George Weston Ltd
TSX:WN
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George Weston Ltd
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Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the George Weston Limited Fourth Quarter Results Conference Call. [Operator Instructions] Thank you. Geoff Wilson, you may begin your conference.
Good morning, and welcome to the George Weston Limited 2017 Fourth 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 2017 and future years. These statements are also -- 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 from time-to-time, including the company's fourth quarter 2017 news release and annual report. 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 fourth 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 financial measure. An archive of this conference call will be available on our website.Loblaw Companies Limited released its fourth quarter results last week, and therefore, we will focus this call on the performance of our Weston Foods segment.Before I turn the call over to Richard, I would like to note that on December 19, 2017, the company announced actions taken to address its role in an industry-wide price-fixing arrangement involving certain packaged bread products. The company continues to cooperate fully with the Competition Bureau. And as such, please note that we will be providing no further comment on this matter at this time.I would now like to introduce our President and CFO, Richard Dufresne.
Thank you, Jeff, and good morning, everyone. Earlier today, we released our fourth quarter results for George Weston Limited.For the fourth quarter of 2017, George Weston Limited reported adjusted diluted net earnings per share of $1.78 compared to $1.59 for the same period in 2016, an increase of 11.9%.In the fourth quarter of 2017, Weston Foods sales decreased by 1.9% to $527 million from $537 million in the same period of 2016. Sales included the negative impact of foreign currency translation of approximately 2.8%. Excluding the unfavorable impact of foreign currency translation, sales increased 0.9%, mainly driven by an increase in volumes of 0.4% and positive sales mix.Weston Foods' adjusted EBITDA in the fourth quarter of 2017 of $61 million decreased by $12 million compared to the same period in 2016. The decline in adjusted EBITDA was driven by changes in sales mix, higher input and distribution costs, partially offset by productivity improvements.Capital for the quarter was $88 million, which is lower than last year. For 2017, capital expenditures totaled $250 million.For 2018, we anticipate sales to be relatively flat as SKU rationalization will moderate volume growth. EBITDA will also be relatively flat as we face cost inflation pressures; one-time costs in support of our transformation efforts, which will be elaborated on by Luc; and savings occurring largely in the second half of the year. Capital will be at similar level to 2017 and includes investment in a new ERP system.I would now like to turn the call over to Galen.
Thank you, Richard, and good morning, everyone. The fourth quarter results for the group came in a little better than we anticipated, driven by Loblaw. Loblaw delivered positive same-store sales in a slightly inflationary environment.After adjusting for the sale of our gas bar business and franchise consolidation, gross margin and SG&A improved. 3 of the 4 business segments of Weston Foods continued to perform in line with expectations and the Frozen business is stable and volume is growing in the categories where we have invested new capital.EBITDA, however, was negatively impacted by our higher input costs related to material cost inflation, higher packaging costs and freight inflation. Unfavorable sales mix also negatively impacted operating performance.Weston Foods experienced a challenging year in 2017, and we recognized the need to accelerate our change agenda. And as a result, the business has embarked on an ambitious 3-year transformation plan, led by our President, Luc Mongeau. I have asked Luc to join us on the call this morning to provide some detail on this initiative.
Good morning. I'm pleased to join Galen and Richard on the call this morning. I've now been with Weston Foods for over 12 months, and can say with confidence that the baking industry is an exciting category with a healthy growth potential and that Weston Foods is an organization with leading brands, a wide assortment of products in growth categories and strong talent with a significant presence in the food retail and food service channels across North America.While improvements have been made in recent years, a challenging 2017 has allied the need to accelerate our company's change agenda. As a result, in late 2017, we launched a transformation program designed to improve our ability to delight consumers and customers and improve our agility and operational efficiencies.This will better position us for future growth and produce a reliable and growing stream of earnings. Our transformation program will achieve these objectives through 3 work streams: restructuring of our organization, simplification of our operations and amplification of our growth efforts.We kicked off our transformation program this past November. So far, we are seeing encouraging results from our restructuring activities. We have moved to one single sales team to better serve our customers. We have transitioned from 4 business units to 1 lean organization, and we have begun elevating our ability to innovate and win in each of the categories we play in.We've also begun work on our simplification work stream. These efforts will simplify our SKU offering and our production and distribution network, and will optimize our cost spend. Once we achieve identified savings, we will launch our amplification workstream, which will ensure we have the best portfolio offering, increase the level of investment in our brands, our production capacity and innovation.This transformation program will not only position us to win with the consumers and customers in North America, it will also result in $100 million improvement in EBITDA for the fiscal year 2020.In summary, I'm confident that our strong foundation, combined with this transformative agenda, will position Weston Foods to become one of the premier bakery in North America.That concludes our comments. And now we would be pleased to take your questions.
[Operator Instructions] Your first question comes from the line of Irene Nattel with RBC Capital Markets.
Just focusing on the transformation agenda, certainly, it seems to be very widespread. And I'm wondering if you could talk us through kind of where you see Weston's weak -- what was it about the way Weston was approaching its business that made it less able to compete? And what gives you the confidence that these changes will have the desired result?
Good morning, Irene. We have a high level of confidence that this transformation will position us for multiple years of growth. The opportunity here is to redesign the organization along 2 access. An access of providing consumers with the best products, delicious, nutritious baked goods; and as well, provide customers with service to excellence and access to the best insights to grow their businesses.
Okay. So when you say that you want to become the premier North American bakery, what does that look like? And what does that mean to you guys?
It definitely starts with above-average returns and it is driven by superior ability to deliver superior taste, superior enjoyment, superior enjoyment of our products and as well deliver, as I mentioned earlier, superior service to our business partners. And superior insights allow them to drive their businesses.
Okay. And as far as the SKU rationalization goes, it's sort of how widespread is this and in service? Could you just give us a little bit of color around in what way you -- sort of where you think you have too many SKUs?
Absolutely. This is a total process, and we're in the middle of the process right now. Early indication point that we will be rationalizing approximately 20% of the portfolio and this is across all the categories that we play in.
Okay. And presumably these are relatively low-volume, low-margin products?
Absolutely.
Your next question comes from Jim Durran with Barclays.
Yes. Just following on from Irene's questions, when we think about the transformation evolution, so we are in the process of closing down a plant in the U.S. and a plant in Canada and you are also doing SKU rationalization. Can you help us out in terms of understanding what kind of volume growth the remaining business might be running at right now? Or where you believe that should get to as we move from the first half of 2018 into the second half and then beyond that?
Jim, it's Richard. Like -- as we said, like the Frozen business is stabilizing, and we're now starting to see growth in the category that we've been invested, mainly cakes and doughnuts. So that's where you should see a significant amount of growth. The other category where we're growing also nicely is artisan.
And so the SKU rationalization, like, it's really just a number of products that might have been put in the marketplace that didn't achieve sufficient volume to continue with? Or is there actually sort of strategic...
Jim, would you speak up a little bit? We're just -- it's a little faint coming through.
Yes. Sorry. With respect to the SKU rationalization, is it predominantly sort of SKUs that may have been introduced to the market over the last few years that haven't gained sufficient tonnage to justify continuing on with? Or is there actually sort of broader strategic decisions about categories that you're exiting and ones you want to go after that you've not been strong in so far?
It's mostly a combination of low sale and no -- low returns. We are not planning on exiting any categories at this point.
Your next question comes from Patricia Baker with Scotiabank.
I think I have 2, but I probably have more. Just with respect to the SKU rationalization, and Jim did mention that there were plant closures, but also you've increased capacity -- invested in increased capacity over the last year or so. So will -- should we be thinking about the fact that the remaining SKUs that you're going to have that there's going to be a massive effort behind them to make sure that you get the volume growth so that you can ramp up that incremental capacity even though you've got fewer SKUs?
Patricia, it's Richard. So no -- so we're seeing -- no, we're seeing like -- the investments we're making, we're now seeing the growth. Like, SKU rationalization is going to be done across the board. Like, if you look at the SKU, someone are using one ingredient and -- for only one client, and so that's an example where maybe we don't make enough money. But there's other ways to combine SKUs together that will make it profitable for us. So it's not a broad, like we're going to exit big categories. All this stuff that we keep on doing is going to drive growth as we expected. And if you look what we're seeing right now, we're starting to see traction in sales and all of the categories that we've been investing in.
Okay. Well that -- I think that's very important. I'm glad that I got you to make that point. And then when you were talking about the -- kind of the 3 buckets of the organizational change, simplifying the operations, which is where the -- in part the SKU reduction comes and then the intensification of the growth efforts. And there was a discussion around a focus on innovation. And correct me if I'm wrong, but haven't we been talking about innovation at Weston Foods for several years now? What is changing here? What is this innovation versus the other innovation that we were focused on?
Yes. This is really focusing our efforts on scalable innovation, an innovation with our key large business partners.
Can you give us any kind of an example, Luc, of maybe an innovation that wasn't scalable, that didn't work? Or just -- so we can have just a more concrete handle on this ambitious plan and everything that it entails.
Yes. I won't get into any specific example, but worth noting is our increased investment in our ability to have very impactful innovation in the market. So yes, the program will result in account reduction. But as importantly, it will result in investments in our ability to generate the right insights from consumers and superior ability to transform these insights into relevant innovation. There are multiple examples out there that have proven that we can innovate with success. You look at our categories of doughnuts and categories of artisan, where we're innovating and driving growth.
Okay. And just quickly, let's go back on the Frozen. So it was really nice to see that you were able to state that the Frozen business has stabilized. And either Luc, you or Richard, do you feel confident that this really is a stabilization, and you'll be able to keep that business at least where it is now or take it slightly higher over time?
Yes. And last -- in the fourth quarter, we saw very promising progress in our Frozen ability and Frozen business where we're bringing stability to the business. We're putting in place processes, procedures that allow us to really match market demand with our capacity in our plant. I feel confident in our future in this business.
[Operator Instructions] Your next question comes from Keith Howlett with Desjardins Securities.
Yes. I wonder if you could speak to the trend in growth in industry capacity for frozen bread across the U.S. and Canada.
The trend in growth in capacity, the -- we see a stabilization right now as the industry is gearing itself up for the next phase of expansion.
And in terms of your success in the wholesale club channel in the U.S. and Canada, how are you faring there?
We're very confident in our ability to grow our business across North America, both in the retail category and as well in food service. Part of this transformation includes the transition from 4 sales teams to 1 retail sales team, that is really focused across -- against core customers across North America. And as importantly, equipped with the strategic selling ability to provide the right insights and the superior service excellence that our business partners need to grow.
Like, you just said wholesale, but I think -- I thought maybe you meant food service, but...
I do actually meant the club channel, the wholesale club, Costco in other words and Sam's Club.
Yes. I won't comment about specifics -- example about specific customers, but we are very well structured to serve this channel.
And I just had one question on the real estate holdings at George Weston, at the parent company level. I wonder if you could speak to those, and whether there is any assets there that might be of interest to the broader mandate of a combined choice in CREIT.
Like George, there is not much real estate to talk about like -- that could grow. All of the real estate is essentially in Loblaw's and in Weston Foods.
So in Weston Food?
I guess, we own a few of our facilities and our offices, but that's it. And Choice already owns a few of those facilities already.
Your next question comes from Irene Nattel with RBC Capital Markets.
Just a couple of follow-up questions, if I might. First of all, on the ERP system, can you tell us what systems you're using now? Can you tell us what you're replacing them with? And how widespread it will be and the cadence of the rollout point?
Irene, so we're going to deploy SAP, okay? And obviously, like we've developed good experience with SAP over the last few years. So it's a work stream that has started, I guess, last year. And we're going to start this year with ACE. ACE is going to be the first one. It's one of our smaller business units. And we want to make sure it works well there, before we sort of deploy it elsewhere. But that point is ACE, and we're ready to do that one this year.
Okay. That's great. And then when do you think -- assuming that it does well, Richard, when do you think that you will get to some of the larger businesses?
Well, it's over the next 2 years, following this year essentially.
Okay. That's great. And then just one other question. You guys have sort of -- both in the written documentation and on the call, you've mentioned service levels to customers. Can you talk a little bit about where your service levels are today? And presumably, they are lower than they should be. And so what the issue is and what the target rate is?
The main issue is really matching demand with capacity. We're in the process of implementing a very robust sales and operations planning process. In the last few periods, we see very encouraging progression that will bring us to best-in-class service levels.
And best-in-class service levels would be how much higher than where you are today?
It's within reach. We're -- we reached levels of 98.5% in recent periods, which is the equivalent of best-in-class.
And overall, Irene, like we're happy with the overall service level. But when you go by category, there is a few areas for improvement.
And there are no further questions in queue at this time. I will turn the call back over to Mr. Geoff Wilson for closing remarks.
Thank you very much for joining us today. Our 2018 first quarter release and our Annual General Meeting are currently scheduled for May 8. Have a good day. Goodbye.
And ladies and gentlemen, this concludes today's conference call. You may now disconnect.