and markets and strengthening its operational processes. Excluding the impact of foreign currency translation and the 53rd week, Weston Foods expect sales to be modestly higher when compared to 2019. Adjusted EBITDA is expected to be higher when compared to 2019, and capital expenditures will decrease to $185 million.

All told, George Weston had a successful year in 2019, executing against its plan, delivering operational stability and supporting each of its businesses in making steady progress against their strategic frameworks. Having completed our first full year of direct ownership in Choice Properties, we marked an important milestone in our transformation toward a more balanced portfolio with 3 strategic complementary businesses in Retail, Real Estate and Consumer Goods.

Today, we are focused on improving the financial flexibility of GWL to support investments in our existing businesses as opportunities arise. We use such flexibility as part of Loblaw's acquisition of Shoppers Drug Mart in 2014 by contributing $500 million of cash and allowing our ownership position in Loblaw to be diluted below 50%. At that time, we clearly stated our objective to return our ownership to over 50%.

Now that our ownership in Loblaw is at 52%, we have achieved that objective, and our focus is turning to building financial flexibility. For this reason, today, we announced our participation in Loblaw's normal course issuer bid program. This means GWL will be selling Loblaw shares into Loblaw's NCIB program with the objective of maintaining our ownership position at 52%.

Assuming Loblaw buys back about $1 billion worth of stock on an annual basis, this will generate approximately $400 million of additional cash on an after-tax basis for GWL annually. We currently hold about $700 million of cash and will seek to accumulate to approximately $2 billion in total over the next few years. We have no specific plans for this cash today, but remain optimistic about the opportunities in each of our businesses. Of course, if it turns out that we can't effectively deploy the cash, then we will consider a range of alternatives, including returning capital to shareholders.

To be clear, we are committed to our controlling position in Loblaw and stand by its strategy. Now returning to the results we released this morning. We are pleased with our Q4 and full year results across the group of companies. We remain focused on supporting Loblaw, Choice Properties and Weston Foods, and believe they are well positioned to win in the future.

I will now 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. To echo Richard's message, we are pleased with the performance of the business during the fourth quarter. 2019 was a good year for the group. Loblaw ended the year with positive momentum as it continues to focus on the customer experience and invest for the future. Choice Properties, leveraging its strong foundation, delivered on its goals of stability and growth for investors over the long term. And Weston Foods, as a business, has stabilized, finishing the year with solid sales and improving financial metrics.

Throughout 2019, we have communicated our focus and commitment on partnering with our portfolio of businesses to develop and execute their strategic plans to create long-term value for shareholders. We believe in deploying expertise in strategy, talent development, capital allocation and mergers and acquisitions across the group of companies. As Richard mentioned, as part of our ongoing strategic review at GWL, we made the decision to participate in Loblaw's normal course issuer bid. This allows us to enhance our financial flexibility. We remain committed to our controlling 52% interest in Loblaw and to its strategy and to deploying the incremental cash in a disciplined manner, not straying from our existing businesses.

As a holding company with 3 strong and well-positioned businesses in retail, real estate and consumer goods, GWL is focused on providing support across the portfolio. The proceeds from the participation in the Loblaw NCIB will provide GWL with flexibility to deploy capital across the group, investing in each of its businesses.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Patricia Baker from Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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It was really nice to see the turn in the business at Weston Foods, the continued momentum in Q4 and nice top line growth there. Can you talk about where you saw the strength and which categories in Q4?

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

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Yes, Q4, we saw growth across 6 of our 9 categories, with strong performance in donuts, alternatives and pies as well.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. That's very helpful. And then can you just update us, Luc on where you are on the SKU rationalization?

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

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Yes, we're about 85% of the way through. You remember, originally the objective was to discontinue about 1,000 SKUs or about 85%. We'll continue discontinuation in the third year of our transformation. And we're able now to balance discontinuation with a fairly robust sales pipeline, which allow us to focus on top line growth as well.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And I think, maybe, Richard, in your remarks, you did reference the fact that you added new lines in Q4. Can you give us a little bit more information on how those are running? Or is everything going to plan?

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

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Yes, we've got new capacity gradually coming online as we're speaking, both in donuts and in bagels. And so far, they're performing as expected.

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Operator [8]

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Your next question comes from Irene Nattel from RBC Capital Markets.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [9]

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First of all, just a couple of questions, bigger picture questions. In the annual report, you reiterated your objective to add $100 million in EBITDA in the Consumer Foods business. Can you please give us or tell us $100 million of which base should we be looking at now? And secondarily, over what period of time?

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Richard Dufresne, George Weston Limited - President & CFO [10]

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Irene, what you're referring to is our transformation program. As mentioned, we are in year 3 of that program. We have 2 years under our belt, and we are running on plan. So if everything goes well, we should be able to deliver that amount fully in 2020. As to what base, I guess, look at where we are now and put 2 years of transformation behind us, and so there's another year to go. And that's how we're saying in our outlook that we plan to grow EBITDA in 2020.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [11]

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That's a big number in 2020. Okay. And...

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Richard Dufresne, George Weston Limited - President & CFO [12]

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Okay. But we don't -- like -- Irene, just to be clear, okay, like our -- we did 2 years of that already, and that is in our numbers. So it's only year 3 that you're going to see in our numbers. So we're not saying that we're going to reach that number in 2020. I just want to be very clear.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [13]

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Okay. That's very helpful. And then just following on the discussion about capital deployment. In the past, you've kind of indicated that retail M&A would happen within Loblaws and/or LCL and that real estate M&A would happen within Choice. In your remarks, you kind of talked about consumer foods, real estate and retail. So I'm wondering how we should be thinking about capital deployment? What is the time period? And if we look specifically at consumer foods, does consumer foods mean baking or does it mean something broader than baking?

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

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Okay. To be very clear and I was trying to be clear in my remarks, too. We currently don't have any plans for deployment of this capital. Our current expectation is we will accumulate cash, so -- because we want to build financial flexibility. And if you remember, we've done so in the past. Like we've held cash at GWL, and we put it in use when we had a need, like the Shoppers acquisition, and the Choice IPO was a need where we invested cash. And at that time, the level of cash was much higher than what we're contemplating now. So we feel that building financial flexibility at George at this time is the right thing to do, but we have no plans for now.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [15]

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That's very helpful. And then just one final little question, if I might. This follows up on the discussion about the incremental capacity. The capacity is coming online now. To what degree do you have commitments from your customers to fill the capacity?

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

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Yes. We're -- overall, our network, we're functioning about 75% capacity right now. We're a bit tighter on our growth categories, donuts and artisan. We're confident that the capacity online will allow us to deliver our objectives for 2020. And we continue to bring capacity online as we win new contracts.

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Operator [17]

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Your next question comes from Mark Petrie from CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [18]

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Just a follow-up on that last topic. Could you give us a sense in terms of what type of capacity increase, the additional lines in donuts and bagels mean for the organization?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [19]

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Yes, the capacity will allow us, as I mentioned earlier, to build -- to meet our objectives of modest growth for 2020. To be more specific is, it's one additional line of -- for donuts and one additional line for bagels.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [20]

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Okay. And sorry, how many lines do you have currently operating? I'm just trying to get a sense of the relative magnitude of the capacity increase.

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Luc Mongeau, Weston Foods (Canada) Inc. - President [21]

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Yes. We've got about 12 lines in donuts across our 3 facilities. And bagels, it's -- I believe, this will be our third line.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [22]

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Okay. Okay. That's helpful. And then, sorry, Richard, just to clarify, in terms of that $100 million in sort of the transformation plan, are you sort of implying like that's the -- I mean, that's the gross savings? And so obviously, we're looking at the net realization aside from a whole bunch of different factors. And so is the realization of the $100 million, is that sort of spread evenly across the 3 years? Or just trying to get a sense of reasonable expectations for 2020?

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

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Yes. No, it's a good question. So the net realization -- first of all, the $100 million is a net number, okay? And the net realization was lower at the beginning and higher at the end.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [24]

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Okay. Okay. And then last question, just with regards to CapEx. Could you just give us a sense in terms of the $185 million guidance, what are the buckets in that number? And then, I mean, obviously, I know you just gave the 2020 number, but I'm just sort of interested to hear anything you can share about how you think bakery cash flows and capital spending or capital investment will evolve over the course of the next few years?

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Luc Mongeau, Weston Foods (Canada) Inc. - President [25]

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Yes, if you take the $185 million, you can -- a simple way to look at it is, you look at it, 50-50. Half of it is spent on foundation and productivity investment. And the other half is spent on growth. So new capacity, as mentioned, these investments are going in donuts and artisan and then alternatives when it comes to growth and the maintenance and productivity capital is going across our network.

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Richard Dufresne, George Weston Limited - President & CFO [26]

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And on the level of capital expenditures, as you know, like we've been overinvesting over the last 5 years. And now we feel we're in a position where we can lower that level of capital expenditure. So you're starting to see that go down, and you can expect that to continue going down over the next few years.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [27]

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Okay. That's helpful. And then actually, sorry, one other question. Just in terms of the SKU rationalization, in 2019, can you give us a sense of how you think that affected revenue or the pressure that put on revenue?

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

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Yes. For us, the focus is really on delivering positive top line sales growth, and we continue to balance a solid sales pipeline with a gradual discontinuation.

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Operator [29]

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(Operator Instructions) Your next question comes from Peter Sklar from BMO Capital Markets.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [30]

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Richard, this $2 million -- sorry, $2 billion cash target you have, I believe, is this the first time you've articulated it? And so what is the magic in $2 billion as a number?

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Richard Dufresne, George Weston Limited - President & CFO [31]

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Like, there's no magic to the number. Like I think, we believe that $2 billion is going to be an amount that will give us appropriate and reasonable financial flexibility. For a company of our size, like, we believe that this is an amount of cash that is appropriate and it's a responsible amount, and that is not too much. So that's how we got to the number.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [32]

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Okay. And if you get there, and there's nothing really cooking in terms of deployment. What will you do, you'll return it to shareholders? Like what you...

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Richard Dufresne, George Weston Limited - President & CFO [33]

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Yes, yes. Like right now, we're putting a premium on financial flexibility. Once we achieve that objective of $2 billion, and assuming we haven't found a purpose to deploy the cash into one of our businesses, like returning capital to shareholders is definitely one of the alternative we'll be considering.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [34]

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Okay. And then just lastly, on this new structure, where you're going to tender into the Loblaw normal course issuer bid, like how is that going to work mechanically? Are you going to try and tender on a pro rata basis? Or is it going to be sporadic? What's your thinking?

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Richard Dufresne, George Weston Limited - President & CFO [35]

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Yes, that's a really good question, Peter. Okay. This is an automatic program, okay? So we actually make no decisions. And the reason why you see the -- you hear the number of $400 million, there's 2 reasons. First, like we own 52.2% of Loblaw, but there is also dilution associated with options. So we need to factor that in. So that means the amount we can tender is a bit lower, and then there is the tax on selling those shares. But the mechanism, the way it works, it's a sort of an automatic program that we turn on. And essentially, each time that Loblaw buys back shares, like we have a party that sort of sells some of our shares to Loblaw so that we maintain that 52.2%. So it's automatic. We don't have any involvement from our perspective here.

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Operator [36]

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Your next question comes from Chris Li from Desjardins.

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Christopher Li, Desjardins Securities Inc., Research Division - Research Analyst [37]

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First of all, I want to say that the incremental disclosure on the free cash flow is very helpful. I guess my first question is, Richard, you mentioned in 2019, debt went down by about $70 million from the free cash flow. I guess going forward, is it fair to assume that as your -- Western Foods EBITDA continues to grow and your CapEx continues to go down, that $70 million that you realized in 2019, that number, in theory, should continue to grow over the next few years?

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Richard Dufresne, George Weston Limited - President & CFO [38]

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Yes. And just to give you a little bit more precision, we actually used also $50 million to put in Choice's equity. So the net cash -- the net excess cash that was generated in George this year was north of $100 million. But the answer to your question is, yes, as the EBITDA at Weston Foods grows and its CapEx diminishes, that amount grows.

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Christopher Li, Desjardins Securities Inc., Research Division - Research Analyst [39]

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And that math combined with the $400 million of cash proceeds from the NCIB should allow you to reach that $2 billion, I think you mentioned in the opening remarks, in a few years?

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Richard Dufresne, George Weston Limited - President & CFO [40]

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Yes.

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Christopher Li, Desjardins Securities Inc., Research Division - Research Analyst [41]

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Okay. And just -- and I'll just maybe one clarification. Just going back to the $100 million of the net EBITDA transformation. So you mentioned it's a net number. It was lower in the beginning and higher in the end. Can you share with us, so in year 1 and 2, how much of that was realized in year 1 and 2?

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Richard Dufresne, George Weston Limited - President & CFO [42]

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Yes, we don't want to give that precision. The benefits themselves were relatively flat over the 3 years, but the cost to achieve those benefits were higher in the first 2 years versus year 3.

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Christopher Li, Desjardins Securities Inc., Research Division - Research Analyst [43]

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Although with a cost, okay.

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Operator [44]

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There are no further questions at this time. I turn the call back over to Tara Speers for closing remarks.

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Tara Speers, George Weston Limited - Senior Director of IR [45]

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Thank you, Kristina. And thanks, 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 May 5, when we will report our Q1 2020 results. Thank you.

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Operator [46]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.