George Weston to close unprofitable bakery in U.S. amid frozen food challenges

TORONTO – George Weston Ltd. (TSX:WN) says it will close an unprofitable frozen cake factory in the United States by the end of the first quarter of 2018 as it reviews its strategy in light of challenges in its frozen food business.

The underperforming frozen foods segment contributed to a decline in earnings at the company’s Weston Foods division, which saw its adjusted EBITDA fall to $80 million in this year’s third quarter from $101 million last year.

Overall, the company says it earned a profit attributable to common shareholders of $420 million or $3.25 per diluted share in the quarter ended Oct. 7, up from $254 million or $1.97 per diluted share a year ago.

That was primarily because of its Loblaw business, which accounts for the bulk of George Weston’s overall sales of $14.65 billion, which were up from $14.61 billion.

Weston Foods accounted for just $668 million of the total revenue, down from $673 million a year earlier.

The parent company said in a statement Tuesday it doesn’t expect the food processing division’s performance will improve in the fourth-quarter, and its earnings will be down year-over-year by a similar magnitude.

Galen Weston, who is executive chairman of both George Weston Ltd. and Loblaw Companies Ltd. (TSX:L), said that problems within some of its frozen foods operations were bigger than anticipated.

“Our fresh, artisan and biscuit business units performed on plan. However, the frozen business fell significantly short due to continuing operational issues in two cake facilities and one pie plant,” Weston told analysts Tuesday.

“The team has been working around the clock to resolve the issues. We’ve announced the closure of the Creative Occasions iced-cake facility and are beginning to see improvements in operational productivity.”

He said some of the work from Creative Occasions — a Nashville, Tenn.-based business acquired by a Weston Foods subsidiary in 2015 — will move to a facility in Cobourg, Ont.

Galen Weston stressed that some of the frozen foods business segments — particularly un-iced cakes and doughnuts — have been growing.

But he added that “it is going to take us some time to get the business back onto a satisfactory trajectory and the team is focused on doing that now.”

A strategic review by Weston Foods president Luc Mongeau, who joined the company in January 2017, is expected to be announced in March with George Weston’s fourth-quarter financial report.

Galen Weston said Mongeau was asked to “significantly change the historical trajectory of the Weston Foods business.

“He has delivered to us what we think is a very promising medium-term plan that will involve some changes to the business and we will comment on that in Q4.”

Weston declined to elaborate when questioned about possible closures and divestitures.

Analyst Irene Nattel of RBC Dominion Securities, however, said in a note that “we expect WN Foods to sharpen its focus within the frozen category on value-added, margin accretive categories and customers with growth potential, which likely implies exiting products/categories that don’t meet the criteria.”

George Weston’s third-quarter results include $11 million year-to-date in depreciation costs related to the planned closures of bread, pie and cake manufacturing facilities.

Still, its overall third-quarter profit was up from a year ago, boosted by the Loblaw business.

On an adjusted basis, George Weston says it earned $277 million or $2.14 per share, up from $266 million or $2.06 per diluted share in the same quarter last year.

Last month, the company confirmed it was aware of an industry-wide investigation by the Competition Bureau into price-fixing related to packaged bread products.

George Weston says court filings by the regulator remain sealed while searches are completed, but it expects to be able to comment further after those filings are unsealed.