George Weston Limited (WN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to today's George Weston Limited Business Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference call over to your speaker today, Roy MacDonald, Vice President of Investor Relations. Please go ahead.

Thank you very much, Michelle, and good morning, everybody. Welcome to a special George Weston Limited business update call regarding this morning's news release. I'm joined on the call this morning by Galen Weston, our Chairman and CEO; and by Richard Dufresne, our President and CFO. And as always, before we begin the call, I want to remind you today that today's discussion will include forward-looking statements, which may include or are not limited to statements made with respect to George Weston's anticipated future results and the results of Weston Foods -- of the Weston Foods sales process. 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's 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. Although we released the related joint release with Loblaw this morning, this call will focus only on the changes at George Weston and Weston Foods. And with that, I will turn the call over to Galen.

Good morning and thank you for joining us on such short notice to discuss this morning's George Weston announcement. In recent years, we've built growing conviction around GWL's role as an allocator of capital that builds generational value through market-leading businesses. Until now, that has meant 3 pillars: retail, real estate and consumer products. Managing that portfolio, however, also means regularly taking a disciplined look at how each asset performs and the scale of its contribution to the group. It's on that basis that we've decided to sell Weston Foods. The bakery has been part of our family and our group of companies since 1882. From my great grandfather's first bread route, it has grown to $2 billion of sales, spanning retail and foodservice across North America. For 4 generations, we've turned out many of our consumers' baked and frozen favorites. Having transformed and modernized the business in recent years, Weston Foods has a strong foundation, attractive and growing margins, a robust list of customers, great brands and a first-rate team. With that momentum, we spent last year exploring opportunities to create a step change in Weston Foods' scale that would allow it to become a truly meaningful part of GWL's value. But in the end, we did not find the right opportunity. Instead, it's now clear that pursuing a sale represents the best way to unlock Weston Foods' potential in strategic product categories, growing market segments and with both new and existing customers. We know Weston Foods has ample room to grow, but it's best positioned to do so in other hands. With the sale of the bakery, we will redouble our focus on real estate and retail. These businesses, Choice Properties and Loblaw, offer our greatest strategic potential. Choice has continued to deliver its strategy, generating stable and growing cash flows from its high-quality commercial and residential properties. It presents ongoing opportunities for capital recycling within the portfolio, and we remain excited about the long-term prospects for its transformational development pipeline. At Loblaw, we have financial momentum, strategic growth initiatives with real weight and confidence in our core retail network. We also have work to do. That work will build on our strengths: 2,500 supermarket and drug stores within 10 minutes of almost every Canadian; 4 of the top brands in Canada, including President's Choice and no name leading the list; Canada's most loved loyalty program; and a leadership position in e-commerce and data not just tied to grocery but bringing together a powerful platform that spans the health, wellness and financial needs of Canadians. The power and potential of these assets is extraordinary. They will become more evident in our service of customers and in our results. Finally, with the strategic repositioning of GWL, I will dedicate renewed time and energy to Loblaw as Chairman and President following Sarah's retirement this May. And Richard will also expand his responsibilities to return as CFO of Loblaw. These are familiar roles that we both held between 2014 and 2017, and we will be joined by Robert Sawyer as Chief Operating Officer. Currently a member of the GWL Board, Robert is known as one of Canada's foremost retail executives and expert in execution. Together with the Management board that is otherwise unchanged, we will hit the ground running. Across the group, we're building from positions of strength as we announce these changes. Weston Foods is an incredible business with value in the market. And as we double down on Loblaw and Choice Properties, we lean heavily into sectors that are changing, revealing opportunities that align with our assets and our ambitions. I will end by extending my heartfelt thanks to Sarah and Darren for their many contributions and ongoing support through this transition period. I would also like to thank the Weston Foods team as they write the next chapter of a business that has a great story with surely more to come. I'll now turn the call over to Richard.

Thank you, Galen, and good morning, everyone. Our decision to dispose of Weston Foods is built on our conviction that our intention should focus on our retail and real estate businesses. They each have scale, leadership positions in their markets and the opportunity to create long-term value. That said, our belief in Weston Foods remains. The business is in a great position. Over the past few years, we have made significant investments in Weston Foods to strengthen our manufacturing network, streamline operations, improve talent and build a stronger customer base. Our management team is strong, focused on operational excellence, driven to top -- through to top line growth through innovation and to margin expansion through process and productivity improvements. Like many companies in the sector, Weston Foods has been challenged by COVID. However, it has remained very profitable despite negative sales pressure. Weston Foods had ended 2020 in a strong position with sales of $2.1 billion, EBITDA of $200 million, which represents a 9.7% margin. Momentum kept building as the year progressed on both revenue and margin performance. There's no question Weston Foods is a very attractive asset to the right purchaser. It adds scale in the bakery industry as well as leading market position in a number of categories. Further, certain categories offer substantial growth potential while others drive cash flow. In spite of these strengths and its position as a leading North American bakery, Weston Foods remained a small part of GWL's overall value, representing less than 10% of our net asset value. We have reviewed several opportunities to increase Weston Foods' relative scale and keep it within GWL. However, despite our substantive effort to consider acquisition opportunities, we did not find the right accretive opportunity for us. As a result, disposing of our bakery assets is the best opportunity to realize value and unlock its strong growth potential. We are confident this is the right time to launch a sale process. Today, we are delivering a clear message. Our shareholders expect George Weston to drive long-term value. The sale of Weston Foods is one step. Focusing more attention on real estate and retail is the second. Loblaw and Choice Properties are market-leading businesses, and our role is to maximize their value. In doing so, we will drive value for George Weston shareholders. Choice continues to deliver stable income, improving the overall quality of its portfolio through capital recycling and beginning to tap the value potential of its development opportunities. Loblaw enters 2021 in a strong position, with an outlook that includes EPS growth in the low double digits. We plan to effect a smooth management transition. While we are always assessing the capital needs of our businesses, both Loblaw and Choice have solid balance sheets and generate strong cash flows. As a result, the proceeds from the sale of Weston Foods are likely to be returned to shareholders through share repurchases over time. Before we open the line to questions, I would like to state that this morning's call is focused on George Weston. As for Loblaw, since we are in a transition period, we will refrain from further comment until the release of the first quarter results and AGM in early May. Thanks for joining us this morning. We will now open the call to questions.

Thanks, Richard. Michelle, may -- can you remind the listeners of the protocol, please, for asking a question?

Yes, definitely. [Operator Instructions] Your first question comes from Irene Nattel from RBC Capital Markets.

A couple of questions. I guess starting with a philosophical, existential one, which is around the need of Weston to continue as a publicly traded company. Should investors be thinking that there's any change to that line of thought?

Good question, Irene. No change to that train of thought. Like we feel that as we drive value for both our businesses, George Weston shareholders should benefit.

Okay. That's great. And as you think about sort of the return -- you said the return of capital would be likely in the form of NCIB. Just out of curiosity, why not something more sort of just like a special buyback or a special dividend?

Oh, we're -- we have not figured this out yet, Lou, (sic) [ Irene ].

Okay.

We're just starting the sale process. We'll see as last time evolves here.

And your next question will come from Michael Van Aelst from TD Securities.

Just following up on that -- on Irene's question. Is there any thought of reinvesting some of that capital into the other -- the remaining 2 pillars?

As I said, Michael, like we're always assessing the capital needs of our businesses. But right now, both businesses, like they're well positioned. They each have very strong balance sheets. They have strong cash flows. So for their normal course, they can satisfy to their own needs. So therefore, that's why we see that most likely, share repurchases will be the way to go with the use of proceeds.

Okay. And then has -- prior to this announcement, has George Weston had any expressions of interest in the bakery business from third parties?

No.

Okay. So you're starting this basically from scratch, Richard?

Yes, Michael, that's a good question. Yes, we're starting from scratch. We -- this is an important decision for the group, and we wanted to go public with it first. And -- but we're not ready to hit the road. But the process will be launched over the coming months.

Okay. All right. And then can you just talk about, I guess, the depth of knowledge of the -- I guess Galen, Richard and Robert, obviously you guys know the Loblaw business extremely well, but I'm just curious as to how much time Richard and Robert have been spending, I guess, reviewing the Loblaw operations rather than other functions over the last year or so and, I guess, just to the extent that you can hit the ground running.

Yes. So Michael, let me take that question. So this is an orderly transition. We're announcing Sarah's retirement as part of this strategic reframing for the business. So Richard's been focused on George. And Robert, he's obviously been a Board member of George. He has participated in some of our strategic reviews. And we are all very comfortable with the Loblaw strategy. We understand it. But we'll be getting underneath the business in a more meaningful way when we get into the chairs in May. And so that's the way to think about it. Not starting from scratch, but we haven't been doing a whole lot of preliminary work in advance of the transition.

Your next question will come from Patricia Baker from Scotiabank.

Just a quick question for either Richard or Galen. I mean, I understand that this decision to sell the bakery comes after a big strategic review. But was there any -- in addition to that, was there any sense of frustration that and recognition that you were never going to be able to surface the value of Western Foods in the context of the publicly traded company, that it always traded at a discount to what its intrinsic value was?

No. Not really, Patricia. Like I think we genuinely thought that we could create a significant pillar. And -- but to do so, we need scale. And scale comes by way of acquisitions. And I can tell you the team worked very hard over the last few years looking at many opportunities. And after reviewing all these opportunities, it became very clear that none of them was creating the right value creation opportunity for us. So it's after that exhaustive effort that we came to the conclusion that the sale was the best approach to pursue.

Okay. And then another question. Your comment that you quite likely will see the proceeds go to share repurchase, does that rule out the possibility that you'll be looking at any M&A activity in the future for either of the other 2 pillars?

Doesn't rule it out. It doesn't rule it out. But like there's nothing on the table that we're looking at right now.

[Operator Instructions] Your next question comes from Peter Sklar from BMO Capital Markets.

So these are pretty dramatic changes -- management changes you're making at Loblaw. So from the perspective of Weston, which is the controlling shareholder, like what was the catalyst that caused you to make -- and what was your thinking or what was the motivation to make these changes? Did you feel the business was underperforming? Was it not making budget? Were you disappointed in the stock price? Obviously, there was something going on that you didn't like, and then I'd like to hear what you were disappointed about.

Yes. So look, the purpose of this call today is to provide context on the decision to strategically refocus it at GWL, and Richard and I will certainly make ourselves available to talk about Loblaw after the transition in May. But it is important to reiterate 2 important things. First, business performance at Loblaw continues to improve. It has since the end of the second quarter last year. And the outlook shared by Sarah and Darren a couple of weeks ago remains unchanged. And as I mentioned in my scripted remarks, Loblaw's strengths are extremely compelling. I think lots of people understand that. Certainly, Richard and I do. And so we don't anticipate a major shift in strategy. But as I said, we'll certainly speak in a more fulsome way about it at the appropriate time.

[Operator Instructions] I have no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Thank you, everybody, for joining us on such short notice this morning. If you've got any follow-up questions, please reach out to Tara or myself. Have a great day.

Thank you, everyone, for joining us today. This will conclude today's conference call. You may now disconnect.