George Weston Limited's (WNGRF) CEO Pavi Binning on Q2 2016 Results - Earnings Call Transcript

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Weston George Ltd. (Canada) (OTCPK:WNGRF) Q2 2016 Earnings Conference Call July 29, 2016 9:00 AM ET

Executives

Geoff Wilson - Vice President, Investor Relations

Richard Dufresne - Chief Financial Officer

Pavi Binning - President and Chief Executive Officer

Analysts

Irene Nattel - RBC Capital Markets

Jim Durran - Barclays

Peter Sklar - BMO Capital Markets

Mark Petrie - CIBC World Markets

David Hartley - Credit Suisse

Keith Howlett - Desjardins Securities

Chris Li - Bank of America

Operator

Good morning, my name is Lincy, and I will be your conference operator today. At this time, I'd like to welcome everyone to the George Weston Limited Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]

Thank you. Mr. Geoff Wilson, you may begin your conference.

Geoff Wilson

Good morning and welcome to the George Weston Limited 2016 second quarter conference call. I am joined here this morning by Pavi Binning, President and CEO; and Richard Dufresne, CFO.

Before we begin today's call, I want to remind you that the discussion will include forward-looking statements, such as the company's beliefs and expectations regarding certain aspects of its financial performance in 2016 and future years. These statements are based on certain assumptions and reflect management's current expectations, and they are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations.

These risks and uncertainties are discussed in the company's materials filed with the Canadian Securities Regulators from time-to-time, including the company's second quarter 2016 news release.

Any forward-looking statements speak only as of the date they are made and 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 as required by law, certain non-GAAP financial measures may be discussed and are referred to today. Please refer to our second quarter news release and other materials filed with the regulators from time-to-time for reconciliation of each of these measures to the most directly comparable GAAP financial measure. An archive of this conference call will be available on our website weston.ca. Loblaw Companies Limited released its second quarter results earlier this week, and therefore we will focus this call on the performance of our Weston Foods segment.

I would now like to introduce our CFO, Richard Dufresne.

Richard Dufresne

Thank you, Geoff, and good morning, everyone. Earlier today we released our second quarter results for George Weston Limited. For the second quarter of 2016, George Weston Limited reported adjusted diluted net earnings per share of $1.56 compared to $1.32 for the same period in 2015, an increase of 18.2%.

In the second quarter of 2016, Weston Foods sales increased by 6.9% to $496 million from $464 million in the same period of 2015.

Foreign currency translation positively impacted sales by approximately 2.6%. Excluding the impact of foreign currency translations, sales increased 4.3% primarily due to an increase in volume.

Weston Foods adjusted EBITDA in the second quarter of 2016 increased to $59 million compared to $58 million for the same period in 2015. Adjusted EBITDA margin decreased to 11.9% from 12.5% in the same period in 2015.

Adjusted EBITDA in the second quarter was positively impacted by increase in sales and productivity improvements partially offset by continued investments in the business and new plant costs.

I would now like to turn it over the call to Pavi.

Pavi Binning

Thank you, Richard, and good morning, everyone. The second quarter results for the group came in better than we anticipated driven by Loblaw. Loblaw delivered positive same store sales in stable margins in a competitive retail environment and continued pressure from healthcare reform.

Weston Foods continue to deliver results in line with our expectations, reflecting the impact of increased capital expenditures and incremental investments to support growth initiative. Our capital investments are on track. Of these seven new lines that I’ve talked to you previously, three are now fully operational and four in the start-up and testing phase. These lines when fully operational will add approximately 20% in incremental capacity in cake, doughnuts and pies. With this capital investment, we expect volumes to continue to growth through the next two quarters as we get through the start-up period and begin to win new business.

Weston Foods expect sales growth generated by new capital and productivity improvements to drive an increase in adjusted EBITDA in 2016 when compared to 2015. The increase in adjusted EBITDA is expected to be greater in the second half of the year as new plant capacity and capability come online.

Management now expects to make capital investments of approximately $275 million in 2016 compared to $300 million previously stated, due to efficiencies. Depreciation is projected to increase in 2016 when compared to 2015 and largely offsets the improvement in adjusted EBITDA. The competitive retail landscape continues to intensify and this may put out a pressure on the business.

That concludes our main comments and we’d be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Irene Nattel with RBC Capital Markets. Your line is now open.

Irene Nattel

Thanks and good morning, everyone. I noticed that in this morning’s release there was no reference to mix or out pricing when you are talking about the drivers of top line growth and there is obviously new language are now intensifying competition, so wondering if you can talk about what you are seeing as in the market place both from a competitive perspective and also from a consumer demand perspective and how that impacting your building to put through price, the volume?

Pavi Binning

Good morning, Irene, and thanks for the question. Irene, in terms of the competitive environment, as you will know the retail environment is becoming more competitive and undoubtedly is putting pressure on the business. And a number of retailers have made comments recently. And certainly if you listen to the Loblaw earnings call earlier this week, you would have picked up this sentiment. What that means is that from a pricing perspective, it is unlikely that we will see opportunity for pricing as we move forward. As know, this year we had a significant increase in cost of goods that was driven by FX and pricing would have been a way to tightly offset this impact. But you know our view was; one, given the retail intensity out there; and secondly, the softness in the fresh category which I talked to in the last or the couple of quarters the pricing was not appropriate at this point in time. But I don’t really see an opportunity for pricing as we move forward.

Irene Nattel

Are you seen any easing of the softness in fresh or and/or are you seeing any pickup in other categories that stop heading out fresh softness?

Pavi Binning

In terms of fresh, in the last quarter, the market was down about 2%. Irene, we were down about a 0.5% in terms of the overall sort of position. So we were slightly better in the market. But in terms of you know other categories; we are seeing good traction in frozen and ACE.

Irene Nattel

That’s very helpful. And just a couple of other questions if I may, and clearly you are adding capacity against this somewhat challenging backdrop, what’s the new response on the part earlier customers turning your capacity?

Pavi Binning

Positive. We are seeing good traction in the frozen category and you know as the capacity comes online, we’re trying to win new business and certainly we’re seeing very positive comments from our customers in relation to the investment that we’re making.

Irene Nattel

That’s great, thank you. And just one final more housekeeping question I might. The $25 million reduction in CapEx this year, is that going for flip into next year and it’s so, how should we be thinking about magnitude of CapEx in 2017-2018?

Pavi Binning

Irene, in terms of the 25 million reduction, it’s primarily efficiencies. How you should be thinking about CapEx in ‘17 and going forward is about the same sort of level as we have this year.

Irene Nattel

That’s very helpful. Thank you.

Operator

Our next question comes from the line of Jim Durran from Barclays. Your line is now open.

Jim Durran

Good morning. Just going back to the price increase situation, I wasn’t clear, are you telling about no pricing for the rest of this year or also into next year as far you can crystal ball?

Pavi Binning

Jim, I am talking about this year and obviously we’ll give you an update on the ‘17 at the appropriate time, but certainly this year is what I am talking about.

Jim Durran

Okay. And with respect to the lower CapEx spend and the efficiencies, can you give us some ideas to what impact that might have on depreciation both this year and into next year?

Pavi Binning

Jim, it’s not material.

Jim Durran

Okay. And finally just within the Canadian environment, we all know that there is increase pressures, right, what are you seeing more recently in terms of volume within both fresh and frozen?

Pavi Binning

As I sort of mentioned earlier in terms of the - you know the market is still touch out there in terms of bakery. And you know the bakery - as I sort of mentioned, the fresh market is still down.

Jim Durran

And I would assume that part of the cautionary languages assumption of what’s going on at Loblaw and their request for suppliers to provide them the support starting September 4th, have you also seen that kind of pressure from other suppliers?

Pavi Binning

It’s not appropriate for me to comment Jim on our interactions with other customers. And all I would sort of say as you know the Loblaw situation and the market is obviously becoming more competitive.

Jim Durran

Okay, that’s great. Thank you.

Operator

Our next question comes from the line of Peter Sklar with BMO Capital Markets. Your line is now open.

Peter Sklar

Pavi, back on the Loblaw issue and the price demand that become effective in September, so like it’s been reported in the press that I think the price demand is 145 basis points. So does that mean, like I am just wondering what is Weston bakery’s response to that, does that mean we should lower our estimates 145 basis points for your sales to Loblaw from what they would have been before or are there things that you can do incrementally to offset that?

Pavi Binning

I mean what we are trying to do is you know accessing opportunity to make up the impact of the supplier off but in terms of certainty, it’s going to have an impact on our business, I mean Loblaw have made the ask and clearly it is going to impact us.

Peter Sklar

Okay, that’s all I have. Thanks.

Operator

Your next question comes from the line of Mark Petrie with CIBC. Your line is now open.

Mark Petrie

Hey, good morning. Just I was hoping if you could a bit more color in terms of the progress in terms of the seven lines? And then as we think about with I guess flat CapEx effectively for 2017, how should we think about capacity growth next year?

Pavi Binning

In terms of the - we have obviously seven lines that are going in, the three are up and running, two of those are cake lines and one is a donut line. And in terms of the ones are in test at the moment, again two are cake, one donut and one pie. And so those are coming on stream throughout the third quarter. So you know they are not going to come on stream right now, where we testing them as we move through the sort of this quarter. And in terms of CapEx going forward, it’s a combination of a number of things in terms of where we are investing capital, part of it is growth capital but part is also replacement and maintenance capital because we do have some facilities at the end of life. So you know there will certainly some capacity is added but also we have to sort of make sure that we have the right assets in place going forward and replace all the assets that are around there.

Mark Petrie

And how does that split Canada versus the U.S. in terms of the relative maintenance versus growth?

Pavi Binning

In terms of you know - the growth capital is largely being invested in the United States, the replacement capital is largely in Canada.

Mark Petrie

Alright, okay, thank you very much.

Operator

And our next question comes from the line of David Hartley with Credit Suisse. Your line is now open.

David Hartley

Thank you. Good morning. Just on the new business that you are wining and the composition of your business going forward. It’s my understanding there is lot of opportunity more on the restaurant, quick restaurant side, but that’s largely unbranded. So when I think about growth and production kind of give me some indication where that growth is coming from, how should I think about margins and do you get enough productivity pickup such that you can maintain your EBITDA margins or perhaps even grow them as we go beyond 2016 into 2017 and 2018?

Pavi Binning

In terms of the growth, the growth is primarily being driven by the frozen category both in terms of our frozen business pies, cakes and donuts and also the artisan business. And that’s both retail and food service.

In terms of margins, margins are obviously sort of a function of a whole different - number of different elements. And in terms of you know the capital that we are putting in that is undoubtedly driving productivity improvements which help that. Clearly the big unknown is what the retail environment is going to be and the pressure that will get from a price perspective. But you know certainly the capital that we are putting in is driving productivity in the business. But there is other factors that are going unlike the FX for example that I spoke about earlier in the pricing environment.

David Hartley

Okay. And when I think about fresh and the composition on you sales in retail, I mean what - how deep is the trend or what kind of trend are we seeing in terms of shift from fresh to frozen Pavi, that kind of thing. How is that trend evolved over the last couple of years and how do you see the evolving in the next couple of years?

Pavi Binning

I think it’s been pretty consistent, the fresh markets been under pressure. And certain category within the frozen markets has been you know doing better. And I expect that trend to continue as we move forward. Our focus on frozen is on the install bakery and the product categories that I outlined. But the fresh market has been under pressure for quite some time.

David Hartley

Okay, for sure. And my final question just on new customer wins, I mean there is a large customer, I understand second half of this year in Canada, the U.S. that will be potentially changing some suppliers or pieces of the supply chain and I am just trying to get a sense of how it is looking in terms of the new customer wins or are you seeing new business with existing customers in a profound way, could you give us some color there?

Pavi Binning

Yeah, we think both actually. What we are seeing is existing customers you know as we have incremental capacity, growing their business with us and also what we are doing is we’re winning new customers, because having put the capacity in place is allows us to actually go out there and chase business that wasn’t otherwise available to us.

David Hartley

So just as a follow-on to that and then I’ll pass it on. With that new business or extended business, I mean can you talk a little bit about the contracts and how those work, are they longer term or they options on that, how would that work and what you know certainty they have that business, still those plans for an extended period of time?

Pavi Binning

Yeah, I mean we wouldn’t have made the capital investments unless there was a degree of confidence having done a detailed assessment of the market. In terms of longer term contract, it’s - in this business people generally give you a contract for a period of time and that can range from anywhere from a shorter term contract say a year or so to a longer term contract. But at the end of the day, you still have to perform to maintain the business with the relative customer. So - but certainly it varies by customer in terms of what their requirement maybe.

David Hartley

Okay, thanks a lot. Great to see the volume come up.

Pavi Binning

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Keith Howlett with Desjardins Securities. Your line is now open.

Keith Howlett

I guess, I was wondering in terms of the price in both Canada and the U.S. I guess in the frozen business, is there any ability to take price in the U.S. market?

Pavi Binning

No, it’s very similar, the Canada very competitive and limit its opportunities to take place.

Keith Howlett

And then just, I am wondering if you could just speak us to how your relative share would be in the growing channels in the U.S. like the club channel or the hard discount type channel?

Pavi Binning

I mean obviously, as we win new business, it’s having a small impact on share but we were relative small player in the United States and that’s why we’re investing.

Keith Howlett

And then just finally on the fresh category in Canada, are there any flatbreads or are there categories that are still growing or is it sort of soft across the board?

Pavi Binning

No, you know I mean there are sort of various of growth, you’ve got the traditional white and wheat breads under pressure. But there are alternative and you know you mentioned one of them that are growing. So you know clearly there are opportunities for some degree of growth in Canada.

Keith Howlett

Thank you.

Operator

And our next question comes from the line of Irene Nattel with RBC Capital Markets. Your line is now open.

Irene Nattel

Thanks. Just a quick follow-up question, with regard instant fresh, clearly traditionally the summer period, dump up in volume of what things of hotdogs and hamburger but are you seeing the softness in fresh extend into those products. And if so, are you seeing replacement with things like some of the other products that you’ve introduced and that can be used as replacements for hotdog and hamburger?

Pavi Binning

In terms of - I mean this is the quarter, the hotdogs and hamburger buns are important and so over the sort of last period of time, Irene there has been sort of softness in this move towards some sort of alternative categories. Those are something I would comment on when we report our quarter three results in terms of - you know but certainly what we are doing is our best to protect the categories that are under pressure.

Irene Nattel

That’s great, thank you.

Operator

Our next question comes from the line Chris Li with Bank of America. Your line is now open.

Chris Li

Hi, good morning. I was wondering if you can please give us an update if there is any with respect to your thoughts on the cash on your balance sheet in terms of deployments, uses of cash going forward?

Pavi Binning

Good morning, Chris. No plans right now, we’re always on the lookout but the only things as we are continuing our small things right now, so you should not see a material change into our cash position in the short to mid-term.

Chris Li

Okay, great. And my other question is I mean I recognize each period is different, I am just curious to see you know as you head into a period where you know you are getting more pressure from your customers in terms of taking a price cut, as you look back at previous periods what this has happened, what happened to your margins during those periods and will you able to during those periods have enough productivity initiatives and savings to kind of mitigate most of this impact, I am just trying to see what this period can potentially happen you know versus what happened in previous periods?

Pavi Binning

In previous periods I mean you know it obviously has impacted margins and what we’ve done is our level best to try and offset the impact. And Chris, all I would say this is something you can and something you can’t. I mean obviously you know we will do our best, but there is going to be pressure on the business as a result of this. There is no doubt about that.

Richard Dufresne

And Chris there is three factors that really run the business here, pricing, FX and we have commodity. So the movement of any of these drivers will effect where we deliver our profit, so we need to focus on those three.

Chris Li

Okay, thank you very much.

Operator

And there are no further questions at this time. I’ll turn the call back over to Mr. Geoff Wilson.

Geoff Wilson

Thank you very much for joining us today. Our third quarter release is currently scheduled for November 22nd. Hope you have a nice long weekend. Thank you.

Operator

That concludes today’s conference call. You may now disconnect.

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