Q1 2021 George Weston Ltd Earnings Call
First quarter results conference call.
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Thank you Phyllis and good morning, everyone welcome to the George Weston Limited first quarter 'twenty 'twenty. One results conference call I'm joined this morning by Galen Weston, our chairman and Chief Executive Officer, Richard Dufresne, Our President and CFO and Lee Marshall the president of Western pitch.
Before we begin today's call I want to remind you that today's discussion will include forward looking statements.
Which may include but are not limited to statements with respect to George Weston as anticipated future results and the impact of the COVID-19 pandemic.
These statements are based on assumptions and reflect management's current expectations on.
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 Securities regulators any forward looking statements speak only as of the day. 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 on.
Also certain non-GAAP financial measures may be discussed or referred to today. Please refer to on an 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 first quarter 'twenty 'twenty. One 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 and good morning, everyone.
Hard to believe that it's been over a year since the start of COVID-19.
Our businesses continue to manage to the many challenges presented by the pandemic, demonstrating resiliency and commitment to serving the needs of our customers and tenants.
In late March we made two important announcements the first note that our plan to sell the Weston foods and the second announced the retirement of Sarah Davis, President of Loblaw with Gale and returning to Loblaw as chairman and President and my own responsibilities expanding to include assuming the role of CFO of Loblaw.
Demanded management changes at Loblaw were effective as loblaw that annual general meeting last week.
And we expect to launch the sale process for Weston Foods next week.
Turning to the quarter, our businesses performed well.
On a consolidated basis, George Weston reported revenues of $12 4 billion for the quarter essentially flat to last year.
Compared to the first quarter of last year adjusted net earnings available to common shareholders of the company were $243 million, an increase of $4 million and adjusted diluted net earnings per share were $1 59, an increase of four cents per share or two 6%.
The increases were due to the improvement in your underlying operating performance of Loblaw, partially offset by a decline at Weston foods and an increase in the company's adjusted effective tax rate.
George Weston corporate free cash flow was $196 million in the quarter.
Loblaw performed well in the first quarter.
Recording of third quarter of sequential performance improvements revenue grew despite lapping over $750 million in incremental COVID-19 related sales in the final few weeks of Q1 2020, when consumers were stocking up at the start of wave one of COVID-19.
Against revenue growth of over 10% in both food and drug last year food retail sales in Q1 were strong up one 8% in drug retail sales declined one 9%.
Choice properties delivered solid financial results in the quarter day.
Business collected 98% of rent once again, demonstrating the value of choice properties necessity based retail portfolio.
Choice properties also had an active quarter on the developer and development fronts as evidenced by its announcement of a partnership to develop and revitalize the golden mile shopping centre in Toronto.
I'm pleased with how the business performed in the quarter.
Many of you will recall that on our fourth quarter call in February we predicted that the resurgence of COVID-19 in many parts of North America in the last month of that quarter would likely have a negative impact on first quarter results. This year.
That's exactly what happened with the impact again being felt and retail celebratory categories, such as cakes search and foodservice channels, especially sit down restaurants.
And profitable girl Scout Cookie sales as a result of restrictions on door to door selling.
If one looks through these impacts the business made continued progress in the first quarter delivering operational improvements in service levels and manufacturing efficiencies.
I'm encouraged by the poor performance of Weston foods and the four first four weeks following the first quarter demonstrating sales growth of 6% excluding the impact of foreign currency translation were seeing renewed signs of strength as the business regains momentum and COVID-19 risks restrictions subside in certain regions.
And in key categories, including artisan celebration and foodservice.
This gives us confidence in the underlying strength of the business as Luke and the Weston foods team that built a solid foundation and have managed the business Welsh with a pandemic.
I will now turn the call over to Galen.
Thank you Richard and good morning, everyone and it's only been a few weeks since we last spoke following the announcement of our intention to sell Weston foods. Since then we've been pleased with the initial interest shown by prospective buyers as meant as Richard mentioned are well positioned to begin the sale process in the coming weeks as we do so with confidence about the underlying performance of Weston foods.
And conviction around the opportunity for it to unlock meaningful incremental value in the right hands.
As we manage through the impact of additional COVID-19 lockdowns steady improvements in operating metrics and renewed signs of momentum since the quarter ended underpin our optimism at.
At the same time loblaw saw its fourth quarter of performance improvements.
Richard and I returned to the roles of CFO and President, we will dedicate renewed time and energy to sustain that positive progress.
Loblaw has a unique and complementary portfolio of market, leading assets together, they provide a powerful value proposition and significant long term potential.
We look forward to that future and engaging with the investment community. When we are on more firmly in our seats.
And a choice properties market, leading rent collection rates this quarter reinforced our confidence in that business as necessity based portfolio and its focus on delivering stability and growth.
Together at George Weston businesses had a good start to the year on while there continues to be uncertainty about what COVID-19 holds in the near term we are far enough into 2020 one to know it will be a better year for all of us in our businesses and our communities.
Finally, I want to express my deep appreciation for the colleagues in our stores warehouses properties and bakeries, who have all set on impressive standard and serving our customers and tenants throughout the pandemic. It is through their efforts. The George Weston continues to build long term value through market leading businesses.
I'd now like to open the call for questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your first question comes from the line of Irene Mattel with RBC capital markets.
Thanks, and good morning, everyone, just I guess starting at the end, perhaps wondering if you.
Could update us on your thoughts perhaps around timing of the sale process and then post sale use of proceeds and if you don't want to answer that maybe what you think the optimal capital structure might be free cash.
For GW out without Weston foods.
Hey, good morning, Irene So as I mentioned in my remarks.
We're launching the sale process next week, which essentially means that that's when we're going to start contacting potential people who've left.
Sure enough interest in the business. So so this will be a normal M&A process low where we're gonna be sending a materials for them to review they are going to send us indications of interest and then we're going to review those so I suspect that it's probably going to take.
Four or five months before before we were ready to announce something but like we'll see so so that's that's that's as far as I can tell you so far and we'll keep you updated as to use of proceeds as we mentioned in our last call I guess for now we're thinking that unless we see opportunities in our <unk>.
Existing business, most likely will be using this cash to return it to shareholders by way of share buybacks.
That's great any thoughts around perhaps redeeming some of the perhaps.
No like are we really like those are perpetual preferred shares I'm stressing the word perpetual here and so so when we look at it.
Value of George Weston shares, we still see a lot of value there and so therefore, we think it's a Ah Stewart use of our cash to buy those back.
That's that's very helpful.
Thank you and then finally, turning to Weston foods, just looking at the year over year decline in revenue wondering if you can share it gives us a little bit of color around how much of that might've been the girl guide cookies versus other categories.
Yes.
So the big business in the first quarter of the Earth's about just south of 20% of total sales. So they were responsible for close to two off of the of the Miss in the quarter. The other that would be our retail business.
That's great and then okay.
I'll stop it there because I'm sure someone else can take up all the other question. Thank you.
Your next question comes from the line of Mark Petrie with CIBC.
Yeah. Good morning, I, just wanted to ask about food inflation and sort of how you are input cost inflation and how you're seeing that our.
Roll through your business today, and then you know what are what's being done with your customers with regards to passing on those higher prices on our call.
We saw significant inflation in the quarter on mostly in labor and distribution as is <unk>.
You'll know there's a lot of our employees.
Employee inflation going on right now as always we work.
Very.
Collaboratively with our business partners to drive efficiencies and productivity to mitigate the impact of that inflation and we all we don't comment on looking forward.
Pricing action.
Hi, Mark it's Richard.
I just wanted to add that.
From a cost perspective, we have a we haven't hedging program on FX and and so for the next few quarters. We were we have pretty high coverage. So as we get later in the year, we have less but like US who are so we feel good for the next the next two quarters for sure from a cost perspective.
Yeah.
Okay understood. Thanks, and could you just update us with regards to the no touch on how that's been ramping up our or one type of I guess, how that's been ramping up and a with a with the second product I guess, the glazing any update on all of that.
Yeah on Dodge continues to progress.
Very well, we're still on the scaling up of the production on and capacities right now as you can imagine this is potentially a product where we were allowed to produce on a couple of million of donuts on a daily basis. So we take this very seriously next big step is a continued on a progressive.
Rollout, which will happen in the next few months.
Okay I appreciate it and then I guess just Richard could you just what's your perspective in terms of share buyback activity you know before.
Before the before the bakery sale is completed.
And sort of a magnitude of that opportunity.
Yes.
As we've said in Q4 like George.
George Weston is a lot of cash right now and so we started our buyback program.
We're going to have to renew our in CIB I think at the end of at the end of the month and so on so we intend to be to be quite active over the coming months on it.
Don't want to specify a number but we're going to be quite active.
Okay I appreciate it thanks and all the best.
Your next question comes from the line of Patricia Baker with Scotiabank.
Hi, Good morning, everyone. My first question is for Luc look Richard referred to the fact that you saw some good manufacturing efficiencies in Q1 can you just talk more broadly about the underlying operating trends on the business that may have been masked by the COVID-19 impact.
Yeah overall, we're sitting our bakeries function on a much better. This is the result of the investment that we've done over the last few years service levels are up on quality is significantly off as well and this is a reflection of the op.
Operational excellence system and processes, we put in our bakery, we're extremely proud of the work that our bankers are doing during these challenging times.
Okay. Thank you very much for that and Richard if I may 222 questions. So based thanks.
So a little bit more information on how long you think that process will take.
And the fact that you're watching the sales force that's next week, but based on the internal are the incoming calls that you've your stage. Once you announced you were selling it are you pretty optimistic.
A couple that coupling that with what you just talked about the the progress improvement are you pretty optimistic that you'll be able to consummate a deal.
Very good question.
The way I'd answer the question Patricia.
We feel we have an amazing business that our scale and that that has made significant progress over the last few years and what our advisors are telling us is that we are in a very.
And a very good environment to be coming to market with a business like this so so when I look at that and I look at the number of calls we got.
Yes, I'm optimistic Okay. I was just going to say it sounds like a short answer to my question is absolutely yes.
Secondly, you know them on look at George Weston Limited.
Appreciate that your intention currently is to return the cash the proceeds.
Return on that cash to shareholders by way of a buyback, but if we if we look out further beyond that.
The sale of the day.
We turned up the cash to our shareholders how should we be looking at the strategic agenda for George Weston Limited how should we be looking at that business. How are you looking at that or.
Or that's.
Very good very good question, Patricia I think.
I think if you look at our structure, where we're very happy with the structure I think it's worked out really well for us in the past and we continue to see a role for George Weston bolt on capital allocation on the strategy for the group and we're gonna be a theres a lot of cash that gets generated two at George Weston. So therefore, our purpose here is to make sure we are.
Locate that cash well and the best way to maximize value to shareholders and we're doing that this year by a by being quite active on buybacks will will focus on making the best decisions.
To maximize the value of shareholders, while focusing on our two businesses and for me the way I am thinking about this as if our two businesses perform well.
George Weston, we are we manage capital well like our shareholders I E at George Weston should benefit from our actions.
Okay. Thank you for that.
Yeah.
Yeah.
Okay.
Your next question comes from the line of Chris Lee with day shut ins.
Good morning.
We should.
Mentioned on very clearly that you think the shares are undervalued just curious your internal analysis. What do you think is it is a fair wholesale discount for the company after the sale of Weston foods.
That's a very good question, Chris and it's one that's very difficult to predict but.
When I look at what's been happening over the last few weeks. Following this announcement and if I go back to where the holding company discount was when when where essentially we had two businesses.
It seems to me that it's quite possible that we ended up with a mid.
Single digit holding company discount for George Weston and in the future.
Okay. That's helpful and can I, just ask is that sort of mid single digit and that also predicated on us hypothetically. If you were to U S. A you know break.
Break up the company or is that sort of mid single digits and reflection on mostly the tax liability that would be incurred to eat that happens hypothetically.
Oh, that's just too complicated for me to answer like I'm, just looking I'm just looking at history. It Chris if I look at history on that that's where we were before when the company was quite simple and it's going to be quite simple.
I guess a year from now and so therefore, that's where I think it should it should be so and it seems to be heading into that direction Tucson.
Okay, I understand and another question on Abbott are you able to maybe provide us with some high level premise.
<unk> on how to think about the tax and transaction cost implication from the sale of Weston foods is it like 10 or 15% of the gross proceeds just some high level. So we can sort of model to the net yeah, yeah really.
It's it's it's not a significant amount.
Okay.
Okay, I'll I'll work with that thank you very much.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
And at this time there are no further questions I will now turn the call back for any closing remarks.
Thank you Phyllis and thanks, everyone for joining us. This morning, if you have any follow up questions. Please don't hesitate to contact way on myself and please mark your calendars for July 30th 2021 when we were on.
Our Q2 2021 results. Thank you.
Okay.
That does conclude today's conference call. We thank you for participating you may now disconnect.
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