George Weston Limited

Ladies and gentlemen, thank you for standing by and welcome to the George Weston Limited 2021 First Quarter Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, Tara Spears. Thank you. Please go ahead.

Thank you, Phyllis, and good morning, everyone. Welcome to the George Weston Limited First Quarter 2021 Results Conference Call. I'm joined this morning by Galen Weston, our Chairman and Chief Executive Officer, Richard Dufresne, our President and CFO, and Luc Mongeau, the President of Western Foods. 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's anticipated future results and the impact of the COVID-19 pandemic. 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 securities 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 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 2021 results, we'll focus today's call on the performance of our Western food segment. I will now turn the call over to Richard.

Thank you and good morning, everyone. It's hard to believe it's been over a year since the start of COVID-19. Our businesses continue to manage through the many challenges presented by the pandemic, demonstrating resiliency and a commitment to serving the needs of our customers and tenants. In late March, we made two important announcements. The first noted our plan to sell Western Foods, and the second announced the retirement of Sarah Davis as president of Loblaw, with Galen returning to Loblaw as chairman and president, and my own responsibilities expanding to include assuming the role of CFO of Loblaw. The management changes at Loblaw were effective as Loblaw's annual general meeting last week, and we expect to launch the sale process for Western 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 $0.04 per share, or 2.6%. The increases were due to the improvement in the 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's corporate free cash flow was $196 million in the quarter. Loblaw performed well in the first quarter, recording a third quarter of sequential performance improvements. Revenue grew despite lapping over $750 million in incremental COVID-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 1.8%, and drug retail sales declined 1.9%. Choice Properties delivered solid financial results in the quarter. The 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 development front, as evidenced by its announcement of a partnership to develop and revitalize the Golden Mile Shopping Center 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 in retail celebratory categories such as cakes, certain food service 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 performance of Western Foods in the first four weeks following the first quarter, demonstrating sales growth of 6%, including the impact of foreign currency translation. We're seeing renewed signs of strength as the business regains momentum and COVID-19 restrictions subside in certain regions and in key categories, including artisan, celebration, and food service. This gives us confidence in the underlying strength of the business as Luke and the Western Foods team have built a solid foundation and have managed the business well through the pandemic. I will now turn the call over to Galen.

Thank you, Richard, and good morning, everyone. It has only been a few weeks since we last spoke, following the announcement of our intention to sell Westin Foods. Since then, we've been pleased with the initial interest shown by prospective buyers, as Richard mentioned, and are well positioned to begin the sale process in the coming weeks. As we do so, it is with confidence about the underlying performance of Westin 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 lockdowns, steady improvements in operating metrics and renewed signs of momentum since the quarter ended underpin our optimism. At the same time, Loblaw saw its fourth quarter of performance improvements. As Richard and I return 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 more firmly in our seats. And at Choice Properties, market-leading rent collection rates this quarter reinforced our confidence in that business's necessity-based portfolio and its focus on delivering stability and growth. Together, George Weston's businesses had a good start to the year, and while there continues to be uncertainty about what COVID holds in the near term, we are far enough into 2021 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 an impressive standard in serving our customers and tenants throughout the pandemic. It is through their efforts that 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 Nettel 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, you know, if you don't want to answer that, maybe what you think the optimal capital structure might be for a GWL without Western Foods.

Good morning, Irene. Good morning. 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 the potential people who've shown us interest in the business. So this will be a normal M&A process, where we're going to be sending materials for them to review. They're 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 we're ready to announce something. But, like, we'll see. So 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 the last call, I guess for now we're thinking that unless we see opportunities in our existing business, most likely we'll 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 prep?

No. We really like those perpetual preferred shares. I'm stressing the word perpetual here. And so when we look at the value of George Weston shares, we still see a lot of value there. And so therefore, we think it's an astute use of our cash to buy those back.

That's very helpful. Thank you. And then finally, turning to Western foods, just looking at the year-over-year decline in revenue, wondering if you can sort of give us a little bit of color around how much of that might have been the Girl Guide cookies versus other categories.

Yeah, the Girl Guide cookies are a big business in the first quarter of the year. It's about just out of 20% of total sales. So they were responsible for close to half of the miss in the quarter. The other half would be our retail business.

That's great. And then, okay, I'll stop it there because I'm sure someone else can pick up all the other questions. 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 or input cost inflation and how you're seeing that roll through your business today and then what's being done with your customers with regards to passing on those higher prices or higher costs.

We saw significant inflation in the quarter, mostly in labor and distribution. As we all know, there's a lot of inflation going on right now. As always, we worked very collaboratively with our business partners to drive efficiencies and productivity to mitigate the impact of that inflation, and we don't comment. on looking forward potential pricing action.

Hi, Mark. It's Richard. I just want to add that from a cost perspective, we have a hedging program on FX. And so for the next few quarters, we have pretty high coverage. So as we get later in the year, we have less. So we feel good for the next two quarters for sure from a cost perspective.

Okay, understood. Thanks. And could you just update us, Luke, with regards to the no-touch line, how that's been ramping up, or one-touch, I guess, how that's been ramping up with the second product, I guess, the glazing, any update on all that, please?

Yeah, one-touch continues to progress very well. We're still in the scaling up of the production capacities right now. As you can imagine, This is potentially a product where we will have to produce a couple million of donuts on a daily basis, so we take this very seriously. Next big step is a continued progressive rollout, which will happen in the next few months.

Okay, I appreciate it. And then I guess just, Richard, what's your perspective in terms of share buyback activity before the – bakery sale is completed and sort of magnitude of that opportunity.

Yeah, as we've said in Q4, like George Weston has a lot of cash right now. And so we started a buyback program. We're going to have to renew our NCIB, I think, at the end of the month. And so we intend to be quite active over the coming months on it. I don't want to specify a number, but we're going to be quite active.

Okay. Appreciate it. Thanks, and all the best.

Your next question comes from the line of Patricia Baker with Scotiabank.

Good morning, everyone. My first question is for Luke. Luke, 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 in the business that may have been masked by the COVID impact?

Overall, we're seeing our bakeries function much better. This is a result of the investment that we've done over the last few years. Service levels are up. Quality is significantly up as well, and this is a reflection of the operational excellence system and processes we've put in our bakeries. We're extremely proud of the work that our bakers are doing during these challenging times.

Okay, thank you very much for that. And, Richard, if I may, two questions. So thanks for giving us a little bit more information on how long you think the process will take and the fact that you're launching the sales process next week. But based on the, you know, internal, the incoming calls that you've received once you announced you were selling it, Are you pretty optimistic? And, you know, coupling that with what Luke just talked about, 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, is we feel we have an amazing business that has scale and 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 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 your short answer to my question is absolutely yes. Then secondly, you know, I want to look at George Weston Limited and, you know, appreciate that your intention currently is to return the cash, the proceeds, you know, return that cash to shareholders by way of buybacks. But if we look out further beyond the sale of the base business, the return of the cash to 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 business? Or that company, rather.

Very good question, Patricia. I think if you look at our structure, 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, both on capital allocation and strategy for the group. And there's a lot of cash that gets generated to George Weston. So, therefore, our purpose here is to make sure we allocate that cash well in the best way to maximize value to shareholders. And we're doing that this year by being quite active on buybacks. We'll focus on making their best decisions to maximize the value of shareholders while focusing on our two businesses. And for me, the way I'm thinking about this is if our two businesses perform well, if George Weston, we manage capital well, like our shareholders, i.e. George Weston, should benefit from our actions.

Okay, thank you for that.

Your next question comes from the line of Chris Lee with Desjardins.

Good morning. Richard, you mentioned very clearly that you think the shares are undervalued. Just curious, in your internal analysis, what do you think is a fair HOCO discount for the company after the sale of Western 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 essentially we had two businesses, It seems to me that it's quite possible that we end up with a mid-single-digit holding company discount for George Weston in the future.

Okay, that's helpful. And can I just ask, is that sort of mid-single-digit, is that also predicated on, hypothetically, if you were to, let's say, break up the company, is that sort of the mid-single-digit is a reflection of mostly the tax policy? that would be incurred if that happens, hypothetically?

That's too complicated for me to answer. I'm just looking at history, Chris. If I look at history, 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 be. And it seems to be heading into that direction, too.

Okay, I understand. And another question I have is, Are you able to maybe provide us with some high-level parameters on how to think about the tax and transaction cost implication from the sale of Western foods? Is it like 10% or 15% of the gross proceeds? Just some high-level so we can sort of model the net proceeds more accurately.

It's not a significant amount.

Okay. Okay. 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 Roy or myself. And please mark your calendars for July 30, 2021, when we report our Q2 2021 results. Thank you.

That does conclude today's conference call. We thank you for participating. You may now disconnect.