TORONTO — Despite volume growth in frozen bakery and biscuits, second-quarter operating results at Weston Foods were bogged down by higher-than-anticipated commodity and input costs, plant start-up costs, lower fresh sales volumes and the cost impact of continued investments in future growth.
Operating income in the second quarter ended June 14 was C$45 million ($41.5 million), down 30% from C$64 million in the same period a year ago. Adjusted operating income in the quarter fell to C$51 million from C$64 million. Sales, meanwhile, were slightly higher, climbing 4% to C$431 million ($397 million) from C$413 million.
“Weston Foods’ operating results in the second quarter were disappointing and more challenging than we had previously forecast,” Pavi Binning, president of George Weston Ltd., said during a July 29 conference call with analysts. “The quarter two results were driven by three main factors that all came in a little worse than we had expected. These were higher commodity costs, higher start-up costs at our new fresh plant in Toronto, and softer volumes in our fresh business, driven in part by the additional retail square footage in the market.
“We are working hard to address the decline in fresh volumes and the additional costs at our new fresh facility. Commodity costs were a challenge this year as we have not been able to pass the increases on to our customers. In terms of outlook, we expect a decline in adjusted operating income in the third quarter. However, the results for the balance of the year should begin to moderate as some of our initiatives kick in and commodity costs improve year-over-year.”
Mr. Binning said George Weston will look offset the softness in its fresh volumes by focusing on categories such as gluten-free, as well as other segments that are growing, including Ace cookies, sweet goods, cakes, donuts and pies.
“There are different trends at play in the various other products,” he said. “And clearly our focus is to make sure that we invest behind and grow the categories that are moving ahead, and protect the businesses that are a little bit soft at the moment.”
He said the company also is investing behind its main brand, Wonder, as well as in D’Italiano and Gadoua.
“We’re also thinking very carefully about the ethnic market,” he said.
Asked by an analyst whether the company has seen any changes in the competitive landscape now that Bimbo Bakeries’ acquisition of Canada Bread has closed, Mr. Binning responded, “We haven’t seen any change. There’s relative stability in the marketplace.”
Mr. Binning also provided some color on the start-up costs associated with the new fresh bakery in Toronto. The facility is serving the greater Toronto area with bread and rolls.“The facility has brand new equipment in it and also new employees working there,” he said. “And what I would sort of say to you is normally it takes up to 12 months to get a new plant of this scale fully operational. And the incremental costs are in areas that you would expect like labor and wastage downtime as we get the plant fully operational. So, we continue to work hard. Things are improving month to month. But, it normally does take up to a year to get something like this fully tuned and operational.”