Weston Foods sale process seen progressing well

TORONTO — The sale of Weston Foods, the baking division of George Weston Ltd., is likely to be announced this fall, said Richard Dufresne, president and chief financial officer of George Weston.

Mr. Dufresne updated the investment community about the Weston Foods sale process during a call with analysts July 30 in connection with the release of second-quarter George Weston financial results. While improved from the second quarter of fiscal 2020, Weston Foods sustained an operating loss during the most recent period.

“On the sale of Weston Foods, the process is well underway, and we are engaged with a broad group of prospective buyers,” Mr. Dufresne said. “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.”

Asked by an analyst whether the challenging economics of the baking business at present may hurt the prospective valuation of Weston Foods, Mr. Dufresne suggested prospective buyers understand baking is facing temporary challenges that will be resolved over time.

“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,” he said. “So we feel confident that they will see through this.”

Weston announced on March 23 plans to launch a sales process for Weston Foods. The operating business of George Weston operates two divisions — retail and foodservice — and bakes bread, rolls, cupcakes, donuts, biscuits, cakes, pies, cones, wafers, artisan baked foods and other products. Its brands include Wonder, Ace Bakery, Country Harvest, All but Gluten and D’Italiano. The company has more than 5,000 employees and operates 40 baking plants and other facilities in Canada and the United States.

Mr. Dufresne said the timing of the announced sale may depend on whether the bidding process becomes highly competitive but said the sale should be completed before the end of December.

Operating loss of the Weston Foods division of George Weston Ltd. In the second quarter ended June 19 was C$6 million ($4.8 million), an improvement relative to a C$49 million loss during the same period in 2020. Of the C$43 million in diminished operating loss, Weston attributed C$20 million to better underlying operating performance and the remaining C$23 million to special items. For the 24 weeks ended June 19, Weston Foods had an operating loss of C$6 million ($4.8 million), versus C$48 million a year earlier.

Weston Foods sales in the second quarter of 2021 were C$431 million ($346 million), an increase of C$19 million, or 4.6%, versus the same period in 2020. Excluding the unfavorable impact of foreign currency translation, sales rose 12.1%, which Weston attributed to lapping the negative impact of the COVID-19 pandemic in the second quarter of 2020.

“Sales were impacted by an increase in volumes in foodservice and retail categories, partially offset by the unfavorable impact of changes in sales mix,” Weston said.

On a year-to-date basis, sales were C$903 million ($724 million), a decrease of $44 million, or 4.6%, compared to the same period in 2020. Sales included the unfavorable effects of foreign currency translation of approximately 4.7%. Excluding this factor, sales increased by 0.1% driven by an increase in volumes primarily due to lapping the negative impact that the pandemic had on sales in the same period last year, partly offset by the effects of a negative sales mix shift. Key elements in the mix shift were a sales volume increase in foodservice and decreased volumes in retail and Girl Scouts cookie sales due to the COVID-19 pandemic and restrictions on in-person sales in 2021.

Overall business conditions improved for Weston Foods during the second quarter compared with a year earlier. That said, even as the business challenges posed by the COVID-19 pandemic receded with the end of government-mandated lockdowns, challenges of higher input costs, higher labor costs and limited labor availability posed new challenges for the company.

“Sales grew in foodservice and retail as government-mandated lockdowns were lifted in many regions of Canada and the United States,” the company said. “In addition to the increase in sales, lower pandemic-related costs and continued productivity improvements contributed to the year-over-year earnings growth. In the second quarter, Weston Foods was faced with higher-than-expected input, labor and distribution costs. The higher costs, together with labor availability challenges, negatively impacted sales and earnings. These factors were primarily the result of a surge in global demand for consumer goods as economies began to reopen following the lifting of many lockdown restrictions. Weston Foods has taken steps, including pricing, to help mitigate the impact of cost inflation, and expects the labor availability challenges will ease over time. The business is well-positioned to meet the increasing demand from its customers and continue to offer superior products and services.”

During the call, Mr. Dufresne said the inflationary storm took hold swiftly and is likely to adversely affect results in the second half of the year.

“Both the inflation and labor availability challenges are notable for the speed, breadth and severity of their impacts on the industry, and both relate to a surge in global demand as the economy began to recover from the negative impact of COVID,” he said. “These challenges impacted Weston Food’s 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.”

Galen G. Weston, chairman and CEO, echoed Mr. Dufresne’s optimism about the sale process while adding that the company was confronting new business challenges.

“As Richard mentioned, we have been pleased with the level of interest from prospective buyers of Weston Foods,” Mr. Weston said. “At the same time, Luc (Mongeau, president of Weston Foods) 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.”

Adjusted net income of George Weston Ltd. In the second quarter ended June 19 was C$272 million ($218 million), or C$1.78 per share on the common stock, up 96% from C$139 million, or C$0.91 per share, in the second quarter last year. Sales were C$12.9 billion ($10.3 billion), up 4.6% from $12.4 billion in the second quarter last year. Year-to-date adjusted net income at George Weston was C$515 million ($413 million), or C$3.37 per share, up 36% from $378 million, or C$2.45, in the first half of 2020. Sales were C$25.3 billion ($20.3 billion), up 2.4%.

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