George Weston Ltd
TSX:WN
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George Weston Ltd
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Good morning, ladies and gentlemen, and welcome to George Weston Limited 2021 Second Quarter Results Conference Call. [Operator Instructions] This call is being recorded on Friday, July 30, 2021. I would now like to turn the conference over to Mr. Roy MacDonald. Please go ahead.
Thank you very much, and good morning, everybody. Welcome to the George Weston Limited second quarter 2021 results 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. And before we begin today's call, I would like to remind you that today's discussion will include forward-looking statements, which may include, but are not limited to, statements with respect to George Weston's anticipated future results and the impact of the COVID-19 pandemic. 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 securities regulators. And any forward-looking statements speak only as of the date they are made. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than what's required by law.Also, certain non-GAAP financial measures may be discussed or referred to today. So 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 quarter results, today, we will focus our call on the performance of our Weston Foods segment. And with that, I will turn the call over to Richard.
Thank you, Roy, and good morning, everyone. We delivered good results in the second quarter. Our businesses delivered growth despite continuing impacts of the pandemic and some new industry pressure in [indiscernible] On a consolidated basis, George Weston Limited reported revenues of CAD12.9 billion for the quarter, an increase of 4.6% versus last year. Adjusted net earnings were CAD272 million, an increase of CAD133 million and adjusted diluted net earnings per share were CAD1.78, an increase of CAD0.87 per share or 95.6%. The increase reflected the improvement in the underlying operating performance of Loblaw, Choice Properties and Weston Foods. Loblaw performed very well in the second quarter with strong revenue and bottom-line growth, continuing to report sequential performance improvements.Retail gross margin continued its strong momentum from the previous quarter, growing 130 basis points compared to last year, reflecting underlying improvements in business initiatives. Looking beyond this quarter's performance on a 2-year basis, Loblaw recorded average growth in revenue of 5.9%, adjusted EBITDA up 8.1% and adjusted EPS growth of 15%. Choice Properties delivered solid financial results in the quarter. The business collected 98% of contractual rents despite an operating environment that was impacted by regional lockdowns across Canada, once again demonstrating the value of Choice's necessity-based retail portfolio. Choice continued to advance its development initiatives and drive meaningful net asset value appreciation through its existing portfolio.Weston Foods delivered much improved financial results in the second quarter of 2021 as the business regained momentum, with COVID restrictions starting to lift and as it laps the severe challenges faced at the start of the pandemic last year. Sales improved by 12.1%, including the impact of foreign currency translation. EBITDA grew by CAD19 million in the quarter, driven by higher sales, lower COVID related expenses and continued productivity improvements. Along with many others in the food manufacturing industry and in manufacturing in general, Weston Foods was challenged in the quarter with high cost inflation in many aspects of its business, especially commodities as well as significant labor availability challenges.Both the inflation and labor availability challenges are notable for the speed, breadth and severity of their impacts on the industry and both relate to a surge in global demand as the economy began to recover from the negative impact of COVID. These challenges impacted Weston Food's ability to meet growing customer demand, i.e., sales and deliver against its profitability targets. These challenges are expected to persist in the second half of the year. Weston Food has taken steps, including broad-based pricing to help mitigate the impact of cost inflation and expect labor availability challenges will ease over time.However, we expect full year earnings to be impacted. As reflected in our outlook statement, we now expect adjusted EBITDA to be monetarily lower compared to 2020 on a 52-week basis. Looking through these challenges, Western Foods remains well positioned to meet the increasing demand from its customers and continue to offer superior products and services. We returned capital to shareholders by repurchasing CAD141 million of common shares in the quarter. Subsequent to quarter end, we purchased an additional CAD130 million worth of GWL shares. Year-to-date, we have repurchased CAD325 million of shares or, I guess, 2.8 million shares. Earlier today, we announced a 9% increase in our quarterly dividend, marking our 10th annual increase.Also, in Q2, we began to settle the net debt associated with a long-standing equity forward sale agreement relating to 9.6 million Loblaw shares. We expect to settle the remaining balance before the end of the year. The net impact of this is a reduction in the annual carrying cost of approximately CAD20 million and an increase in our economic interest in Loblaw to the tune of 9.6 million shares. Looking forward, I remain encouraged by the underlying strength of all of our businesses.On the sale of Weston Foods, the process is well underway, and we are engaged with a broad group of prospective buyers. We received indications of interest from a number of financial and strategic buyers and are currently going through the second phase of the process. We expect to be in a position to announce the transaction this fall. With that, I will turn the call over to Galen.
Good morning. Like Richard, I'm pleased with the steady progress each of our businesses made against their financial and operating metrics during what was a dynamic and challenging second quarter. At Loblaw, strong results were accompanied by a re-prioritization of strategic initiatives, which has freed up capacity to focus on retail fundamentals. This puts the business on firm footing and leaves us well positioned relative to the rest of the industry as we navigate the second half of 2021.Choice Properties' necessity-based portfolio and its disciplined approach to financial management continued to serve it well as the pandemic evolved and communities entered various stages of reopening. With market-leading rent collection rates and a strong balance sheet, Choice is set to drive meaningful net asset value appreciation as it further advances its development program. And finally, as Richard mentioned, we have been pleased with the level of interest from prospective buyers of Weston Foods. At the same time, Luc and the team have actively been mitigating the current inflation and labor challenges facing the industry. The fundamentals underpinning Weston Foods remains strong with leading bakery assets and high customer engagement, and we maintain our conviction around the opportunity for that business to unlock meaningful, incremental value in the right hands.As vaccination rates rise, communities gradually reopen and the pressures of the pandemic ease, each of our businesses are positioned to build upon their market-leading positions. As they do so, I want to express my appreciation for the colleagues in our stores, warehouses, properties and bakeries, who continue to set an impressive standard as they serve our customers and tenants. It's through their efforts that George Weston continues to build long-term value for shareholders. I'd now like to open the call for questions.
Thank you, Galen. Sorry, [ Anis ], could I get you to introduce the process, please?
[Operator Instructions] Your first question comes from Irene Nattel with RBC.
If we could just start with the sale process. Can you just talk through the degree to which potential buyers are willing to look through the curtain -- the current, let's call it, valley, if you will, in earnings and value the food business on something closer to a normalized earnings run rate?
Yes. Good question, Irene. We actually had that discussion at our Board meeting yesterday. If you look at the people who are interested in the process, most of them have experience in our industry and are actually facing the same issues as us. So we feel confident that they will see through this.
That's helpful. And then just to the extent that they are already involved in the industry, do you anticipate meaningful competition grow challenges?
Depends on who ultimately gets it.
Okay. So in terms of -- if we get an announcement this fall, what's a reasonable time line do you think to closing?
Depending on whether or not there is competition review, it could be really quick. So -- but our expectation would be, we would like to close this before year-end.
Okay. That's great. And then just finally, one other question. In terms of the unwind of the equity forward structure, can you just walk us through the mechanics of it? The aggregate cost of the redemption, how this all works and what the net outflow will be?
Really? You won't me to walk you through that? So this is -- I'll just make it very simple, Irene. This is an old instrument that we obviously placed a while back, and we made the decision that we want to sell it. And we're cleaning it up because it's been a bit of a nuisance in our financial statement. And so we're essentially using cash to buy it out. And effectively, what's happening is that we're increasing our economic interest in Loblaw shares to the tune of 9.6 million shares. And when you've all cleaned it up, we're going to be saving essentially CAD20 million of interest.
Your next question comes from Peter Sklar with BMO.
It's Emily for Peter Sklar. Just wanted to touch on the Food Services segment. We're wondering if you could maybe spend us -- a minute or so telling us how that segment has rebounded now that we're lapping the worst quarters of COVID last year?
Yes, we're very happy with the way our food service business is rebounding for, for example, our QSR business behind the strength of our Artisan and Donuts categories is actually now outperforming 2019 levels. So sales are coming back that momentum is really good.
Great. So it sounds like it's coming back real quickly. So in terms of inflation and your levers to help mitigate that, how often are you able to put through price increases? And how large is the gap now between the cost inflation that you're feeling and the price increases that you've been able to implement so far? Obviously, we don't have crystal balls with the inflation, but what are your levers to try to mitigate that and minimize that gap?
Yes. In terms of inflation, we're seeing inflation in the back half of this year, hitting us at a rate that's about 3x higher than what we normally put in the plan. So this is really unprecedented. The -- we're using the normal levers that we use, so tight SG&A, we lean more aggressively on productivity. And we've already announced pricing that's going to be effective by the end of August. What's challenging right now is the lag between the time that the inflation hit us and pricing becoming effective, which I just mentioned at the end of August. So we put out their first price increase. If this level of inflation continue, we will potentially consider a second wave of price increase.
[Operator Instructions] Your next question comes from Mark Petrie with CIBC.
This is [indiscernible] for Mark. I just want to know if you could talk about your planned capital structure post bakery sale?
Yes. Our capital structure will remain more or less the same. Like we have some debt at the George Weston level that is years away from maturing. So that will remain on the balance sheet. The proceeds from the sales are most likely to be used to pursue more share buyback.
There are no further questions at this time. Mr. MacDonald, you may [Technical Difficulty]
Great. Thank you very much, Anis, and thanks, everybody, for joining us this morning. If you have any follow-up questions, please give me a shout. And mark your calendars for November 23 when we will be recording our 2021 Q3 results. Thanks very much, and have a great day.