George Weston Ltd
TSX:WN
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George Weston Ltd
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Good morning, my name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the George Weston Limited First Quarter Results Conference Call. [Operator Instructions].I would now like to turn the call over to Mr. Geoff Wilson. Please go ahead, sir.
Thank you. Good morning, and welcome to the George Weston Limited 2018 First Quarter Conference Call. I'm joined here this morning by Galen Weston, Chairman and CEO; Richard Dufresne, 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 include forward-looking statements, such as the company's beliefs and expectations regarding certain aspects of its financial performance in 2018 and 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 -- first quarter 2018 news release. 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 as required by law, certain non-GAAP financial measures may be discussed and are referred to today. Please refer to our first quarter news release, 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 measure. An archive of this conference call will be available on our website. Loblaw Companies Limited released its first quarter results last week, and therefore, we'll focus this call on the performance of our Weston Foods segment.I would now like to introduce Richard.
Thank you, Geoff, and good morning, everyone. Earlier today, we released our first quarter results for George Weston Limited. For the first quarter, George Weston Limited reported adjusted diluted net earnings per share of $1.38 compared to $1.43 for the same period in 2017, a decrease of $0.05. Normalized for the disposition of Loblaw's gas bar operations, EPS decreased by only $0.01 per share. In the first quarter of 2018, Weston Foods sales decreased by 4.1% to $570 million, a decline of $22 million over the same period of 2017.Foreign exchange translation negatively impacted sales by about $15 million, and the balance was due to decreased volume from product rationalization. Weston Foods' adjusted EBITDA in the first quarter of 2018 was on plan at $44 million, a decrease of $17 million compared to the same period in 2017. Adjusted EBITDA margin decreased to 8.5% compared to 11.3% in the same period in 2017. The decline in adjusted EBITDA was driven by higher input and distribution costs, the cost of the transformation program and a decrease in volume.Capital for the quarter was $22 million, which is lower than last year. However, for the year, investments continue to be estimated at around $230 million. For 2018, our outlook remains the same. We anticipate sales to be essentially flat to 2017. Growth in volume is expected to be offset by product rationalization and the negative impact of foreign exchange. Adjusted EBITDA will be essentially flat to 2017. Adjusted EBITDA will include improvements from the transformation program and productivity but will be offset by headwinds from higher input and distribution costs, minimum wage increases and foreign exchange. In the first half of 2018, adjusted EBITDA is expected to decline, primarily due to the cost related to the transformation program and inflation. Adjusted EBITDA in the second half of 2018 is expected to improve, driven by sales growth and realized benefits from the transformation program, partially offset by continued inflationary pressures.I would now like to turn the call over to Galen.
Thank you, Richard, and good morning, everyone. The first quarter was marked by significant headwinds in both Loblaw as well as Weston Foods. Loblaw delivered solid results with external pressures from minimum wage and health care reform. Weston Foods business performance has been impacted by challenging inflationary pressures and cost relating to the transformation program.I'm pleased to report that the transformation initiative is on track. Weston Foods is now 1 business with 9 go-to-market categories, with a new team that is working well together. Top line performance for Weston Foods was impacted by higher foreign exchange and product rationalization as part of our transformation plan.I'm happy to report that our previous operational issues have now been rectified in addition to our transformation efforts. We are focusing on backfilling the lost business due to product rationalization. This replacement volume, however, is taking a bit longer than we anticipated. And we are working hard to fill the capacity and should see tangible improvement in the second half of the year.The transformation program is improving how we operate, and I thought I'd provide some color on some of the changes we have implemented to date. First, new processes. We have implemented a new sales and operational planning process, whereby we are matching our operations planning to sales forecasting on a category basis versus our previous forecasting on a business unit basis, resulting in better alignment between supply and demand. Simplification, we have dramatically reduced the number of supply vendors we are using to service the business, thus improving our economies of scale. And people, we are realigning our resources to focus on key growth areas. A good example would be our customer versus business unit alignment, which has enabled over 30 U.S. colleagues to now sell artisan and in-store baking products, whereby, previously, we had only 5 artisan colleagues in the U.S. covering limited accounts.I'm also pleased to report that we are increasing our dividend by 7.7% to $0.49 per share. This represents the seventh consecutive year we have raised our dividend to shareholders.Operator, I would now like to open the call to questions.
[Operator Instructions] Your first question comes from the line of Mark Petrie with CIBC.
I just wanted to ask about the volume trends in the business outside of the SKU rationalization. And maybe you could just give a little bit of color in terms of some of the categories that are performing better or worse?
Volume trends remain more or less the same. The fresh business as we mentioned is still going down slightly every year, and that is continuing. However, we're seeing growth in the areas where we investing, mainly doughnuts and artisan.
Okay. And then I think on the last call, you mentioned that the SKU rationalization was about 20% of the portfolio, but that number might change a little bit. Is that still the case, about 20%?
Yes, the number is still about 20% of our portfolio of 5,000 SKUs.
Okay. And then just in terms of the input and distribution costs that you guys are feeling some pressure from. And you sort of talk about a better outlook for the second half. Does that include any ability to offset those costs? Or is it really just a result of improvement into -- or improvements in terms of the efficiency plans that you guys have in place?
Yes, mostly going to be through efficiencies because the trend that we're seeing in these costs is expected to continue. And when we talk about inflation, I think it's worth noting that distribution costs now are a big factor, and they are impacting our business this year. So we're seeing inflation in our normal costs, but we're also seeing significant increase in distribution cost, and we're working hard to offset those with efficiency.
Okay. And then, I guess, just a last question. With regards to M&A, could you just remind us of the criteria that you would apply when looking at M&A within George Weston? And then specifically, any commentary you can provide in terms of industries or categories that you would consider or are not under consideration?
Yes, so I'll take that question. I think you are speaking specifically to George Weston Limited. And we typically don't comment on M&A, but I can tell you that we like the businesses that we're in. And our focus at the moment is continuing to invest in those businesses to ensure that they are on the strongest platform and footing possible. And we feel confident that each of the businesses in the Western Loblaw Group are in a position to achieve that.
And I guess, just -- sorry, just a follow-up on that. Thinking about bakery as an example, you would consider acquisitions to sort of further or broaden your exposure within that category but not necessarily look at food manufacturing outside of bakery, is that right?
Yes. Look, I mean, M&A, in terms of any of our business categories, is always something that we are considering, and we would certainly consider it in the bakery business at some point. But the way to think about our focus, and Luc and the team's focus today is, it's on the transformation plan, making sure that, that transformation plan is successful. And once we've achieved that, then we can open up our eyes and determine whether there are any complementary M&A transactions to consider but there is nothing on the horizon at this point.
Your next question comes from the line of Irene Nattel with RBC Capital Markets.
I was wondering whether you could walk us through what the 9 categories are at -- that you're focused on? And how your capacity at this point in time is aligned with respect to these 9 categories you're focusing on?
The 9 categories are the commercial package breads, the alternative calories with tortillas, English muffin and bagel. The artisan bread, pies, cake, doughnuts, biscuits, cones and wafers and -- so those are the categories. Right now, we're looking at -- we're in a good position for capacity. We continue to invest in the areas of growth, which are namely doughnuts, alternatives and artisan breads.
That's great. And in terms of your capacity and your capacity utilization efficiency levels in some of the more mature categories or the declining categories, notably commercial bread, where you see that at this point in time? And is that realigning capacity -- is that faster towards getting you to your $100 million objective?
No. Like, we're happy with our capacity. As Luc mentioned, like, the areas where we're tighter in capacities are in artisan and doughnuts, and that's where we are investing.
Okay. That's great. And just in terms of the balance between SKU rationalization and building back volume, are you kind of happy with the way that's progressing? Where things are little bit slower than you expected in terms of filling up the new capacity and offsetting the rationalization in terms of volume growth?
We're about on schedule with the SKU discontinuation. We're about 30% of our way through the benefit. We're a bit slower in securing flowback of the volume, but we're making quick progress, and we're confident in our ability to deliver the overall savings in this side of the initiative.
And just last question, I mean, on this subject. What's been the reaction on the part of your customers as you inform them that, yes, you're rationalizing SKUs, but here is this product over here that looks very similar, what's kind of been the response?
Overall, there's been a very positive. We're adding -- we're eliminating SKUs that have been, in most cases, very low volume and add very little differentiation to the consumer. So overall, the response is positive.
Your next question comes from the line of Jim Durran with Barclays.
I just wanted to ask about pricing power, U.S., Canada, fresh frozen. In Canada, I assume, there is no opportunity to increase prices and offset some of the cost pressures. Is there any leverage that you have in the U.S.?
There's a bit more room in the U.S., Jim, but I think you've answered the question.
Just going back to the SKU rationalization process. You mentioned you're about 30% of the way through. Like, how much longer do you feel that that will have a meaningful impact on volume? Is it for the rest of this first half? And then you expect a clean run in the second half, you'll see the return to volume growth?
Yes, we're forecasting solid pullback towards the end of 2018.
Okay. And the sales transition, that's fully in place now?
Yes. We started the restructuring of our organization in late 2017, and we started with the sales team going from 4 distinct retail sales team sort of formation of 1 strong and aligned 1 retail sales team, that was completed late 2017.
Okay. And then last question, just would you categorize this quarter as being in line with your expectations or slightly below it? And I don't know if you are willing to comment about Q2 as to how you see Q2 in comparison to Q1?
So, Jim, on the bottom line, the quarter was on plan. On the top line, it was not on plan. FX was way worse than expected, and we expect that trend to continue at least into Q2.
Your next question comes from the line of Peter Sklar with BMO Capital Markets.
Richard, in the discussion in your report about why EBITDA is down year-over-year, you listed 3 factors: volume, higher costs and transformation program. In terms of which is more impactful, is that the order of the list? Is that consistent with, like, most impactful to least impactful?
Yes. I'd say, transformation and material cost and inflation are about equal, and the smaller portion would be volume. And as I said earlier, material cost, there's 2 factors, typically it's been mostly the cost of raw material. But this year we have the transportation cost, that's been adding to it. So that's why that factor is bigger in Q1.
Right. And when you're talking about the transformation -- the cost of the transformation program, are you referring to disruption costs? Are you talking about, like, the broader context of the rationalization of the SKUs and the result in lower volume?
No. We're actually talking about the actual cost of implementing the program. So those are real costs that have been booked in our statement.
[Operator Instructions] Your next question comes from the line of Keith Howlett with DesJardins Securities.
Just had a question on the distribution network for bakery. Does it -- is it direct to store when it's fresh and warehouse when it's frozen? Or is it less obvious than that?
Yes, you got it pretty much right. It's a variation of all these things, but that's mostly accurate.
Is there any room within your current distribution to go to the warehouse? Is that like -- is that end up with a lower freight cost per retail price that way or...
So Keith, the way to think on this, though, is, on the fresh side, a lot of the business is DFD, obviously because the product is fresh and they can't stay too long in our warehouse. We have certain regions at our warehouse but frozen -- the product is frozen, so it's actually easy to put into our warehouse and get it ultimately to the store from warehouses, so that's how you should be thinking about it.
Great. So there's not a lot of room to sort of improve the distribution efficiency. It's already pretty well where you want it to be?
There's always room, but we've looked at this in the past, specifically in fresh. And when you look at the way we're operating now, I think it's pretty good, but there's always ways to make it a little bit better. But it -- you're not going to see a marked change in that, in saving on doing that.
And in terms of the trend to healthy eating or perceived health eating, like, are sort of organic products -- or do your pies have organic berries? Or you sort of more of a traditional seller of indulgent big goods, so to speak?
Yes. We continue to elevate our portfolio to make sure that we delight consumers in Canada and the U.S. There's 2 access that we're innovating on. The first one is better for you, and you can see this in our artisan products and alternative products. They are doing extremely well. We just built organic capability in our kitchen bakery. And as well, we are innovating in indulgent product areas. There is a strong demand for product that deliver great indulgence, and we're benefiting and growing in these areas with our portfolio, very delicious doughnuts.
And we have no further questions in the queue at this time. I would now like to turn the call back to the presenters for closing remarks.
Thank you very much for joining us today. Our 2018 Annual General Meeting commences at 11:00 a.m. this morning. And our 2018 second quarter release is currently scheduled for July 31. Hope you have a great day. Thank you very much for joining us. Bye-bye.
Thank you to everyone for attending today. This will conclude today's call, and you may now disconnect.