George Weston Ltd
TSX:WN
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
156.66
233.87
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
George Weston Ltd
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by, and welcome to the George Weston Limited 2020 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 your speaker today, Tara Speers. Thank you. Please go ahead.
Thank you, Mariama, and good morning, everyone. Welcome to the George Weston Limited Third 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 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.I will now turn the call over to Richard.
Thank you, Tara, and good morning, everyone. As our operating companies continue to respond to the challenges of the pandemic in the third quarter, our results demonstrate the stability and resilience of each of our businesses.During the third quarter, our businesses continue to take thoughtful and deliberate actions in response to the pandemic, and I'm proud of our colleagues and their commitment to meeting the needs of customers and tenants.Through the third quarter, Loblaw remained focused on providing value to customers. Loblaw observed sequentially improving performance in tonnage, market share and margin, while continue to invest in the safety of colleagues and customers.Choice Properties results reflected solid earnings and an increase in rents collected. In addition, Choice resumed investment activity in the quarter, completing or entering agreements to buy and sell a number of properties. Capital recycling remains a focus for Choice as it aims to improve the overall quality of its portfolio. Since the end of the second quarter, Choice has completed or entered into agreements to dispose of $341 million worth of properties and acquire some for about $335 million.Weston Foods remains committed to driving operational improvements, realizing benefits from its transformation program and developing strong customer relationships and delivered strong improvement versus the second quarter.On a consolidated basis, George Weston Limited reported revenues of $16.2 billion, an increase of 6.5% compared to last year, driven by Loblaw. The company incurred COVID-19-related costs of about $93 million related to safety and security measures to protect colleagues, customers, tenants and other stakeholders.The company reported adjusted diluted net earnings per share of $2.35, a decrease of $0.19 per share compared to the same period last year. The decrease is largely driven by a normal income tax rate this year versus a lower one last year.For the third quarter, George Weston Limited corporate's free cash flow was $307 million, an increase of $273 million over last year, driven by favorable changes in cash flow from operating businesses and proceeds from our participation in Loblaw's normal course issuer bid.Weston Foods' third quarter results improved versus the second quarter. However, we continue to be affected by COVID-19. I'm encouraged by the improved sales trend at Weston Foods in the quarter despite continued challenges in certain retail and foodservice categories.In the quarter, Weston Foods incurred $4 million worth of COVID costs relating to increased health and safety measures to protect colleagues versus $16 million in the second quarter. Weston Foods sales were $592 million, a decrease of $46 million or 7.2% versus the same period last year, an improvement versus the minus 14% recorded in the second quarter.Weston Foods' adjusted EBITDA was $62 million, a decrease of $10 million versus the same period last year, primarily driven by lower sales, higher input costs and COVID-19-related costs against an improvement -- again, an improvement versus the second quarter. Adjusted EBITDA margin was 10.5% in the quarter, and that number is in line with what we delivered in 2019 for the full year.While Weston Foods continued to face challenges presented by the pandemic, it observed encouraging signs during the third quarter. It continued to realize benefits from its transformation program. It demonstrated operational and service level improvements and sustained SG&A cost-savings initiatives. The Weston Foods team continued to gain traction with strategic partners, winning new business in artisan, donuts and bagels.In the 4 weeks following the end of the third quarter, Weston Foods continue to observe improving sales trends. However, we still see volatility. In addition, the 4-week run rate for COVID-19-related cost was approximately $400,000.The demand for quality baked goods remained strong despite continued challenge associated with COVID-19. Overall, our third quarter results were encouraging with each of our operating companies progressing their strategic priorities, while taking measured and appropriate action in respond to the challenges presented by the pandemic.I will now turn the call over to Galen.
Thank you, Richard, and good morning, everyone.During the third quarter, our businesses continued to face into the challenges of a complex operating environment with confidence, maintaining the steadfast commitment to colleague, customer and tenant safety. Doing so, they delivered stability in their operations, as Loblaw resisted pressure to increase prices at a time when Canadians needed value most and saw customer satisfaction scores reach all-time highs.Choice Properties benefited from the strength of its necessity-based portfolio of tenants, maintaining 97% occupancy during the quarter, while collecting 98% of contractual rents, up from 89% in Q2. And as Richard highlighted, Weston Foods saw a sequential improvement in its performance as service levels increased.In each of these cases, our businesses demonstrated their ability to respond to changing conditions. This strong underlying operating performance gives us conviction about the future.During the quarter, we invested in that future, making strides against the strategic priorities in each of our companies. Loblaw maintained momentum in everyday digital retail with e-commerce growing at 175%, led by online grocery. They launched PC Money, an online bank account, further strengthening the PC Optimum loyalty loop. And they advanced their Connected Health Care strategy with the launch of PC Health in the Maritimes as well as an investment in Maple, the virtual clinic platform that is already offering care to patients at 160 of our pharmacies in British Columbia.At the same time, Choice Properties resumed its investment activity and capital recycling continues to improve the overall quality of their portfolio while strengthening their balance sheet. As Richard mentioned, since the end of the second quarter, Choice saw total transaction activity valued at over $675 million, demonstrating their ability to make strategic advances despite the challenges presented by the pandemic.And finally, I'm encouraged by the results at Weston Foods. Improved operational metrics, sustained SG&A savings and their success in winning new business from strategic customers in artisan and donuts, the business is headed in the right direction.In the face of these extraordinary circumstances, I'm proud of how our teams continue to respond, and I want to thank the dedicated individuals at every level of the group with their commitment to safely serving our customers and tenants while moving their businesses forward. We have a clear strategy and remain committed to long-term value creation.Thank you. I'll now turn the call to operator for questions.
[Operator Instructions] Your first question comes from Peter Sklar with BMO Capital Markets.
It's Emily Foo for Peter. So with respect to pricing, we noted that this quarter that you were negatively impacted by pricing after a couple of quarters of pricing benefits. So have we lapped the last round of price out? And what is the current environment for near-term price increases?
No, there -- we weren't negatively impacted by pricing in the quarter. We were impacted by negative volumes in the quarter.
Okay, I see. Okay. Now let's switch to the foodservice channel...
Emily, it's Richard. I just want to add, in the press release, we talk about the combined effect of pricing and mix. And it's the combined effect of both. So pricing was positive and mix was negative, but the sum of both was negative. So that's why we wanted to clarify that.
Okay. Okay. I see. I must have just read the first part and did not see and mix. Yes. Okay. How did the foodservice channel improve over Q3? We know there's still many uncertainties with COVID and dining restrictions, but did foodservice sales perhaps settled in a range during Q3? How did you enter and exit the quarter with respect to foodservice sales? Any insight would be helpful.
Yes. We're very happy with the recovery that we're seeing in Q3 of our foodservice business. To give you a bit more details, our food business was -- foodservice business was down minus 38% versus last year in Q2. And in Q3, we were minus 4%. That's driven by a very strong recovery in our quick-serve restaurants business where we're seeing very good performance from our artisan alternatives and donuts business.
Great. That's wonderful. And with the new lines that's expected to come online before the end of 2020, like are there any operational now that you've ramped up perhaps during Q3? And has the projected capacity for all of these lines been impacted in any way by COVID?
We've got a series of lines that are coming up in 2020. You must have seen our announcement on our new bagel line, which is up and running. Our new donuts line just outside of Nashville, that is up and running as well. And we've got some capital that will be -- some new capacity on -- in cupcakes that will be up and running in the months to come. This -- a lot of this capacity is already spoken of, and part of it as well will allow us to grow in the near future.
Your next question comes from Irene Nattel with RBC Capital Markets.
Just following up on the last question. The donut line, is that the one touch line? And first -- I guess, yes, is that the one touch line? And how is that coming along?
It is not the one touch line. Moving on to one touch, one touch is progressing quite well, still on schedule for launch early next year, and we're going through the first production trial runs right now.
And how are the first production trial runs going?
They taste delicious. And their production -- the production trials are going very well, very encouraging.
I agree with Luc, Irene. They taste really good, actually.
Okay. Can you stop saying that because my stomach is grumbling? Just sticking with sort of the concept of, I guess, value-added baked goods. I think that Q4 tends to have a seasonal bump, Halloween, Thanksgiving, Christmas, any insights you can give us in terms of demand for those types of like higher-margin products? Like what have you seen quarter-to-date? And how are you thinking about U.S. Thanksgiving, in particular?
Yes. Of course, there's still a lot of volatility. But what we can see so far is we have a very solid U.S. Thanksgiving season, with a very strong performance in our pie categories, for example.
Excellent. Excellent. Yes?
And Irene, I just want to add like pies doesn't have the same margin as the rest of the portfolio. They're a bit lower. So we're very, very pleased with the volume, but like you need to know that. It's a factor that falls into play in our performance in every Q4 that we go through.
Okay. That's actually very helpful. And then one more, if I might, just switching gears a little bit. Could you update us on your current thoughts around M&A, please, particularly in the baking segment?
Irene, we can't comment on M&A. Like, we don't do that, sorry.
Your next question comes from Mark Petrie with CIBC.
I just wanted to follow up on a couple of things. With regards to pricing, you mentioned higher input costs for the quarter, but commodity costs are continuing to rise. I'm just curious what your outlook is for pricing over the next little bit?
We don't comment on any forward-pricing activity. What we're seeing from a commodity standpoint is, we saw increases in oils and sugar, and we see these stabilizing going forward.
Okay. And with regards to the COVID cost, did I hear you say its run rate right now is about $400,000 a month? Is that what you said?
The question cut, but I have a pretty good idea of what you were asking. So as Richard mentioned, COVID costs were roughly $1 million a week in Q2. In Q3, we saw that come down to about $300,000 per week. And what we're seeing most recently is these coming down to roughly about $100,000 per week. Again, there's a lot of volatility associated with the pandemic. But right now, we're at $100,000. We've got $100,000 per week. We've got very strong protocols, robust protocols in place in our bakeries, which gives us confidence that we can operate our bakeries effectively in this new environment.
Okay. That is what I was looking for. And then with regards to the sales trends, back on the Q2 call, you had mentioned you're sort of trending at down about 5%. The quarter came in a little bit below that. I'm just curious, was that mostly changes in the Retail trend or mostly in foodservice?
As mentioned earlier, we saw a very strong recovery in -- our overall in foodservice and a slower recovery in the Retail business.
Okay. And then my last question, I mean, obviously, there's been significant upheaval in consumer behavior over the last, well, 8 months over the pandemic. And it seems like grocers are taking a renewed look at things like store offerings and prepared food, but also assortments, category management and things like private-label penetration. And I guess I'm just sort of curious, when you think about all of those different moving parts, how do you sort of think about the opportunities or threats for Weston Foods?
For me, I'll start with the -- the demand for baked goods remains extremely strong. So the opportunities that how do we get delicious baked goods to consumers in this new reality. A lot of the trends that you just highlighted actually play in our favor. The big opportunity for us right now is really elevating, reinventing the bulk bin. So the bulk of donuts display, for example, to ensure that we can get delicious donuts to consumers in a -- in this very changing environment. But otherwise, many of the trends play in our favor.
Okay. And actually, just one other one. Obviously, there's also been a huge consumer trend towards online grocery. It doesn't seem like your categories necessarily lend themselves terribly well to that channel or at least being overpenetrated in that channel. But I'm just curious how you think about that in the context of your business? And what sort of opportunities you see with the growth in online and thinking maybe even if not from a product perspective, then from a marketing perspective?
Yes. We've been investing in elevating our e-commerce capabilities for many years. We're working with key retailers, both traditional brick-and-mortar who go into e-commerce and pure e-commerce retailers. We've been working with them for many years, ensuring that we out-develop the bakery category in these new platforms. So lots of innovation in terms of marketing initiative to make sure that these items pop up at the right time at the right place, when people are shopping online and as well, elevating the quality of our products, so they can retain their integrity through this different supply chain. So lots of collaboration happening with retailers across North America on this. We feel good about it.
Your next question comes from Patricia Baker with Scotiabank.
Just with that very strong recovery in foodservice with it only down 4% year-on-year. Can you just talk about what capacity utilization you have at your plants? What are they running at currently?
Yes. Overall, we're running at roughly 75% capacity. There are a couple of categories where we're a bit tighter. But our investment and new capacity coming online will allow us to meet the growing demand.
And then you did provide us with those metrics on foodservice, and you did indicate that you have a slower recovery in Retail. Can you tell us how much Retail was down in the quarter relative to Q2?
Yes. Yes. So remember, Retail, in Q1, we were up plus 2; in Q2, Retail was down minus 10%; and Q3, Retail was down minus 8%.
Your next question comes from Chris Li with Desjardins.
This is Jim on for Chris. So my first question is some of peers now that they are benefiting from consumer trading up from private label to branded products in the retail channel during the pandemic. Are you seeing that as well? And what percentage of your Retail business is private label?
It's the -- the large portion of our -- more than 40% of our Retail business is private label. We're seeing a good performance of our branded business and both of our private label as well. So we're not seeing a significant change.
Okay. Great. And my second question is relating to the promotional environment in the Retail channel. Has it become more intense in third quarter versus the second quarter?
The -- I don't know if you can repeat the question, the line cut, so we couldn't hear.
Sorry, just relating to the promotional environment in the Retail channel. Just wondering if it has become more intense in the third quarter versus second quarter?
Very similar.
I'm showing no further questions at this time. I will now turn the call back over to Tara Speers for closing remarks.
Thank you, Mariama, and thank you, everyone, for your time this morning. If you have any follow-up questions, please don't hesitate to contact Roy or myself. And please mark your calendars for March 4, 2021, when we will report our full year 2020 results. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.