George Weston's (WNGRF) CEO Galen Weston on Q4 2016 Results - Earnings Call Transcript

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Weston George Ltd. (Canada) (OTCPK:WNGRF) Q4 2016 Results Earnings Conference Call March 2, 2017 9:00 AM ET

Executives

Geoff Wilson - SVP, IR

Galen Weston - Chairman and CEO

Richard Dufresne - CFO

Analysts

Jim Durran - Barclays

Irene Nattel - RBC Dominion Securities Inc

Patricia Baker - Scotia Capital

Mark Petrie - CIBC World Markets

Peter Sklar - BMO Capital Markets

Keith Howlett - Desjardins Securities

Operator

Good morning. My name Jodie and I will be your conference operator today. At this time, I would like to welcome everyone to the George Weston Limited Fourth 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. Geoff Wilson, you may begin your conference.

Geoff Wilson

Thank you. Good morning and welcome to the George Weston Limited 2016 fourth quarter conference call. I am joined here this morning by Galen Weston, Chairman 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 fourth quarter 2016 news release. 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 as required by law, certain non-GAAP financial measures may be discussed and are referred to today. Please refer to our fourth quarter news release, 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. An archive of this conference call will be available on our website. Loblaw Companies Limited released its fourth quarter results last 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 fourth quarter results for George Weston Limited. For the fourth quarter of 2016, George Weston Limited reported adjusted diluted net earnings per share of $1.59 compared to $1.43 for the same period in 2015, an increase of 11.2%.

In the fourth quarter of 2016 Weston Food sales increased by 1.9% to $537 million from $527 million in the same period of 2015, primarily due for an increase in volume. Weston Foods adjusted EBITDA in the fourth quarter of 2016 increased to $73 million compared to $67 million for the same period in 2015.

Adjustment EBITDA margin improved to 13.6% from 12.7% in the same period in 2015. Adjusted EBITDA in the fourth quarter of 2016 was positively impacted by the increase in sales and productivity improvement partially offset by continued investments in the business and higher input costs. Capital for the year came in slightly higher than previously projected as we were able to get some projects completed ahead of plan.

I would now like to turn over the call to Galen.

Galen Weston

Thank you Richard and good morning everyone. The fourth quarter results for the group came in better than we anticipated driven by Loblaw. Loblaw delivered positive same-store sales, stable margins and lower SG&A in a competitive retail environment. Weston Foods continued to deliver results in line with our expectations reflecting the impact of increased capital expenditures and incremental investments to support growth initiatives.

The seven new manufacturing lines that we have referred to previously are operating well and are generating incremental volume and growth. Weston Foods expects sales growth generated by incremental capacity and productivity improvements to drive an increase in adjusted EBITDA in 2017 when compared to 2016. However, this improvement will be partly offset by a challenging environment in our Canadian fresh bakery business and incremental investments required to meet new more stringent regulatory requirements in food safety and labeling.

The increase in adjusted EBITDA is expected to be greater in the second half of the year. Management expects to make capital investments of approximately $250 million in 2017 related to growth, regulatory and maintenance. Depreciation is projected to increase in 2017 when compared to 2016 and more than offset the improvement in adjusted EBITDA.

I would like to take the opportunity to thank Pavi Binning, our former President and CEO for his significant contributions to the business over the past seven years and I look forward to continuing to work with him at our family holding company. I would also like to welcome our new President to Weston Foods, Luc Mongeau. Luc has strong leadership skills and extensive business experience in CPG companies. I look forward to working with Luc as we execute our strategic plan.

That concludes our comments and we'd now be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jim Durran of Barclays. Your line is open.

Jim Durran

Good morning. I just wanted to focus on the volume number for the quarter of 1.9%.I assume versus the prior year that this is mostly a function of the pie recall, but excluding that impact, like how was the volume growth for the business overall?

Galen Weston

Yes, we’re actually pleased with our volume growth overall. Like if you were to adjust for the pie recall obviously we would have done better, like our frozen lines are now operational. So we saw a nice improvement in volume from that and we were also pleased with our volume in our fresh business.

Jim Durran

And on the pricing side, specifically to fresh in Canada, are we seeing the pricing deteriorate sequentially or do we feel like we found a new level that's sustainable through 2017?

Richard Dufresne

I'm not sure we know yet, but the first wave of pricing seems to have gone into place over the last few months, looks stable, but there is a lot of competition at the moment, a lot of people moving their investments around and whether it increases in fresh bakery at this point is still uncertain.

Jim Durran

Okay and a last question just sort of holistically, if it wasn't for this pricing situation on fresh in Canada would you have viewed 2017 unfolding in line with your expectations or is there other factors that might be slowing down the progression?

Galen Weston

There are other factors affecting the business in general, not specifically fresh in Canada. From a regulatory standpoint the food that are regulation in the U.S. are becoming more stringent. If you look I think at the Food Modernization Act which essentially is shifting the focus from contamination to prevention. And so therefore there are a bunch of new rules that are coming into play which are adding to our costs and the rest of the industry in the U.S.

And there are some new FDA requirements regarding labeling which are going to be enacted in July 2018, so we need to get ready for that in the U.S. and we are anticipating that such requirements will I guess happen in Canada, but probably over a longer term time period. So those costs are now new that we need to take on and are reflected in our outlook for 2017.

Jim Durran

And can you give us a ballpark as to how many dollars that represents?

Galen Weston

Jim, no we can't sorry.

Jim Durran

Okay I appreciate it. Thank you.

Operator

Your next question comes from the line of Irene Nattel, RBC Capital Markets. Your line is open.

Irene Nattel

Thanks and good morning everyone. And just sticking with the Canadian situation, are you seeing intensifying competitive activity, is everyone struggling to hang on to their slice of bread as it were as the market compresses?

Galen Weston

You are asking that question to Loblaw or are you asking it to Weston Foods?

Irene Nattel

I was asking to Weston Foods, but I guess it sounds to have broader application Galen.

Galen Weston

So look, I mean I would say it does not appear to be that much different to other major categories. People have views as to where to invest and where to get the best return at retail and some people have a view that investing in bread is a good place to differentiate from the consumer and the more successful those investments become, the more likely others are to follow and I think again at this stage we just do not know where it is going to settle. It is intense out there at the moment.

Irene Nattel

And are you having a little bit more success in holding on to your share in I guess some of the alternative fresh products thinking here about flatbreads and the like and then just in the straight sliced bread?

Galen Weston

Yes, absolutely. You know the art here is to make the right investments in the categories that are price sensitive and then to mix back the portfolio in places where you have differentiated innovation where you can where there is a lot less direct competition. And of course in our business on the food side we see a lot of very attractive prospects in the U.S. in our frozen business. And you've seen the investments that we've been making in capital over the last couple of years are very much focused in that area and we are really pleased across the board with the results that we're seeing there.

Irene Nattel

That's very helpful and finally if I may maintenance is a large one to follow through, just on the M&A side are you seeing anything interesting either in Canada or the U.S. in those smaller kind of niches that your sort of expertise and reach could really help grow?

Galen Weston

Oh, you know we don't comment on sort of M&A and I'd say we have a new President in Weston Foods at the moment and what he's doing is getting stuck into the business and trying to understand it, soup to nuts based on his own experience and then he's going to come back to us and he is going to no doubt make a few incremental recommendations about how to accelerate or modify the strategy. That may include some M&A. It may not at this point. You know it's too early to tell.

Irene Nattel

That's great, thank you.

Operator

Your next question comes from the line of Patricia Baker of Scotia Bank. Your line is open.

Patricia Baker

Yes, good morning. Actually my questions have been answered, but I'll do a slight followup. In reference to the fact that the new plants are up and running quite nicely and you are getting some volume gains from that, would you say that you were where you thought you would be in the early days of ramping that up in terms of adding on new customers? And according to plan you've attracted the people you wanted to in the early days?

Galen Weston

Yes Patricia, I think our biggest challenge for 2017 was just to get all these lines up and running. If you remember we had seven lines and there are all up and running and operational and so we are very pleased with that and the capacity is actually filling up nicely, so no we're very pleased on both fronts.

Patricia Baker

Okay, that's good news. And Richard, just in reference, my question was going to be around the regulatory changes and they required spend there and you referenced the fact that this is primarily taking place in the U.S. but you anticipate that Canada will follow suit at some point in time. Is it fair to assume that you won't make the investments in Canada until you see the Regs change?

Richard Dufresne

Yes.

Patricia Baker

Okay, thank you.

Operator

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

Mark Petrie

Yes, good morning. Just one quick followup actually, I think on the last conference call you mentioned that in terms of the frozen capacity you were right about 40% utilization. Could you give us a ballpark number of where you are today?

Richard Dufresne

What is right on that. I don’t have a number specifically, but we still have capacity to fill that we'll work hard to fill in 2017, but we're already contemplating adding capacity as part of our capital plan like half of the capital next year is going to be to growth, so we plan to add more capacity in many of our categories already.

Mark Petrie

Okay, that's helpful, thank you.

Operator

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

Peter Sklar

When you talk about challenges in the fresh bakery business in Canada are you referring to customer push back on your pricing or competitive dynamics or is it other factors that you're talking about?

Galen Weston

Well, I think the biggest one which you are all very familiar with is the COGS asks that came from the retailers over the course of 2016 and you know as I said before different retailers are making different decisions on where to invest that money, but they've ultimately asked each of the manufacturers to reduce their costs and Loblaw has obviously been leading the way on that front, that's the biggest driver of the deterioration or the additional pressure in bread.

Peter Sklar

Okay and then on your input costs I think you said that one of the pressures in the fourth quarter was rising input costs, but I believe grain and cereal prices are deflating. So I'm just wondering if you can reconcile that and also talk about what the outlook is for deflation in terms of grains and cereals and how you think that's going to like how that's going to play out through your pricing and margins?

Richard Dufresne

Good morning Peter, like yes but we hedge a lot of our stuff, so we're not really exposed to spot pricing. So there was some impact on input costs definitely and going forward we also see some of it. Don't forget that when we look at input costs it includes everything, like that's not only the commodities we can hedge. There are a bunch of other commodities that go up every year and labor is also a big factor. So if you factor all the input costs, then we're definitely going to see pressure in 2017 on our budget, more in line with what we had in 2016.

Peter Sklar

Okay and as grains and cereals deflate, how does that flow through I mean your customers, like your customers get immediate access to in terms of their pricing improvement as those commodities decline or are you able to keep some of it or how does that all unfold?

Richard Dufresne

The way it works here is we have a policy to be hedged for a minimum of six months and because of the good pricing environment we've seen in many of these commodities, we're actually hedging closing to 12 and so therefore the pricing activity we try to tie up with our hedging position. So right now we're hedged on FX and on commodities for 2017 for a large portion of it.

Peter Sklar

Okay, thanks.

Operator

The next question comes from Keith Howlett, Desjardins Securities. Your line is open.

Keith Howlett

Yes, just had a question on differentiation in the fresh bakery area. Are you able to make a fresh bread that is similar to a par baked or is it technically not possible to deliver the attributes that you get in par bake in a fresh product?

Galen Weston

Well, I mean we will have to get Luc here at some stage to answer that question. What I will say I think what Richard and I can comment on is we're very committed in the fresh business to differentiation, to innovation. We've got a new product called Country Harvest Bakes which is out in the market we're really proud of and think it is going to help move the fresh bread business into the snacking category with some excitement. And we have a portfolio of other things that the teams are working on that we'll bring to market in the coming months. So yes, we’re focused on differentiation and innovation.

Keith Howlett

Thank you.

Operator

We have no further questions at this time. I'll turn the call over to the presenters.

Geoff Wilson

Thank you very much for joining us this morning. We look forward to seeing you at our Annual Meeting scheduled for May 9 and that will also be the date of our first quarter release. Have a good day. Thank you.

Operator

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

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