TORONTO — After spending several months reviewing the North American bakery market, management at George Weston Ltd. has concluded the best course of action to create shareholder value over the long term is to increase the level of investment in Weston Foods.
“Our plan is to invest in targeted areas of growth, in innovation and in capabilities across the business,” Pavi Binning, president of George Weston Ltd., said during a March 5 conference call with analysts to discuss financial results. “Although these investments will impact profitability in the short term, they will position us well for the future.”
Mr. Binning said Weston has identified several areas of the business it believes have room from growth, including cake, donuts, artisan, cookies and crackers.
“The bakery industry in North America has been going through a challenging period in the last few years,” he explained. “We have clearly all seen pressure (in fresh) whether it’s in Canada or North America with the declines in white and wheat bread.
“What we have also seen is commodity and input costs increasing, but we have not been able to pass these on for a number of years into the marketplace, and that has resulted in pressure in margins. And so that was what really led us to conducting the strategic analysis of the business. And we do a strategic plan every year, but over the last year or so, with my direct involvement in the business, I thought it was appropriate that we absolutely look at every one of our businesses in some detail and put a plan in place for each of them. And through that, we did a lot of work with the local management teams to assess the market out there, our competitive position in it and how we could develop our business over the long term.
“What we have done is we have put in place a good strategic plan in place for every area of the business. And what we identified as we went through and did this work is that we had good positions in the areas we are investing in, but we could build those positions over time. And the capacity clearly was an issue. It was an issue, for example, in the artisan business, and we put in new facilities up in Toronto this year, which gives a lot of runway as we move forward to grow the ACE business as we move forward.
“And what we have done is something very similar in each of the other areas. If you take the North American — in particular the U.S. — in-store bakery, it is a growing area. Donuts, cake and biscuits are very important categories in in-store bakery. Our customers are coming to us and saying, ‘You’re doing a good job in these areas. We would like to actually grow our business with you.’ And that’s the essence of why we’re doing what we’re doing. And my overall comment is Weston Food is a good business. We absolutely believe in this business and that is why we are investing it.”
He said the company will need an infusion of capital to grow the business, and the company has earmarked $300 million for capital spending in 2015 and another $170 million in 2016.
“This will have a negative impact on operating income, as we will have higher depreciation and will incur start-up costs and full overheads in our P&L while it will take us time to build up the volume and sales,” he said. “To support and drive this growth agenda we will invest in people in areas such as sales and marketing, procurement and supply chain. In addition to the above, we will step up our investment in innovation, research and product development, and consumer insights to make sure we continue to maintain and build our leadership positions in the categories where we are strong.”
In the fiscal year ended Dec. 31, 2014, Weston Foods had adjusted EBITDA of C$311 million ($249 million), down from C$322 million a year ago, and operating income of C$241 million ($193 million), down 7% from C$259 million in fiscal 2013. Revenue for the year was C$1,923 million ($1,537 million), up 6% from C$1,812 million.
Mr. Binning said Weston plans to split its capital spending in such a way that two-thirds will go toward efforts in the United States and one-third will go toward Canada. Not all the spending will be for capacity expansion at existing facilities, either. Mr. Binning said the company plans to put in place a couple new greenfield projects.
“This is not simply upgrading existing facilities,” he said. “This is actually putting new assets in the ground, which will be state-of-the-art.”
He said the company also will consider bolt-on acquisitions, but he indicated they would be small. To that end, the company on March 6 said it has completed the purchase of Starr Culinary Delights Inc. of Mississauga, Ont. Starr has more than 25 years of experience baking a full range of cakes for the North American market. Starr’s products are sold to retail and food service customers across Canada and the United States and include a wide range of cake and dessert products such as Starr’s signature coffee cakes, cheese cakes, loaf cakes, layer cakes, cupcakes, tarts, mousses and more.“This strategic acquisition will complement our growing cake and sweet goods business with high quality, innovative and unique products and capabilities,” said Kevin McDonough, president of frozen and biscuit divisions. “We continue to enhance our product offering for our customers and consumers throughout North America. Weston Foods is excited to partner with Kelly Perera and Christian Perera, who will continue to play a key role in the future of Starr under Weston Foods' ownership.”