George Weston Limited

Ladies and gentlemen, thank you for standing by, and welcome to the George Weston Limited 2020 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star, then zero. I would now like to hand the conference over to your speaker today, Ms. Tara Spears. Thank you. Please go ahead, ma'am.

Thank you, Alisa, and good morning, everyone. Welcome to the George Weston Limited First 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 Western 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 Canadian securities regulators for a reconciliation of each of these measures to the most directly comparable GAAP financial measure. Since Lava Companies Limited and Choice Properties have both released their first quarter results, we will focus today's call on the performance of our Westin Foods segment. With that, I will turn the call over to Richard.

Thank you and good morning, everyone. Over the last several weeks, the world has changed drastically. Each of us is living a new reality. This reality is filled with enormous disruption and uncertainty. I normally start by providing the financial highlights for the quarter, but today I will start by thanking our frontline colleagues across our businesses. These employees continue to show up to work every day and provide critical services to our customers and communities. Our culture is one focused on concepts which unite our operating companies, and one of these concepts is core values. Our core values are defined as follow. Care, ownership, respect, and excellence, core. I believe these values have never been more evident than during this crisis. In addition, our group of companies benefit from strong balance sheets and ample liquidity. I believe it's the combination of the right people and investments, along with access to capital, that position our businesses well to navigate during these difficult times. As a result of the uncertainty about the duration and impacts of the COVID-19 pandemic on the Canadian economy, it's difficult to predict how the company and its operating segments will perform for the balance of the year. Given these uncertainties, we withdrew guidance on April 9th. I will now update you on the financial results of our first quarter. From a financial perspective, our businesses were not significantly impacted by the COVID-19 outbreak in the first quarter. Our businesses performed well. During the final weeks of the quarter, the operating segments responded swiftly to the changing circumstances brought on by COVID-19. Loblaw responded to the increase in sales driven by pantry stocking, which had a positive impact on earnings. In parallel to the increase in sales, Loblaw began to make meaningful investments to support colleagues, enhance customer convenience, secure operations, and provide financial support. Choice properties move quickly to manage the health and safety of staff and tenants, adapting quickly to working from home and implementing enhanced health and safety measures at its sites. And Weston Foods answered increased customer requests for retail product, which spiked at the onset of the crisis. For the first quarter, on a consolidated basis, George Weston Limited reported revenues of $12.3 billion an increase of 10.4% compared to last year. First quarter results reflect an estimated increase in sales from the impact of COVID-19 of approximately $750 million. The COVID-19 impact is primarily related to the significant increase in initial demand for grocery and pharmacy products at Loblaw at the end of March following the onset of the crisis. For the first quarter, adjusted net earnings available to common shareholders of the company were $239 million compared to the same period last year. This represented an increase of $38 million or 18.9% due to the improvement in the underlying performance of our businesses, partially offset by the higher net interest expense and other financing charges. Normalized for the interest charges on the financial liability relating to the Oak Street disposition at choice, adjusted net earnings available to common shareholders of the company were $244 million compared to the same period last year. This represented an increase of $43 million or 21.4%, which essentially represents the blended increase in earnings of our three businesses. The company reported adjusted diluted net earnings per share of $1.55, an increase of 25 cents a share, or 19.2%, compared to the same period last year. Normalized for the interest charges on the financial liability relating to the Oak Street disposition at choice, adjusted net earnings per common share were $1.58, an increase of 28 cents per share, or 21.5%. First quarter financial results include the estimated increase in net earnings available to common shareholders of $29 million, or 19 cents per common share, related to the impact of COVID-19. For the first quarter, GDL corporate free cash flow was $214 million, an increase of $97 million over last year. Looking ahead to the second quarter, the challenges of the COVID-19 pandemic continue. At Loblaw, physical distancing protocols, investments in safety and sanitation, enhancing the customer experience, and the provision of financial support have continued and result in significant costs to the business. While a significant percent of the Choice portfolio is anchored by necessity-based retail tenants, Choice has and continues to respond to requests for rent deferrals from small business tenants. As of April, 86.6% of choices rent was paid. Western Foods supplies both retail and food service customers. Based on physical distance distancing requirements and closures across the food service industry, customer demand has increased by more than 50% in this, decreased, sorry, by more than 50% in this segment, which represents about 20% of Western Foods sales. In addition, Western Foods retail business has also been affected. While retail customers are buying more fresh bread, customers are not purchasing bakery case or celebratory items. The increase in packaged bread does not offset the declines in food service and other retail categories. In addition to changes in customer demand, Western Foods is investing in pay premiums and pay protection for frontline employees and health and safety measures. In response to COVID-19 and the challenges across the business, Western Foods is incurring increased costs of approximately a million dollars per week since the first week of the second quarter. To mitigate these increased costs, Western Food is continuing with its transformation program and is taking additional measures to significantly reduce costs. We've also updated our capital expenditure forecast downward somewhat. This is an unprecedented time, and it's impossible for us to predict how the businesses will perform through the balance of the year. We are confident in each of their operating team's abilities to navigate through this challenging period. We operate in retail, real estate, and consumer goods, providing customers and tenants essential services, and I believe our businesses will emerge from this crisis stronger and better positioned to meet customer and tenant expectations. With that, I will turn the call over to Galen.

Thank you, Richard. The global COVID-19 pandemic has touched every corner of our economy and every part of the George Weston Group of Companies. We've always believed in creating value by owning businesses that play an essential role in the lives of our customers, but in these circumstances, the term essential has truly come into focus. Over the last two months, our actions have been anchored in an absolute commitment to do what's asked of us while at the same time keeping colleagues, customers, and tenants safe. Each of our businesses rose to that challenge, ensuring that essential supermarkets and pharmacies remained open, bakery shelves stayed stocked, and hundreds of properties kept operating for their tenants. Now, as we see promising signs that broad government and community actions are bending the curve of COVID-19 infections, conversations are turning to reopening the economy. As we transition into this next phase, we're confident that the long-standing strategies across our portfolio will continue to serve us well. At Loblaw, while it's difficult to anticipate precisely how the business will change in any emerging new normal, there are certain consumer trends that we expect to accelerate substantially from pre-COVID run rates. The company sees this in online grocery shopping, digital promotions and one-to-one customer communications, and in digital healthcare. In the coming months, the company will continue to invest in each of these areas of opportunity. At Choice Properties, we have excellent financial flexibility following recent steps to strengthen the balance sheet, and the company is well positioned to continue to deliver both stability and growth for unit holders over the longer term. And at Westin Foods, their transformation program has allowed a response to these extraordinary circumstances from a lower cost base and with greater process disciplines all across the business. As they lean into serving sustained demand from their core retail customers, recent investments in artisan and donuts are set to capture consumer interest in these premium and indulgence categories as traditional food service remains largely shuttered. And we all find ourselves seeking a bit more inspiration while we cook at home. In the coming months, we expect to build on these strengths in each of our businesses. doing so from a position of strong financial liquidity and supported by a team of dedicated colleagues and employees across the group. Their resilience and resolve in recent weeks has been inspiring, and I wish to thank all of them for remaining so steadfastly focused on serving our tenants and customers. I'd now like to open the line for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Irene Mattel.

Irene Mattel Thanks, and good morning, everyone. Thank you for the overview and the disclosure around food service versus retail. I'm wondering, however, about some of the categories that may be a little bit more touched right now, things like the sheet cakes and sort of anything that's sold in the fresh baking section or the fresh bakery section. Could you give us an idea what percentage that might represent of your total revenues at Western Foods?

Good morning, Irene. So I'd like to think of our business split in two ways, retail and food service. Food service, about 20% of our total business, and the remaining 80 is retail. Out of that 80, I would say that 50% of that is seeing increases in demand right now. traditional packaged bread categories, our alternatives, and our biscuit business as well. Unfortunately, these increases are not big enough to mitigate the declines that Richard mentioned in food service and the declines that we're seeing as well in cakes, in pies, and in doughnuts.

That's very helpful. And is there anything that you think that you can do in terms of packaging to make them more, I guess, consumer-friendly? And I guess the second part of that is, you know, I guess you have a unique window with Loblaws. What are you thinking about the probable ongoing sort of closure of certain parts of the store as even though we reopen, social distancing and touching, for lack of a better word, it needs to be kept to a minimum.

Yeah, there's multiple ways to, multiple things to look there. So across North America, we're staying in very close contact with our top 25, 30 retail and food service customers to make sure that we capture all demand that's out there right now. With retailers, we're increasing the calibration that we do with their e-commerce side of things, as consumers are not as often physically in store right now. As for either different packaging or different displays at store level, some of these trends are too early for us to address from a permanent standpoint. But we're working very closely with retailers to make sure we capture every opportunity possible.

That's great. Thank you.

Your next question comes from the line of Mark Petri.

Hey, good morning. Much of your investment over the last couple of years, and I think projected growth as well, is in food service. So just curious how the pandemic and sort of the resulting uncertainty around consumer behavior affects that strategy.

Our long-term growth was based on expansion of our doughnuts and artisan business. There was a split behind those between retail and food service. When it comes to food service, as I mentioned earlier, we're in close contact with the largest QSR operators in North America. I've talked to them personally, to the largest top 10 over the last few weeks. We monitor the situation very closely. As our innovation on donuts and artisan is based on deeply rooted consumer, shopper, food service operator insights, and we're confident that as these food service operators reopen their operations, that we should be able to benefit from that growth.

Yeah, we remain committed on the growth in QSR. And once this crisis is behind us, I think it's a segment that should provide good growth for us.

Okay, thanks. And within food service, that 20% of sales, is QSR the vast majority, or what other components of the food service industry are material for you?

For us, our food service business is split amongst institutions. So schools, hospitals, it's split with brokers and wholesalers, and it's split in QSR.

And it's split relatively evenly, or can you give us some sense of the weights of those three?

I can't really give you an exact split, but our long-term growth will be fueled by QSR.

Yeah, okay. And I guess alternatively, you know, do you think there's perhaps, you know, there will be chances to be opportunistic to accelerate M&A because some competitors in the bakery industry may struggle, you know, more than you guys or be less well capitalized?

Right now, we're solely focused on operations and how to support our business within this crisis. That's our area of focus right now.

Okay. And then just last, Richard, you'd mentioned you'd moderated CapEx. Can you give us any sense of the magnitude specifically for Western Foods for 2020?

It's not that significant and it's more driven by the fact that we're trying to limit access to our bakeries. As you can imagine, we want to make sure we're focused on production. So we're going to have certain delays because we're not letting construction workers or engineers walk into our plants. So it's not a significant number, but it's going to be down versus our initial plan.

Okay. Thank you. All the best. Thanks.

Your next question comes from the line of Patricia Baker.

Thank you very much. Good morning, everyone. Just firstly, Claude, can you give us a little more information on the plant closures that were referenced in the press release? How much capacity have you taken out associated with the decline in demand for some of the products?

Good morning, Patricia. So far, if we look at it this morning, for instance, there's four bakeries that are temporarily closed right now. Three of them are related to positive COVID cases, and one of them are related to decreases in demand. Okay.

And is there a plan with the three plants that are related to COVID cases? Is there a period of time that you have in mind when you'll be reopening that, or is that something to be determined?

Yes. For the COVID-positive cases, on average, we've put in place very robust protocols that on average allow us to reopen the bakeries within a period of four days. When it comes to shutdowns, so far we've had temporary shutdowns that last, on average, about 11 to 15 days.

Okay, thank you. And second, another question, just a follow-up on some of Mark's points. Would I be wrong, Richard, in saying that the QSR segment is a segment that you had been historically underpenetrated in, and strategically you guys recognize that? as a growth channel, and that's why you made the decision a few years ago to more aggressively go after that channel?

Yeah, like our artisan strategy is essentially fueled by QSR.

Okay. And my last question is just a very simple one. So the elevated, the higher bread demand, has that remained elevated through the entire period? In other words, people keep replenishing that kind of on a weekly basis?

Yeah, we're still seeing increased demand in traditional packaged bread.

Okay. Thank you very much.

Thank you. Your next question comes from the line of Peter Sklar.

Good morning. Just a question for Luke. These additional costs, COVID-19 related costs, you said they're running at a million per week. Is that the run rate going forward or was there initially some disruption as you coped with the issue and as you dealt with the plants that had to go down because there were employees who caught the virus?

This is the one rate that we can see for the foreseeable future right now.

Okay, that's all I have. Thank you.

Your next question comes from the line of Chris Lee.

Oh, hi. Good morning. Just the first question is, just following your comments earlier about, you know, 80% of your business is retail and food service is 20%. And then of the retail business, about half you're seeing, you know, decent increase in demand on the traditional side. So I'm just doing some back down flow math. So that will imply about 60% of your business is facing some pressure. And then based on your disclosure that your sales are down about 15% in the first four weeks, that would imply that 60% of your business is down about 25% for the four weeks. Am I in the ballpark with that, Matt?

Like food service, we said is down 50%. So add that to your model and you'll figure out the best.

Okay. That's helpful. And then For the categories that are seeing decline, is it fair to say they do tend to carry higher margins than the ones that are growing, or is that not the case?

Not necessarily.

Okay. And then just last question, this is more of a longer-term question. As people cook more at home, obviously we're seeing baking has also become a very popular activity. I know it's a tough question to answer, but as COVID subsides hopefully next year, Do you expect that increase in baking activity to represent a structural change to your industry and maybe potentially have some pressure on demand going forward as people bake more at home?

No, we don't see this being a long-term sustainable trend.

Okay. Thanks very much and the best wishes during these challenging times.

Thank you.

There are no further questions at this time.

I would now like to turn the call back over to Tara Spears.

Thanks, Alisa. And thanks, everybody, for your time this morning. If you have any follow-up questions, please don't hesitate to contact Roy or myself. And you can mark your calendars for July 28th when we will report our second quarter 2020 results. Thank you.

This concludes today's conference call. You may now disconnect.