Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the George Weston Limited fourth and full year 2019 earnings results Conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you want me depressed.
Darwen on your telephone please be advised conference is being recorded if you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your speaker today terrorists Spears Senior director Investor Relations. Please go ahead.
Thank you Christina and good morning.
Welcome to the George Western limited fourth quarter and full year 2019 results Conference call I'm joined this morning by Galen Weston, our chairman and CEO, Richard you frame, our president and CFO, Luke Mom show President of Western fees, and why Mcdonald, Vice President Investor Relations.
[noise] 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 [noise].
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 expectation.
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 there 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 non-GAAP financial measures may be discussed are 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.
And since law Black companies limited and choice properties have both released their second sorry, their fourth quarter and full year results. We will focus today's call on the performance of our Western food segment.
Before I pass the call over to Richard I would like to highlight the updates we made to the GW UL annual report specifically the revised front section of the management discussion and analysis.
In response to your feedback we updated the annual report to provide information. We believe it's helpful. In your understanding of George West and.
Our objective for the update with to answer recruiting questions highlight our operating and value creation strategy and provide key performance metrics. We hope you find the update useful we're excited to share the new document with you and look forward to your feedback with that I will turn the call over to Richard.
Thank you John good morning, everyone.
We are pleased with the results for the quarter, our businesses performed well with solid operating and financial results.
On a consolidated basis, George West and limited reported revenue of $12.1 billion, an increase of 3.3% compared to last year.
For the full year revenue was $50.1 billion, an increase of 3.2% compared to last year.
For the fourth quarter net earnings were $433 million compared to $271 million last year, an increase of $162 million.
On an adjusted basis net earnings increased by $30 million or 12.9% to $262 million preliminary.
Primarily due to the improvement in the underlying operating performance of each of our businesses.
We reported adjusted diluted net earnings per share of $1.69, an increase of 10 cents per share or 6.3% compared to last year.
Our third dimension, we have included new metrics in the front section of our Mdna to assist with understanding of our business, including GW L. corporate free cash flow.
GW corporate free cash flow is a measure we used to evaluate the cash generated in two GW will.
It consists of the streams of cash will receive from our operating subs should subsidiaries, which include the dividends from loblaw distributions from choice properties and the net cash flow contribution from western foods less corporate costs.
For the year ended 2019.
No real corporate free cash flow was 400 million $411 million, an increase of $311 million over last year.
When we account for dividends, we paid to our shareholders interest on our indebtedness and our $50 million equity contribution to choices equity offering last spring.
GW added $70 million of cash to its balance sheet in 2019.
At year end GW of cash balance stood at around $700 million.
Loblaw extended this positive momentum during the quarter with continued improvement in its food retail business and strong results in its drug retail business.
Through its buyback program loblaw repurchased approximately 2.3 million shares during the quarter for a total cost of $163 million.
Our ownership now sits at 52.2%.
Lowball remains committed to its strategy responding to evolving customer customer needs and positioning the business for the future.
Loblaw seeks to deliver process and efficiency savings to offset cost pressures and enable investments in his strategic growth areas of everyday digital retail payments on rewards and connected health care.
Diligent digital retail is already contributing to the business, having delivered $1 billion of revenues in 2019.
Choice properties delivered another quarter of solid results.
Choice continues to focus on generating stable income and active development program to add high quality real estate to the portfolio and balance sheet strength to provide financial flexibility.
Choice further strengthen its balance sheet in 2019, following 400 million dollar equity issuance and $400 million of asset sales.
Choice portfolios occupancy at year end was 97.7% with same asset and NOI growth of 2.6%.
Within foods performed well during the quarter sales were $522 million up $15 million from $507 million in Q4 2018 for the full year sales were $2.15 billion up $33 million versus 2018.
For the quarter worse than foods, adjusted EBITDA was up $5 million, excluding the positive impact of IR for our 16 and the prior year net gain on the sale leaseback of property.
Adjusted EBITDA was positively impacted by improved gross margin through productivity improvements and the net benefits realized from Western foods transformation program, partially offset by higher input costs and an increase in performance related compensation accruals.
For the full year within fluids, adjusted EBITDA was $211 million up $2 million versus 2018, excluding the positive impact of higher for 16 and the prior year net gain on the sale leaseback of properties.
Adjusted EBITDA was positively impacted by improved gross margin through productivity and the transformation program, partially offset by higher input and distribution costs and an increase in performance related compensation accruals.
We are pleased with the momentum observed at West and foods throughout 2019 management's focus was on stabilizing the business through a return to topline growth financial scrutiny and strengthening its arguably organizational capabilities.
The business achieved these objectives.
By focusing on winning new business from new and existing customers. The business was able to deliver sales growth.
Through cost savings initiatives and process improvements the business improve its financial metrics.
And through the first waves of Sep deployment and improve processes the business improve its organize organizational capabilities and delivered improvement in service metrics.
With some foods as stabilize and is now positioned for growth.
However, there are still lots of work to be done.
The S&P deployment accelerates in 2020, and we are in the last year of our transformation program further new capacities coming online in Donuts and bagels and we remain focused on the successful startups of this new capacity, which is well underway.
Looking ahead to 2020 West and foods remained committed to its strategy with a focus on winning new business in key categories and markets and strengthening its operational processes.
Excluding the impact of foreign currency translation, and the 50, Threerd week West and foods expect sales to be modestly higher when compared to 2019.
Adjusted EBITDA as expected to be higher when compared to 2019 and capital expenditures will decrease to $185 million.
All told George Weston at a successful year and 29 team executing against his plan delivering operational stability and supporting each of us businesses in making steady progress against their strategic frameworks.
I think completed our first full year of direct ownership and choice properties. We marked an important milestone in our transformation toward a more balanced portfolio with street.
Three strategic complimentary businesses in retail real estate and consumer goods.
Today, we are focused on improving the financial flexibility of GW al to support investments in our existing businesses as opportunities arise.
We use such flexibility as part of Loblaws acquisition of shoppers drug Mart in 2014 by contributing $500 million, a cash and allowing our ownership position in law to be diluted below 50%.
At that time, we clearly stated or objective to return our ownership to over 50% to 50%.
Now that our ownership and load lies at 52% we have achieved that objective and our focus is turning to building financial flexibility.
For this reason today, we announced our participation in Loblaws normal course issuer bid program.
This means GW al will be selling loblaw shares into Loblaws NC IB program with the objective maintaining our ownership position at 52%.
Assuming lob alibis back about 1 billion dollars' worth of stock on an annual basis. This will generate approximately $400 million of additional cash on an after tax basis for GW will annually.
We currently hold about $700 million of cash and we will seek to accumulate approximates to approximately 2 billion in total over the next few years.
We have no specific plans for this cash today, but remain optimistic about the opportunities in each of our businesses.
Of course, if it turns out that we can't effectively deployed a cash then we will consider a range of alternatives, including returning capital to shareholders.
To be clear, we are committed to our controlling position in loblaw and standby its strategy.
Now returning to the results. We released this morning, we are pleased with our Q4 and full year results ACA across the group of companies. We remain focused on supporting Loblaw choice properties and listen foods and believe they are well positioned to win in the future.
Ill now turn the call over to Galan.
Thank you Richard to Echo Richard message, we are pleased with the performance of the business. During the fourth quarter 2019 was a good year for the group Loblaw ended the year with positive momentum as it continues to focus on the customer experience and invest for the future twice properties leveraging its strong foundation delivered on its goals of stability and growth for investors over the long.
Term and western foods as a business has stabilized, finishing the year with solid sales and improving financial metrics.
Throughout 2019, we've communicated our focus and commitment on partnering with our portfolio of businesses to develop and execute our strategic plans to create long term value for shareholders. We believe in deploying expertise and strategy talent development capital allocation and mergers and acquisitions across the group of companies.
As Richard mentioned as part of our ongoing strategic review at GW, well, we made the decision to participate in Loblaws normal course issuer bid.
This allows us to enhance our financial flexibility.
We remain committed to our controlling 52% interest in loblaw and two at strategy and to deploying the incremental cash in a disciplined manner not straying from our existing businesses.
As a holding company with three strong and well positioned businesses and retail real estate and consumer goods GW al is focused on providing support across the portfolio. The proceeds from the participation and allow NCB will provide GW well with flexibility to deploy capital across the group investing in each of its businesses.
I'll now ask the operator to open the line for questions. Thank you.
At this time I would like to remind everyone in order to ask your question. Please press star one on your telephones. Your first question comes from per Kilo Paris.
Patricia Baker from Scotiabank Your line is open.
Thank you very much and good morning, everyone.
It was really nice to see the B turn in the business at Westminster continued momentum.
In Q4 and nice.
Topline growth there can you talk about where you saw that strengthened which which categories in Q4.
Before we saw growth across six of our nine nine categories with strong performance and donuts alternatives and pies as well.
Okay. Thank you Thats very helpful. And then can you just update US look on where you are on the SKU rationalization.
Yes, we're we're about 85% of the the way through share member originally the objective was to discourage you about 1000.
SK user about 85% will continue discontinuation in the third year of our transformation, we're able now to balance our discontinuation, where they are fairly robust sales pipeline, which allow us to focus on topline growth as well.
Okay. Thank you and I think it may be Richard in your remarks, you did reference the fact that you added new line.
Q4 can you give us a little bit more information on how those are how those are running or is everything going to plan.
Yes, we've got new capacity.
Gradually coming online as we're speaking both fan donuts and in bagels, and so far there are outperforming as expected.
Great. Thank you very much.
Your next question comes from Irene Nattel from RBC capital markets. Your line is open.
Thanks, and good morning, everyone.
First of all just a couple of questions bigger picture question.
In the annual report you reiterate your objective to add 100 million in EBITDA in the consumer foods business.
Can you please.
Give us or tell US 100 million off which base should we be looking at now and secondarily over what period of time.
Good morning Irene.
The.
What you're referring to as our is our transformation program.
As mentioned we are in year three of that program.
Two years under our belt and and we were we are running running on plan. So if everything goes well, we should be able to deliver that amount.
Fully in the in 2020 as to.
What base I guess.
Look at where we are now and with two years.
The transformation behind us and so there is another year to go and Thats how were.
Saying and our outlook that we plan to grow EBITDA in 2020.
That's how big a number in 2020 okay.
Thank you.
We don't.
Okay, Irene just to be clear, okay like our.
We did two years of that already and that is in our numbers. So it's only year three that you're going to see in our numbers. So so we're not saying that we're going to reach that number in 2020, just wanted to be very clear. Okay. Thank you. Okay. Thank you.
That's very helpful. And then just following on the discussion about capital deployment.
In the past, you've you've kind of indicated that.
Retail M&A would happen within loblaws, and or ALCL and that real estate M&A would happen within choice.
In the in your remarks, you kind of talk about consumer foods real estate and retail so I'm wondering how we should be thinking about.
Capital deployment, what is the time period.
And if we look specifically at consumer foods.
Tim This consumer foods me baking or does it mean something broader than baking.
Okay to be very clear nay was illustrating the clear my remarks to we currently do don't have any plans for deployment of this capital. Our current expectation is we will accumulate cash so.
Because we want to bill financial flexibility.
And if you if you remember we've done so in the past.
Like we've held cash at GW, well and we put it in use when we had a need like the shoppers acquisition and the choice IPO was a need where we we invested cash and at that time the level of cash was much higher than what we're contemplating now so we feel that building financial financial flexibility at George at this time is the right thing to do.
But we have no plans.
For now.
That's very helpful. And then just one final little question, if I might add this follows up on a discussion of as the incremental capacity.
The capacities coming on line now to what degree do you have commitments from your customers to fill the capacity.
Yeah were.
Overall, our network were function at about 75% capacity right now were bit tighter on on our growth categories Donuts and artisan, we're confident that the capacity on line will allow us to to deliver our objectives for Fourq 2020, and we continue to bring capacity.
The online as we as we when new contracts.
That's great. Thank you.
Your next question comes from Mark Petri from CBC. Your line is open.
Hey, good morning, just a follow up on that last topic could you give us a sense in terms of what type of capacity increase the additional lines.
In the in Donuts and bagels.
I mean for the organization.
Yes, the scrip answered will allow us a as I mentioned earlier too to build through to two to meet our objectives of modest growth for our 420 20 to be more specific is off it's one additional line of for doing lots and one additional line for.
Signals.
Okay, and sorry, how many lines you have currently operating just trying to get a sense of the relative magnitude of of the capacity increase.
Yes, we've got about 12 lines and donuts across our three three facilities and bay goals.
It's.
I believe this will be our offered line.
Okay. Okay. That's helpful. Thanks.
And then.
Richard just to just to clarify in terms of that 100 million and sort of the transformation plan.
Are you sort of implying like Thats. The I mean, that's the gross savings and.
And so obviously, we're looking at that at the net realized nation.
Aside from a whole bunch of different factors and so is the realization of the 100 million is that sort of spread evenly across the three years or.
Just trying to get a sense of reasonable expectations for 2020.
Yes, I know it's good question. So so the net realization first of all the 100 million is a net number okay and the net realization was.
Was lower at the beginning and higher IDN.
Okay. Okay. Thanks, and then last question just with regards to.
Capex.
Could you just give us a sense in terms of.
The 185 million guidance what are the buckets.
In that number and then I mean, obviously I know you just gave the 2020 number but it just sort of interested to hear anything you can share about how you think bakery cash flows and capital spending or capital investment will evolve over the course of the next few years.
If you think the 185 you Ken.
A simple way to look at is you look at it 50 50 off of it is span on foundation and productivity investment and the other half is spent on on growth. So new new capacity as mentioned is these investments are going.
In the Donuts and artisan and then alternatives when it comes to to growth and the maintenance and productivity.
Capital is going across our our network.
And now on the level of capital expenditures.
As you know like we've been over investing over the last five years and now we feel were in a position where we can lower debt level.
Capital expenditures, so you're starting to see that go down and you can expect that to continue going down over the next few years.
Okay. That's helpful and then actually sorry, one other question just in terms of the SKU rationalization in 2019 deal can you give us a sense of how you think that affected.
Revenue or the pressure that put on on revenue.
The job for US you. Another focus is really is really on dialogue on delivering positive.
Topline sales on sales growth and we we continue to balance.
Sure.
Solid sales pipeline with gradual discontinuations.
Okay. Thanks, very much on the west.
Okay, and if you would like to ask a question. Please press star one telephone keypad. Your next question comes from Peter Sklar from BMO capital markets. Your line is open.
Restart this 2 million sorry 2 billion.
Cash target you have I believe is this the first time, you've articulated it and so what is the magic and 2 billion as a number.
[noise] Lakehead, there's no magic to the numbers like I think we believe that 2 billion is going to be an amount that give us.
Brokerage.
And reasonable financial flexibility for a company of our size like we believed that this is an amount of cash that is appropriate and it's a responsible amount and that is not too much. So so thats, how we got to the number okay and if you get there and there's nothing really cooking in terms of deployment.
What we would you you'll returning to shareholders.
Yes, yes.
Yeah like right now, we're putting a premium on financial flexibility once we achieve that objective of 2 billion and assuming we haven't found a purpose to deploy the cash into one of our businesses like returning capital to shareholders is definitely one of the alternative will be considering.
Okay.
And then just.
Lastly.
On this new structure, where you're going to.
Tender into the Loblaw normal course issuer bid like how is that kind of work mechanically or you had a dry AMD tender on a pro rata basis or is it going up okay.
Thank you, yes, that's a really good question Peter Okay. This is an automatic program. Okay. So we actually make no decision and the reason why you see the you here at a number of 400 million. There's two reasons first like we owned 52.2% of Love Love, but there is also dilution associated with the.
With that we'd options, so we need to factored that in so that means the the amount we can.
We can tender is a bit lower and then there is that facts on the on the on selling selling those shares but the mechanism. The way works. It's just sort of an automatic program that we turn on and essentially each time that loblaw.
Buys back shares like we have we have party that sort of sales some of our shares to loblaw. So that we maintained at 52.2%. So its automatic we don't have any involvement from our perspective here.
Okay.
All I have thank you.
Your next question comes from Chris Lee from days, our Dunn Your line is open.
Hi, Good morning, guys first of all Niseight them the incremental disclosure on the free cash flow is very helpful. So thank you for that.
Okay. My first question is Russia, you mentioned in 2019 debt went down by about $70 million from that free cash flow.
Yes going forward is is it fair to assume that engine Weston foods EBITDA continues to grow and your Capex continues to grow to go down that $70 million.
You realized in 2019 that number in theory should continue to grow over over next few years.
Yes, and just to give you a little bit more precision we actually used also 50 million to put in in choices equity. So the net cash the net excess cash that was generated in Georgia. This year was north of 100 million, but the answer to your question is yes, as the EBIT EBITDA at West and food grow.
Those and its capex diminishes that amount rose.
And that math combined with a 400 million of them.
Cash proceeds from the NCB should allow you to reached a $2 billion I think you mentioned in the opening remarks in a few years.
Yes, Okay, and just and I'll, just maybe one clarification just going back to the 100 million of the net EBITDA.
Transformation. So you mentioned is in that number it was lower in the beginning higher NDN can you share with us so in year, one into how much of that was realized.
In Q1 and two.
No we don't want to give that precision the benefits themselves were relatively flat over the three years, but the cost to achieve those benefits were higher in the first two years versus your.
Well there with the costs, okay. Thanks very much.
There are no further questions at this time I turn the call back over to tear speakers for closing remarks.
Thank you Christina and thanks, everyone for joining us this morning, and you have any follow up questions. Please don't hesitate to contact where myself in please mark your calendars for Nathan only though we'll report our Q1 2020 results. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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