George Weston Ltd
TSX:WN
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George Weston Ltd
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Ladies and gentlemen, thank you for standing by. And welcome to the George Weston Limited 2020 First Quarter Results Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Tara Speers. Thank you. Please go ahead, ma'am.
Thank you, Alisa. And good morning, everyone. Welcome to the George Weston Limited First Quarter 2020 Results Conference Call. I'm joined 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 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, certain non-GAAP financial measures may be discussed or referred to today. Please refer to our annual report and other materials filed with Canadian securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. 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. With that, I will turn the call over to Richard.
Thank you, and good morning, everyone. Over the last several weeks, the world has changed drastically. Each of us is living a new reality. This reality is filled with enormous disruption and uncertainty. I normally start by providing the financial highlights for the quarter. But today, I will start by thanking our frontline colleagues across our businesses. These employees continue to show up to work every day and provide critical services to our customers and communities. Our culture is one focused on concepts, which unite our operating companies, and one of these concepts is core values. Our core values are defined as follow: care, ownership, respect and excellence. Core, I believe these values have never been more evident than during this crisis. In addition, our group of companies benefit from strong balance sheets and ample liquidity. I believe it's the combination of the right people and investments, along with excess capital that position our businesses well to navigate during these difficult times. As a result of the uncertainty about the duration and impacts of the COVID-19 pandemic on the Canadian economy, it's difficult to predict how the company and its operating segments will perform for the balance of the year. Given these uncertainties, we withdrew guidance on April 9. I will now update you on the financial results of our first quarter. From a financial perspective, our businesses were not significantly impacted by the COVID-19 outbreak in the first quarter. Our businesses performed well. During the final weeks of the quarter, the operating segments responded swiftly to the changing circumstances brought on by COVID-19. Loblaw responded to the increase in sale driven by pantry stocking, which had a positive impact on earnings. In parallel to the increase in sales, Loblaw began to make meaningful investments to support colleagues, enhance customer convenience, secure operations and provide financial support. Choice Properties moved quickly to manage the health and safety of staff and tenants, adapting quickly to working from home and implementing enhanced health and safety measures at its sites. And Weston Foods answered increased customer request for retail products, which spiked at the onset of the crisis. For the first quarter, on a consolidated basis, George Weston Limited reported revenues of $12.3 billion, an increase of 10.4% compared to last year. First quarter results reflect an estimated increase in sales from the impact of COVID-19 of approximately $750 million. The COVID-19 impact is primarily related to the significant increase in initial demand for grocery and pharmacy products at Loblaw at the end of March, following the onset of the crisis. For the first quarter, adjusted net earnings available to common shareholders of the company were $239 million compared to the same period last year. This represented an increase of $38 million or 18.9% due to the improvement in the underlying performance of our businesses, partially offset by the higher net interest expense and other financing charges. Normalized for the interest charges on the financial liability relating to the Oak Street disposition at Choice, adjusted net earnings available to common shareholders of the company were $244 million compared to the same period last year. This represented an increase of $43 million or 21.4%, which essentially represents the blended increase in earnings of our 3 businesses. The company reported adjusted diluted net earnings per share of $1.55, an increase of $0.25 a share or 19.2% compared to the same period last year. Normalized for the interest charges on the financial liability relating to the Oak Street disposition at Choice, adjusted net earnings per common share were $1.58, an increase of $0.28 per share or 21.5%. First quarter financial results include the estimated increase in net earnings available to common shareholders of $29 million or $0.19 per common share related to the impact of COVID-19. For the first quarter, GWL Corporate free cash flow was $214 million, an increase of $97 million over last year. Looking ahead to the second quarter, the challenges of the COVID-19 pandemic continue. At Loblaw, physical distancing protocols, investments in safety and sanitation, enhancing the customer experience and the provision of financial support have continued and result in significant costs to the business. While a significant percent of the Choice portfolio is anchored by necessity-based retail tenants, Choice has and continues to respond to requests for rent deferrals from small business tenants. As of April, 86.6% of Choice's rent was paid. Weston Foods supplies both retail and foodservice customers. Based on physical distancing requirements and closures across the foodservice industry, customer demand has increased by more than 50% in this -- decreased, sorry, by more than 50% in this segment, which represents about 20% of Weston Foods sales. In addition, Weston Foods retail business has also been affected. While Retail customers are buying more fresh bread, customers are not purchasing bakery case or celebratory items. The increase in packaged bread does not offset the declines in foodservice and other retail categories. In addition to changes in customer demand, Weston Foods is investing in pay premiums and pay protection for frontline employees and health and safety measures. In response to COVID-19 and the challenges across the business, Weston Foods is incurring increased costs of approximately $1 million per week since the first week of the second quarter. To mitigate these increased costs, Weston Food is continuing with its transformation program and is taking additional measures to significantly reduce cost. We've also updated our capital expenditure forecast downward somewhat. This is an unprecedented time, and it's impossible for us to predict how the businesses will perform through the balance of the year. We are confident in each of their operating team's abilities to navigate through this challenging period. We operate in retail, real estate and consumer goods, providing customers and tenants, essential services, and I believe our businesses will emerge from this crisis stronger and better positioned to meet customer and tenant expectations. With that, I will turn the call over to Galen.
Thank you, Richard. The global COVID-19 pandemic has touched every corner of our economy and every part of the George Weston group of companies. We've always believed in creating value by owning businesses that play an essential role in the lives of our customers. But in these circumstances, the term essential has truly come into focus. Over the last 2 months, our actions have been anchored in an absolute commitment to do what's asked of us, while at the same time keeping colleagues, customers and tenants safe. Each of our businesses rose to that challenge, ensuring that essential supermarkets and pharmacies remained open, bakery shelves stayed stocked and hundreds of properties kept operating for their tenants. Now as we see promising signs that broad government and community actions are bending the curve of COVID-19 infections, conversations are turning to reopening the economy. As we transition into this next phase, we're confident that the long-standing strategies across our portfolio will continue to serve us well. At Loblaw, while it's difficult to anticipate precisely how the business will change in any emerging new normal, there are certain consumer trends that we expect to accelerate substantially from pre-COVID run rates. The company sees this in online grocery shopping, digital promotions and one-to-one customer communications and in digital health care. In the coming months the company will continue to invest in each of these areas of opportunity. At Choice Properties, we have excellent financial flexibility following recent steps to strengthen the balance sheet, and the company is well positioned to continue to deliver both stability and growth for unitholders over the longer term. And at Weston Foods, their transformation program has allowed a response to these extraordinary circumstances from a lower cost base and with greater process disciplines all across the business. As they lean into serving sustained demand from their core retail customers, recent investments in artisan and donuts are set to capture consumer interest in these premium and indulgence categories as traditional foodservice remains largely shuttered, and we all find ourselves seeking a bit more inspiration while we cook at home. In the coming months, we expect to build on these strengths in each of our businesses, doing so from a position of strong financial liquidity and supported by a team of dedicated colleagues and employees across the group. Their resilience and resolve in recent weeks has been inspiring, and I wish to thank all of them for remaining so steadfastly focused on serving our tenants and customers. I'd now like to open the line for questions.
[Operator Instructions] Your first question comes from the line of Irene Nattel.
Thank you for the overview and the disclosure around foodservice versus retail. I'm wondering, however, about some of the categories that may be a little bit more touched right now, things like the sheet cakes and sorbet, anything that's sold in the fresh baking section or fresh bakery section. Could you give us an idea what percentage that might represent of your total revenues at Weston Foods?
Irene, so I'd like to think of our business split in 2 ways, retail and foodservice. Foodservice about 20% of our total business and the remaining 80% is retail. Out of that 80%, I would say that 50% of that is seeing increases in demand right now. And that's our traditional packaged bread categories, our alternatives and our Biscuit business as well. Unfortunately, these increases are not big enough to mitigate the declines that Richard mentioned in foodservice and the decline that we're seeing as well in cakes and pies and in donuts.
That's very helpful. And the -- is there anything that you think that you can do in terms of packaging to make them more, I guess, consumer friendly. And I guess the second part of that is, I guess, you have a unique window with Loblaws, what are you thinking about the probable online sort of closure of certain parts of the store as even though we reopen social distancing and touching, for a lack of a better word, it needs to be kept to a minimum?
Yes. There's multiple ways to -- multiple things to look there. So across North America, we're staying in very close contact with our top 25, 30 retail and foodservice customers to make sure that we capture all demand that's out there right now. With retailers, we're increasing the collaboration that we do with their e-commerce side of things as consumers are not as often are physically in store right now. As for either different packaging or different displays at store level, some of these trends are too early for us now to address from a permanent standpoint. But we're working very closely with retailers to make sure we capture every opportunity possible.
Your next question comes from the line of Mark Petrie.
Much of your investments over the last couple of years, and I think projected growth as well, is in foodservice. And so just curious how the pandemic and sort of the resulting uncertainty around consumer behavior affects that strategy?
Yes. We're -- our long-term growth was based on expansion of our donuts and artisan business. There was a split behind those, between retail and foodservice. When it comes to foodservice, as I mentioned earlier, we're in close contact with the largest QSR operators in North America. I've talked to them personally to the largest top 10 over the last few weeks. We monitor the situation very closely. As our innovation on donuts and artisan is based on deeply rooted consumer shopper, foodservice operator insights, and we're confident that we -- as these foodservice operators reopen their operations that we should be able to benefit from that growth.
Yes. We remain committed on the growth in QSR. And once this crisis is behind us, I think it's a segment that should provide good growth for us.
Okay. And within foodservice, that 20% of sales, is QSR the vast majority? Or what other components of the foodservice industry are material for you?
Yes. First off, foodservice business is split amongst institutions. So schools, hospitals, it's split with brokers and wholesalers, and it's split in QSR.
And it's split relatively evenly? Or can you give us some sense of the weights of those 3?
It's -- I can't really give you an exact split, but our long-term growth is -- will be fueled by QSR.
Yes. Okay. And I guess, alternatively, do you think there is perhaps -- there will be chances to be opportunistic to accelerate M&A because some competitors in the bakery industry may struggle more than you guys or be less capital -- less well capitalized?
Right now, we're solely focused on operations and how to support our business within this crisis. That's our area of focus right now.
Okay. And then just last, Richard, you had mentioned you had moderated CapEx. Can you give us any sense of the magnitude, specifically for Weston Foods for 2020?
It's not that significant, and it's more driven by the fact that we're trying to limit access to our bakeries. As you can imagine, we want to make sure we're focused on production. So we're going have certain delays because we're no letting construction workers or engineers walk into our plants. So it's not a significant number, but it's going to be down versus our initial plan.
Your next question comes from the line of Patricia Baker.
Just firstly, can you give us a little more information on the plant closures that were referenced in the press release? How much capacity have you taken out associated with the decline in demand for some of the products?
Patricia, so far, when -- if we look at it this morning, for instance, there is 4 bakeries that are temporarily closed right now: 3 of them are related to positive COVID cases, and one of them are related to decreases in demand.
Okay. And do you have a -- is there a plan with your -- the 3 plants that are related to COVID cases, is there a period of time that you have in mind when you'll be reopening that? Or is that something to be determined?
Yes. For the COVID positive cases, on average -- we've put in place very robust protocols that on average allow us to reopen the bakeries within a period of 4 days. When it comes to shutdowns, so far, we've had temporary shutdowns that last, on average, about 11 to 15 days.
Okay. And second -- another question was a follow-up on Mark -- some of Mark's point. And would I be wrong, Richard, in saying that the QSR segment is a segment that you had been historically underpenetrated in and strategically you guys recognized that as a growth channel, and that's why you made the decision a few years to -- or go to -- to more aggressively go after that channel?
Yes. Like our artisan strategy is essentially fueled by QSR.
Okay. And my last question, just a very simple one. So the elevated -- the bread -- the higher bread demand, has that remained elevated through the entire period in other words, people keep replenishing that kind of on a weekly basis?
Yes. We're still seeing increased demand in traditional package bread.
Your next questions come from the line of Peter Sklar.
Just a question for Luc. These additional costs, COVID-19-related costs, you said they're running at $1 million per week. Is that the run rate going forward? Or was there initially some disruption as you coped with the issue and as you dealt with the plants that had to go down because there were employees who caught the virus?
This is the -- this is a run rate that we can see for the foreseeable future right now.
Your next question comes from the line of Chris Li.
Just the first question is, just following your comments earlier about 80% of your business is retail and foodservice is 20%. And then of the retail business, about half you're seeing decent increase in demand on the traditional side. So I'm just doing some [indiscernible] math. So that may imply about 60% of your business is facing some pressure. And then based on your disclosure that your sales are down about 15% in the first 4 weeks. That would imply that 60% of your business is down about 25% for the 4 weeks. Am I in the ballpark with that math?
Like foodservice, we said, is down 50%. Add that to your model, and you'll figure out the [ math ].
Okay. That's helpful. And then for the categories that are seeing decline, is it fair to say they do tend to carry higher margins than the ones that are growing? Or that's not the case?
Not necessarily.
Okay. And then just last question, this is more of a longer term question. As people cook more at home, obviously, we're seeing baking has also become a very popular activity. I know it's a tough question to answer, but as COVID subsides, hopefully next year, do you expect that increase in baking activity to represent a structural change to our industry and maybe potentially have some pressure on demand going forward as people bake more at home?
No. No, we don't see this being a long-term sustainable trend.
There are no further questions at this time. I would now like to turn the call back over to Tara Speers.
Thanks, Alisa, and thanks, everybody, for your time this morning. If you have any follow-up questions, please don't hesitate to contact Roy or myself. And you can mark your calendars for July 28, when we will report our second quarter 2020 results. Thank you.
This concludes today's conference call. You may now disconnect.