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 2019 Third Quarter 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 Tara Speers, Senior Director of Investor Relations. Thank you. Please go ahead.
Thank you, Denise, and good morning, everyone. Welcome to the George Weston Limited Third Quarter 2019 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 2019 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 and 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. Since Loblaw Companies Limited and Choice Properties have both released their third 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. Let me start by saying that we are pleased with the results for the quarter. Our businesses performed well, with good operating and financial results. On a consolidated basis, George Weston Limited reported revenues of $15.2 billion, an increase of 2.4% compared to last year. Net earnings available to common shareholders was $69 million compared to net earnings of $51 million last year. On an adjusted basis, net earnings available to common shareholders increased by $103 million to $391 million, mainly driven by the positive contribution of the company's direct ownership in Choice Properties as a result of last year's spin-out; a decrease in income tax expense, driven by the disposition of the portfolio of properties by Choice; and the improvement in the underlying operating performance at Loblaw. We reported adjusted diluted net earnings per share of $2.54, an increase of $0.29 per share or 12.9% compared to last year. Loblaw delivered on its financial framework in the quarter. The drug retail business had another strong quarter and the food business improved its sales performance compared to Q2. Management is committed to its strategy, making targeted and measured investments to improve same-store sales and tonnage and driving process and efficiencies to support investments to position the company for the future. Through its buyback program, Loblaw repurchased approximately 4.3 million shares during the quarter. Our ownership now sits at approximately 51.8%. Choice Properties delivered another quarter of strong results. Choice continues to focus on owning, operating and developing a portfolio of high-quality assets. Choice further improved its balance sheet in the quarter, in line with our strategy. Weston Foods performance was in line with our expectations for the quarter. Sales were $638 million, up from 638 -- $630 million, sorry, in Q3 of last year. Weston Foods adjusted EBITDA was flat, excluding the positive impact of IFRS 16 and the prior year net gain on the sale leaseback of a property. Adjusted EBITDA was impacted by productivity improvements and the net benefits realized from Weston Foods transformation program, offset by higher input and distribution costs, and an increase in performance-related compensation accruals. We are pleased with the positive momentum we see at Weston Foods. Management is delivering results, including operational efficiencies, strong customer engagement and benefits from the transformation program. The team continues to focus on winning new business in its growth categories and driving operational efficiencies. There is still lots of work to do, but we are encouraged by our Q3 results as we continue to stabilize the business. We have updated the full year outlook for Weston Foods to note that we now expect full year sales to be positive compared to last year, attributed to the positive impact from foreign currency translation. As we look at the final quarter of 2019, our ability to drive value at George Weston will be from the continued performance of Loblaw and Choice and the stabilization of Weston Foods. I will now turn the call over to Galen.
Thank you, Richard. The third quarter was another period of solid operating and financial results across our portfolio of businesses. Loblaw continue to execute against its strategy, focusing on stable trading while unlocking process and efficiencies to fuel investments in its strategic growth areas. Amidst the competitive marketplace, Loblaw improved its food sales trend with measured margin investments. However, the job is not yet done, and it remains a continued area of focus for the business. Choice Properties performed well during the quarter, demonstrating its commitments to owning high-quality portfolio of properties, while further strengthening its balance sheet for the future. And lastly, Weston Foods demonstrated momentum as the business continued to stabilize. The improving trend is encouraging and gives us further confidence in our transformation towards becoming North America's premier bakery. As we exit the third quarter, we're pleased with the performance of George Weston. Each of our portfolio businesses continued to show a commitment to executing against our strategies, in turn, delivering long-term value for our shareholders. I'll now ask the operator to open the line for questions.
[Operator Instructions] Your first question comes from Peter Sklar with BMO Capital Markets.
It's Emily Foo for Peter. So for the Weston Bakery, sales increased, ex FX was 0.6%. And you mentioned that some of it was price. So I was just wondering how much of it is price and whether or not you have some insight as to how price is going to be moving forward into 2020?
Yes, the impact of price was very limited in Q3. The positive trend was driven mostly, we had a very solid summer in our summer buns business, and we continue to grow our doughnuts business. The reality is that inflation is really becoming a theme in the food industry in North America. And for us, we're focusing on driving efficiency and productivity gain to mitigate the impact of inflations.
Yes. So while we're on that topic, can you tell us a little bit more about some specifics about the transformational program that you've been working on? And how much more runway do we have with the productivity improvements and benefits?
Yes. So our transformation program is a 3-year program. So we're about to complete year 2. We're happy with where we are at this point, and we're on track to deliver our objectives.
Okay. And just the mechanics question with regards to the sales outlook. So without FX, we should expect 2019 sales to be slightly below 2018. So that would be a 2018 sales number also stripping for the FX impact?
Yes. If we look at our sales performance, excluding FX, it's been improving for every quarter so far this year. So that's how we've been looking at our performance so far.
Your next question comes from Irene Nattel with RBC Capital Markets.
If we look at the Q3 EBITDA run rate, on an equivalent 12-week basis, it looks as though you're up about 10% versus the first half of the year. Is that sort of the similar -- should we expect the similar kind of progression in Q4?
Irene, Q4 is an important quarter for us, and so we need to see it come to an end before we can comment. And we will update our outlook for 2020 once we release Q4 numbers.
Okay. I totally understand. Let me ask the question a different way. Presumably, if you're going to achieve your financial objective as we move through late 2019 and into 2020, we need to see an acceleration in year-over-year EBITDA growth, is that -- okay, so that's reasonable. Okay. So when you say that you're on plan, we should interpret it that way?
Yes, it's the same as sales. If you look at our EBITDA performance, it's been improving quarter-over-quarter so far this year. So that's -- we're encouraged by that, but like Q4 is an important quarter, it's Christmas and U.S. Thanksgiving, so we need to see it through to deliver the year.
Okay. And some of the innovation work you've been doing in the doughnut area seems to be an important element as we -- potentially in the go-forward position of the business. Is there any commentary you can give us? Any insights you can give us into how that's progressing?
Yes, this is progressing really well. In Q3, we continue to drive innovation, our doughnut business, by launching premium doughnuts, so cookie topped doughnuts that we launched in the U.S. We're happy with the growth we're seeing in our donuts business. In Q4 of this year, we're going to be adding 2 lines. 2 lines are going to come up for capacity, as we will be satisfying demand for a food service contract we won in the U.S.
Excellent. And then just finally, one question. We know that Loblaw has had a negative Thanksgiving hit for you guys. I assume you would have a shift earlier, but is there anything we should keep in mind because of the shift in timing of Canadian Thanksgiving? And also...
At Thanksgiving?
Yes. And then just also in the U.S., there's a bit of a calendar shift. Does that have any impact on you?
No, the calendar did not impact us. So there was no impact in the quarter from Canadian Thanksgiving. And the U.S. shift of a week will not impact quarter-over-quarter results.
[Operator Instructions] Your next question comes from Mark Petrie with CIBC.
This is actually Krishna Ruthnum on for Mark. My first question is, can you give us a sense of relative capacity utilization across categories? And I'm also wondering about which category saw sales growth in the quarter.
Yes. So part of our transformation program is the -- includes the optimization of our network. We're at a place now where we're satisfied with the efficiency of the level of utilization within our network. We're at a place where we can meet a near-term demand. And we're at a place where we can add capacity as demand materializes. So for example, earlier this year, we added a line in our artisan business to meet growing demand there. As mentioned earlier, we are bringing on line 2 additional lines in Q4 for our doughnuts business, and we're in the process of commissioning a line that will be adding capacity in our bagels business early in 2020. So growth in Q3 was driven by growth in -- slight growth in Q2 driven by growth in our doughnuts business and alternative business as well.
Okay. Great. And can you elaborate a little bit more in which geographies are we seeing more sales growth and, additionally, this CapEx investment?
Yes, it's mixed. So the CapEx investments are split within -- between Canada and U.S. So bagel investment in Canada. Doughnuts investment right now in the U.S. The artisan line was added in Gaffney, South Carolina. The growth of our business is split between retail and food service, with a slight bias in the U.S.
Okay. And lastly, just in Canada, CPI has been ticking up in the bakery category. I'm just wondering if you're seeing any inflation over and above your level of cost increases or if it's really just to capture the additional input costs?
I mean, as mentioned earlier, I mean inflation is really a theme across transportation, labor and cost of materials going into. We're focusing the bulk of our efforts in partnering with retailers and food service traders and driving efficiencies and productivity gains to mitigate these impacts. And pricing is really a last resort.
There are no further questions queued up at this time. I'll turn the call back over to the presenters.
Thank you, Denise, and thank you, everybody, for your time this morning. If you have any follow-up questions, please don't hesitate to contact myself. And please mark your calendars for February 26, when we will report our fourth quarter 2019 results. Thank you.
This concludes today's conference call. You may now disconnect.