George Weston Limited (OTCPK:WNGRF) Q2 2021 Earnings Conference Call July 30, 2021 9:00 AM ET
Roy MacDonald - Vice President, Investor Relations
Richard Dufresne - President and Chief Financial Officer
Galen Weston - Chairman and Chief Executive Officer
Luc Mongeau - President, Weston Foods
Conference Call Participants
Irene Nattel - RBC Capital Markets
Good morning ladies and gentlemen, and welcome to the George Weston Limited 2021 Second Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Friday July 30, 2021.
I would now like to turn the conference over to Mr. Roy MacDonald. Please go ahead.
Thank you very much, and good morning, everybody. Welcome to the George Weston Limited second quarter 2021 results call. I'm joined this morning by Galen Weston, our Chairman and CEO; Richard Dufresne, our President and CFO; and Luc Mongeau, President of Weston Foods.
And before we begin today's call, I would like 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. And 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. So 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. And since Loblaw Companies Limited and Choice Properties have both released their second quarter results, today we will focus our call on the performance of our Weston Foods segment.
And with that, I will turn the call over to Richard.
Thank you, Ryan. Good morning, everyone. We delivered good results in the second quarter. Our businesses delivered growth despite continuing impacts of the pandemic and some new industry pressure makers [ph].
On a consolidated basis, George Weston Limited reported revenues of $12.9 billion for the quarter an increase of 4.6% versus last year. Adjusted net earnings were $272 million, an increase of $133 million and adjusted diluted net earnings per share were $1.78, an increase of $0.87 per share or 95.6%. The increase reflected the improvement in the underlying operating performance of Loblaw, Choice Properties, and Weston Foods.
Loblaw performed very well in the second quarter with strong revenue and bottom-line growth, continuing to report sequential performance improvement. Retail gross margin continued its strong momentum from the previous quarter growing a 130 basis points compared to last year, reflecting underlying improvements in business initiatives.
Looking beyond this quarter's performance on a two-year basis, Loblaw recorded its average growth in revenue of 5.9%, adjusted EBITDA up 8.1% and adjusted EPS growth up 15%. Choice Properties delivered solid financial results in the quarter. The business collected 98% of contractual rent, despite an operating environment that was impacted by regional lockdown across Canada, once again demonstrating the value of Choices Mississippi based retail portfolio.
Choice continued to advance its development initiatives and drive meaningful asset value appreciation through its existing portfolio. Weston Foods delivered much improved financial results in the second quarter of 2021, as the business regained momentum with COVID restrictions starting to lift and as it laps the severe challenges faced at the start of the pandemic last year. Sales improved 12.1% including the impact of foreign currency translation. EBITDA grew by $19 million in the quarter driven by higher sales, lower COVID related expenses and continued productivity improvements.
Along with many others in the food manufacturing industry, and in manufacturing in general, Weston Foods was challenge in the quarter with high cost inflation in many aspects of its business, especially commodities, as well as significant labor availability challenges. Both the inflation and labor availability challenges are notable for the speed, breadth and severity of their impact on the industry. And both relates to a surge in global demand as the economy began to recover from the negative impacts of COVID. These challenges impacted Weston Foods ability to meet growing customer demand, i.e. sales and deliver against its profitability targets. These challenges are expected to persist in the second half of the year. Weston Foods has taken steps including broad based pricing to help mitigate the impact of cost inflation, and expect labor availability challenges will ease over time.
However, we expect full-year earnings to be impacted. As reflected in our outlook statement, we now expect adjusted EBITDA to be monetarily lower compared to 2020 on a 52 week basis. Looking through these challenges, Weston Foods remain well positioned to meet the increasing demand from its customers and continue to offer superior products and services.
We return capital to shareholders by repurchasing $141 million of common shares in the quarter. Subsequent to quarter-end, we purchased an additional $130 million worth of GWL share. Year-to-date, we have repurchased $325 million of shares or I guess 2.8 million shares. Earlier today, we announced a 9% increase in our quarterly dividend marking our 10th annual increase.
Also, in Q2, we began to settle the net debt associated with a longstanding equity forward sale agreement relating to 9.6 million Loblaw shares. We expect to settle the remaining balance before the end of the year. The net impact of this is a reduction in annual carrying cost of approximately $20 million and an increase in our economic interest in Loblaw to the tune of 9.6 million shares. Looking forward, I remain encouraged by the underlying strength of all of our businesses.
On the sale of Weston Foods, the process is well underway, and we are engaged with a broad group of prospective buyers. We received indications of interest from a number of financial and strategic buyers, and are currently going through the second phase of the process. We expect to be in a position to announce the transaction this fall.
With that, I will turn the call over to Galen.
Good morning. Like Richard, I'm pleased with the steady progress each of our businesses made against our financial and operating metrics during what was the dynamic and challenging second quarter. Loblaw strong results were accompanied by a reprioritization of strategic initiatives which has freed up capacity to focus on retail fundamentals. This puts the business on firm footing and leaves us well positioned relative to the rest of the industry as we navigate the second half of 2021.
Choice Properties necessity based portfolio and its disciplined approach to financial management continued to serve it well as the pandemic evolved and communities entered various stages of reopening. With market leading rent collection rates and a strong balance sheet, Choice is set to drive meaningful net asset value appreciation, as it further advances its development program.
And finally, as Richard mentioned, we have been pleased with the level of interest from prospective buyers of Weston Foods. At the same time, Luc and the team have actively been mitigating the current inflation and labor challenges facing the industry. The fundamentals underpinning Weston Foods remains strong with leading bakery assets and high customer engagement and we maintain our conviction around the opportunity for that business to unlock meaningful incremental value in the right hands.
As vaccination rates rise, communities gradually reopen and the pressures of the pandemic ease, each of our businesses are positioned to build upon their market leading positions. As they do so, I want to express my appreciation for the colleagues in our stores, warehouses, properties, and bakeries, who continue to set an impressive standard as they serve our customers and tenants. It's through their efforts that George Weston continues to build long-term value for shareholders. I'd now like to open the call for questions.
Thank you, Galen. Sorry, Anis, could I get you to introduce the process, please.
Thank you. Ladies and gentlemen, we will now begin question-and-answer session. [Operator Instructions] One moment for your first question. Your first question comes from Irene Nattel with RBC. Please go ahead.
Thanks and good morning, everyone. If we could just start with the sale process. Can you just talk through the degree to which potential buyers are willing to look through the curtain - the current let's call it valley, if you will in earnings and value the food business on something closer to a normalized earnings run rate?
Yes, good question, Irene. We actually had that discussion at our Board meeting yesterday. Like if you look at the people who are interested in the process, most of them have experience in our industry, and are actually facing the same issues as us. So we feel confident that they will see through this.
That's helpful. Thank you. And then just to the extent that they are already involved in the industry, do you anticipate meaningful Competition Bureau challenges?
Depends on who ultimately yes.
So in terms of if we get an announcement this fall, what's a reasonable timeline do you think to closing?
Depending on whether or not there is competition review, it could be really quick.
But our expectation would be, we would like to close this before year-end.
Okay, that's great. And then just finally, one other question in terms of the unwind of the equity forward structure, can you just walk us through the mechanics of it as sort of the aggregate cost of the redemption, how this all works, and what the net outflow will be?
Really, you want me to walk you through that? So this is, I'll just make it very simple, Irene. This is an old instrument that we obviously placed a while back, and we made the decision that we want to settle it and clean it up, because it's been a bit of a nuisance in our financial statements. And so we're essentially using cash to buy it out. And effectively what's happening is that we're increasing our economic interest in Loblaw shares to the tune of 9.6 million shares. And when you've all cleaned it up, we're going to be saving essentially $20 million of interest.
Perfect, thank you.
Thank you. Your next question comes from Peter Sklar with BMO. Please go ahead.
Hi, good morning. It's Emily for Peter Sklar. So, just wanted to touch on the Food Services segment. We're wondering if you could maybe spend a minute or so telling us how that segment has rebounded. Now that we're lapping the worst quarters of COVID last year?
Yes, we're very happy with the way our Food Service business is rebounding for, for example, our QSR business behind the strength of our Artisan and Donuts categories is actually now outperforming 2019 levels. But sales are coming back, that momentum is really good.
Great, so it sounds like it's coming back real quickly. In terms of inflation, and your levers to help mitigate that, like how often are you able to put through price increases? And how large is the gap now between the cost inflation that you're feeling and the price increases that you've been able to implement so far? So obviously, we do have crystal ball with inflation, but what are your levers to try to mitigate that and minimize that gap?
Yes, in terms of inflation, we're seeing inflation in the back half of this year, hitting us at a rate that's about three times higher than what we normally put in the plan. So this is really unprecedented. We were using the normal levers that we use, so tight SG&A, we lean more aggressively on productivity. And we've already announced pricing that's going to be effective by the end of August.
What's challenging right now is the lag between the time that the inflation hit us and pricing becoming effective, which I just mentioned at the end of August. So we put out their first price increase if this level of inflation continue, we will potentially consider a second wave of price increase.
Great, thank you. That's all my questions.
Thank you. [Operator Instructions] Your next question comes from Mark Petrie with CIBC. Please go ahead.
This is Chris now calling in for Mark. Thanks for taking our questions. I just want to know if you could talk about planned capital structure post bakery sale?
Yes, our capital structure will remain more or less the same like we have some debt at the George Weston level that is years away from maturing, so that debt will remain on the balance sheet. The proceeds from the sale are most likely to be used to pursue more share buybacks.
Okay, that's perfect. Thank you.
Thank you. There are no further questions at this time. Mr. McDonald, you may continue.
Great, thank you very much, Anis, thanks everybody for joining us this morning. If you have any follow-up questions, please give me a shout and mark your calendars for November 23 when we will be reporting our 2021 Q3 results. Thanks very much and have a great day.