Q2 2020 George Weston Ltd Earnings Call

Weston limited 2022nd quarter results.

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I would now like to hand, the conference over to terrorist Spears. Thank you. Please go ahead.

Thank you, Chris and good morning, everyone welcome to the George Westin Limited second quarter 2020 results conference call.

I'm joined this morning by gallon Weston, our chairman and CEO.

Richard you frame, our president and CFO and nuclear Jones, the president of questions here.

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 poor performance in 2020 and future years.

These statements are based on assumptions 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 today. They are made the company disclaims any intention or obligation to update or revise any forward looking statement.

Whether as a result of new information future events or otherwise.

Other than what is required by law.

Also certain non-GAAP financial measures, maybe discuss to 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.

His LAKANA companies limited and choice properties have both released their second quarter results. We will focus today's call on the performance of our Western feed segment I will now turn the call over to Richard.

Thank you Karen good morning, everyone.

We continue to navigate through this challenging and dynamic time, and our thoughts our windows were affected by Cobot 90.

During the quarter, our businesses continued to respond to the challenges presented by the pandemic and I'm proud of the great work being accomplished across our company.

Loblaws, ensuring and deliver services Canadians rely on in a safe and secure environment.

It has made significant progress on some of its key strategic initiative, notably in digital where our focus on E. Commerce has resulted in a significant increase in our online sales, which I've reached 1.2 billion in the first half of this year versus 1 billion for all of 2019.

[noise] choice properties is focused on corrective measures to mitigate risk and supporting its tenants weapons negatively impacted by the pandemic.

Choice is well positioned going forward as its benefits from its portfolio of high quality properties with solid tenants and as one of the best balance sheets into real estate sector.

What's in Foods remain committee commitment to meeting and exceeding because customer needs through the provision of superior Big keep bakery products and has continued to earned appraised of many of its customers over the last few months.

On a consolidated basis, George West and limited reported revenues of $12.4 billion, an increase of 6.5 per cent compared to last year.

<unk> increased spending on cobot 19 cost during the quarter incurring costs of approximately $312 million.

Hi, good as costs are related to temporary paid premiums pay protection safeguard security customer convenience and increased health and safety measures to protect colleagues customers tenants and other stakeholders.

From a financial perspective, our businesses were negatively impacted by cobot 19 during the quarter on an adjusted basis adjusted net earnings available to common shareholders were $142 million compared to the same period last year. This represented a decrease of 121.

The company reported adjusted diluted net earnings per share of 93 cents, an increase of 70 577 cents per share compared to the same period last year.

On a night as far as basis net loss available to common shareholders was $255 million compared to net earnings of 184 million law <unk> dollars last year, a decrease of $439 million and fully diluted earnings per share. They could have a dollarssixty six an increase of 239 point.

5%.

For the second quarter GW, all corporate free cash flow with $70 million, a decrease of $88 million over last year driven by the decline in cash grew from west in food and timing of distributions received from choice properties.

I'd Love law changes in customer behavior, and the strength of its network resulted in higher sales [noise].

However, this combined with $282 million in cold and related costs with pressure on Loblaws financial model in the quarter.

Well a significant percentage of the choice portfolio is anchored by Mississippi base retail tenants choice continues to work with tenants who has been negatively impacted by the pandemic through the provision a rental assistance.

Choice properties result reflect the stability inherent and it's in income producing portfolio and the four and for the quarter ended June Thirtyth choice collected 89% of rent.

That's number reached 93% in July.

The second quarter was financially difficult for west inflows as described on our last call. The first quarter was strong building on the momentum established through the second half of 29 pm.

Then cold here.

Pocketing certain retail categories in food service channel.

The onset of the crisis, many food retailers temporarily closed in store bakeries, and bakery display cases, which negatively impact retail sales.

Similarly government mandated closures of non it's essential businesses and physical distance distancing protocols negatively impacted the foodservice channel.

In addition to the decrease in sales through the second quarter Weston Foods, corporate 19 related spending continued including temporary pay premiums and pay protection safeguards and increased health and safety measures.

Colleagues.

Within food sales were 412 million into second quarter, a decrease of $67 million or negative 14%.

Versus the same period last year.

Listen food, it's good it's continuing with its transformation program has updated its capital expenditure forecast and us reduce as you need to mitigate cost in response to the coldest pandemic.

Two to four weeks following the end of the second quarter sales at West and food have improved significantly.

While sales for the quarter were down 14%. The last four weeks were down only 5% compared to last year, excluding the impact of foreign currency as we experienced recovery in many categories.

Over 19 related costs are also dropping rapidly as they were approximately $1 million over the last four weeks versus $16 million in the second quarter.

Well listen food foods face significant challenges and the second quarter the demand for quality baked goods remain strong the business remains committed to its strategic priorities and we believe that demand for baked goods will remain solid going forward.

Across the group of companies, we continue to respond to the challenges presented by the pandemic and we are confident in each of the operating teams ability to navigate through this period.

Although the pandemic us with near term pressure on our financial performance. It has increased our conviction in our strategic priority.

I'll now turn to turn the call over together [noise].

Thank you Richard during the second quarter, our teams faced into the challenges of cobot 19 with confidence and we confirmed the fundamental strength of each of our businesses.

Loblaw demonstrated operational excellence choice properties deliberate stability and growth Wesson foods benefited from the progress. It's made on its transformational journey in each case, we kept our customers and tenant safe uninsured. They had the essential goods and services they needed during an uncertain time.

Loblaw, our core business was strong as more Canadians turned to us to stay healthy and well fed than any other grocer.

And as consumers changed how they cared for their families. During the pandemic recent investments in ecommerce and virtual health care allowed us to quickly scale up and meet the surging demand for both.

Choice properties conservative balance sheet and its necessity based portfolio provided steady income as we collected 89% of rents during a volatile quarter outperforming many other Canadian reads.

During a time when restaurants and in store bakeries were mostly closed improved processes Weston foods allowed us to quickly adopt production to support increased demand in retail categories, such as fresh bread all of this while maintaining a no compromise approach to keeping our people safe and meeting consumers continued appetite for high quality baked goods.

Looking ahead, the underlying operating performance of our company's remains strong we are propelling our strategic initiatives forward and are well positioned to serve our customers today and into the future. We remain determined to do so with long term value creation as our primary objective.

Thank you well now take any questions.

Ladies and gentlemen in order to ask a question you want me to press Star one on your telephone. Please stand by what we can follow the Q and a roster.

Our first question comes from Irene that's how with RBC capital markets. Your line is open.

Thanks, and good morning, everyone. I was wondering if we could get a little bit more color.

On the demand trends, both in Q2, and particularly as we moved into Q3 for the different categories of your business.

And what the implications are on the margin profile going forward.

Good good morning years get ornate indoor outdoor cut the situation right now overall other consumer demand for baked goods remains very strong actually how strong it has to go for good crisis.

Well as often as I've quoted as modifies the way consumers got the ads on goals are baked goods. So in retail we've seen temporary closures of display cases. This place then.

And then foodservice, we've seen floors or government.

David on the floor is yours, all fall restaurants, and some something years, what we're seeing are both in retail and food service as the economy real Oh. The demand is is really strong and we're seeing a nice recovery and retail.

Going out so cases.

For example.

In foodservice, we're seeing a very strong recovery in and QSR.

So were as Richard mentioned, we see now were sales performance improved significantly and the for first four weeks following the end of the quarter.

From a cost.

Standpoint, and margin impact so as you can imagine impact margin is impacted it's impacted by three factors and they're pretty much all equal.

As far as there's the margin loss on.

By the odd, Rob and not and volumes and we know this temporary.

Second we are incremental costs, we did experience or capital costs at the quarter our related directly to hold it so whether it's a premium pay protection.

And we note that these costs are coming down as well and finally, they are stranded fixed costs and bakeries.

That we can't eliminate as volume when volume.

Rapidly.

And again.

These costs I mean, we won't get the reverse in park will get leverage of these costs when volume comes back in the base.

[noise] Irene let me just on just a little bit more detailed it is.

So what you were Q2.

Not at EBITDA was down 42 million.

And we've mentioned that Qubits costs were 16 million. So the balance is 26 million enough that 26 million like about 17 is because of volume and the rest is like the stranded cost us Lucas mentioning so that gives you a sense so as the sales recover.

Credit costs like are now being absorbed by the businesses our volume comes back and Colby costs are falling rapidly.

Okay. That's really helpful interesting now at one of the things that you that you didn't mention with a shift in mix so presumably gosh.

[noise] notwithstanding the fact that you sold lower volume and some of the in store bakery types of products that tend to have a higher absolute price point, we should see that showed that the margin mix impact normalize in the back half of the here.

Yes, we should.

That is great. Thank you.

You're welcome.

Our next question is from Merck battery with C.I.B.C. Your line is open.

Hi, Good morning, I'm just wondering.

If you could give a little bit more color the extensive any sort of manufacturing shutdowns and then the current status I mean, it sounds like.

Everything is basically back up and running but could you just sort of clarify that give any clarity on Q2, it exactly what happened.

Yeah everything is back up.

And and running during Q2, we odd a few temporary shutdowns as we were balancing production would talk with them out but as of this morning everything is is running.

Okay. Thanks, and then as I understand it you had sort of a could some capacity expansion plan for I guess back half of 2020 or by end of year.

With some new technologies as part of that what's the current status of that initiative and when do you expect that this is going to begin to show up or contribute to result.

Now we are new capacity scheduled to come up on line when it's one and in artisan and Donuts and ER and bagels of all these are all on truck and a backup of the year. We've got on your capacity coming up on our degraded cakes and all these things all.

Schedule.

Okay. So those will be contributing in 2021.

Yes, most likely.

Yes, assuming all all everything continues as expected and and then with regards to the 16 million.

Is that could you give us a sense of you know most of that is labor I would assume and so by virtue of the fact that that's now you know almost nil or or very minimal. That's that's just a reflection of the manufacturing being back online is that is that fair.

No as Richard mentioned on the on the corporate related costs for the quarter were 16 million.

The first four weeks following down over the quarter, there were roughly a million dollar.

The bulk of the 16 was driven by pay premium and IP protection.

To ensure that we are we pick up the out the network up and going and our <unk> employees safe.

Okay, and then just last.

There's been a lot of disruption in the bakery industry and just curious if I if that alters your view with regards to potential consolidation in that industry at all or does it presents some near term opportunities that may be you know weren't there are six months ago, What's your current view on consolidation and bakery.

Yeah as mentioned in the past Mortlake.

We continue to believe that the biggest opportunity to create shareholder value as by stabilizing the west and foods business and we were well on our way.

At Q1, so so that's remains the area of focus like we do acknowledge that disruption can lead to operate two opportunities, but right. Now we were we remain focused on the strategic initiatives.

Each of our business.

Okay. Appreciate all the comments all of us.

Our next question is from Peter Sklar with BMO capital markets. Your line is open.

Richard when you reconcile Duff 42 million dollar.

EBIT da change year over year, 16 million, where corporate costs 17 million, where volumes and I didn't quite catch what were the what was the remainder the 9 million. Yeah. Those are the fixed cost essentially that you can't.

We couldn't get rid of.

Despite the loss and volume so.

I don't quite yet that gets fixed costs are unchanged year over year, I know, but like essentially essentially like you. If you weren't the combined volume and fixed cost essentially like a when you when you get lost in volume like if it hits that the marginal rate. So the marginal rate is much higher.

There is a variable margin and there's a fixed components in a in our gross profit. So the 17 relates purely to what we call our variable margin and the balance is essentially though the plant overhead.

Yeah, Okay, I get that the.

The other thing I wanted to ask you strategically I mean, you've talked about.

In the past that you're.

Like you're quite positive on you know the very long term outlook for the reach.

Given that there's maybe a multi decade opportunity of redevelopment opportunities and so I'm just wondering.

With what you've gone through over the last few months in terms of co bid and.

Is that in any way.

Challenged or changed your perspective on on real estate and are you thinking about the real estate development potential in choice any differently than you were before.

No like.

Our strategy on what choice remains focused on quality real estate and we believe that long term quality real estate will always will always do well and most of our development potential is extremely well located in urban centers. So therefore, we feel quite positive about the future of real.

The state.

And what about the.

You know that.

The the employment preference to work at home some of that's going to be sticky.

No I don't want.

Good question, Okay, I'm sure there's tons of articles coming out speculating about whether or not we're going back to offices and all that stuff like.

My personal opinion would be that maybe we see maybe us like a slower growth in demand for office, but as I was noticing in our organization like us since March Okay about a week from now when all the new players that we have.

Plan to come in there are going to be in we're gonna have like 15% of the employees have George Western that I've not set forth in this office. So we're still growing so I'm assuming businesses are still growing so there might be sort of a.

Leveling of demands for corporate space for awhile, but that businesses grow you'll need you'll need to put people in places. So I suspect that I suspect, it's going to be fine, but that's my personal opinion.

Okay. Thank you.

And again, ladies and gentlemen, it is star and then one tick you for question. Your next question is from Chris Lee with Fitzgerald. Your line is open.

Hi, good morning, Thanks for the comments on the other fixed cost that was very helpful. Just maybe one follow up just on the corporate costs of $1 million in the first four weeks of the current quarter is if I just say that's a pretty good run rates for the rest of the quota.

Yes. It is.

Okay. Thanks again can you also maybe provide us with an update on some of the key cost reduction.

Efficiency improvement initiatives that you're currently working on.

Yes, one part of the transformation program, it's a simplification of our network of bakeries, and Dcs, which we continue to make progress on I'm sure you're you're.

You're familiar with the soldiers, we announced a simplification of our supplier network as well Bill allows us to drive economies of scale simplification our portfolio. So all these initiatives continue to move forward and provide benefits.

Okay. That's helpful and it's fair to say the majority of the 5% sales decline in the first four weeks of the quarter is that mostly coming from.

And show the segment or are you still seeing some decline in parts of your retail segments.

It's mostly in part driven by by food.

Service, we're still seeing a bit of negative impact and retail, but as mentioned the these business, our recovering very well and the the trends are positive.

Okay. That's my last question is.

It was reported in the media I think this past weekend that one of the launch would be tellers and Canada is increasing the fees charged to the suppliers to help fund investment in stores and online generally speaking do you expect this to be a headwind for western foods in the other retail channels that you, but that is sales too.

For us we.

The crisis, we continued to ought to worked very closely what our retailers E. Commerce is saw is something that we've been investing ahead of the of the curve and win 10 on winning and this and on this platform.

Okay. Thanks very much.

And ladies and gentlemen, this concludes the Q in any period I'll now turn it back over to terrorist fears.

Thank you, Chris and thank you everyone for joining us. This morning, if you have any follow up questions. Please don't hesitate to contact where myself and please mark your calendars for November 17th when we will report our third quarter 2020 results.

Thank you.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation names you may now disconnect.

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