Weston Foods: announces Q3/2015 results

Toronto / CA. (gwl) George Weston Limited (GWL) announced its consolidated unaudited results for the 16 weeks ended October 10, 2015. The company reported a 4.4 percent increase in Adjusted EPS and a 283.3 percent increase in Basic EPS for Q3/2015. «George Weston Limited continued to make progress on its strategic initiatives in the third quarter, with long term value creation for shareholders remaining a key priority. We are well-positioned to deliver long term growth and profitability», said W. Galen Weston, Executive Chairman, George Weston Limited.

Pavi Binning, President, George Weston Limited, commented that «We are satisfied with the Company’s third quarter results. Loblaw’s solid performance, including the achievement of its deleveraging target during the quarter, demonstrated its ability to execute against its strategic initiatives in a competitive industry and a challenging regulatory environment. Weston Foods delivered sales growth and results in line with expectations as it continued to invest in the business and execute on its priorities».

Consolidated results of operations

Adjusted net earnings available to common shareholders of the Company increased by eight million CAD (0.07 CAD per common share) to 212 million CAD (1.66 CAD per common share) in the third quarter of 2015 compared to the same period in 2014. The increase in adjusted net earnings available to common shareholders of the Company was primarily due to:

• an improvement in underlying operating performance primarily driven by Loblaw Companies Limited’s Retail segment, partially offset by a decline in operating performance at Weston Foods; and
• a reduction in adjusted net interest expense and other financing charges driven by lower interest expense as a result of repayments on Loblaw’s unsecured term loan facility, obtained in connection with the acquisition of Shoppers Drug Mart Corporation.

Net earnings available to common shareholders of the Company increased by 108 million CAD (0.85 CAD per common share) to 147 million CAD (1.15 CAD per common share) in the third quarter of 2015 compared to the same period in 2014. In addition to the items described above, the increase in net earnings available to common shareholders of the Company included the year-over-year net impact of the following significant items:

• the favourable impact of a charge incurred in the third quarter of 2014 of 107 million CAD (0.28 CAD per common share) related to the fair value increment on the acquired inventory sold associated with the acquisition of Shoppers Drug Mart;
• the favourable impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of 64 million CAD (0.37 CAD per common share); and
• the favourable impact of higher foreign currency translation gains of 23 million CAD (0.19 CAD per common share); partially offset by
• the unfavourable impact of restructuring and other related costs of 56 million CAD (0.20 CAD per common share); and
• an increase in the effective income tax rate from 17.7 percent to 27.3 percent, primarily attributable to an increase in certain non-deductible items, including the fair value loss (2014 – gain) on the Trust Unit liability.

Weston Foods Segment Results

Sales: Weston Foods sales in the third quarter of 2015 were 649 million CAD, an increase of 75 million CAD, or 13.1 percent, compared to the same period in 2014. Foreign currency translation positively impacted sales by approximately 8.9 percent. Excluding the impact of foreign currency translation, sales increased by 4.2 percent primarily due to the combined positive impact of pricing and changes in sales mix, as volumes remained flat.

Adjusted Ebitda: Weston Foods adjusted Ebitda in the third quarter of 2015 was 97 million CAD, a decrease of five million CAD compared to the same period in 2014. The decline in adjusted Ebitda was primarily due to investments in capabilities and innovation, new plant costs and higher input costs not fully offset by higher pricing.

Adjusted Ebitda margin in the third quarter of 2015 was 14.9 percent compared to 17.8 percent in the same period in 2014. The decline in adjusted Ebitda margin was due to the factors impacting adjusted Ebitda, as described above.

Depreciation and Amortization: Weston Foods depreciation and amortization was 32 million CAD in the third quarter of 2015, an increase of eleven million CAD. Depreciation and amortization included five million CAD (2014 – nil) of accelerated depreciation related to the planned closure of a cake manufacturing facility approved in the third quarter of 2015. Excluding this amount, the increase was due to investments in capital.

Weston Foods Other Business Matters

Restructuring Weston Foods continuously evaluates strategic and cost reduction initiatives related to its manufacturing assets, distribution networks and administrative infrastructure with the objective of ensuring a low cost operating structure. Restructuring activities related to these initiatives are ongoing and in the third quarter of 2015, Weston Foods recorded restructuring and other charges of 14 million CAD (2014 – two million CAD) including five million CAD (2014 – nil) of accelerated depreciation. These charges primarily relate to a restructuring plan approved in the third quarter of 2015 to close a cake manufacturing facility in the United States. Weston Foods expects that this closure will be completed by the end of the second quarter of 2016 with production transferring to other facilities.

Loblaw Segment Results

For details please refer to the company’s website.

Outlook

The outlook reflects the underlying operating performance of the Company’s operating segments as discussed below.

For full year 2015, Weston Foods expects a decline in adjusted operating income due to the costs associated with capital investments, incremental investments in innovation and capabilities and higher input costs. This decline will be partially offset by the positive impact of pricing, volume growth and productivity improvements. On an equivalent 52-week basis, management continues to expect the decline in adjusted operating income to be greater in the first half of the year than in the second half, primarily driven by operating performance in the fourth quarter.

Loblaw’s strategic framework is focused on delivering the best in food, best in health and beauty, operational excellence and growth. This strategic framework is supported by a financial strategy of maintaining a stable trading environment that targets positive same-store sales and stable gross margin; surfacing efficiencies; delivering synergies as a result of its acquisition of Shoppers Drug Mart; and deleveraging the balance sheet. Consistent with its previous outlook, on a full year comparative basis reflecting 2014 financial results for Loblaw and Shoppers Drug Mart, in 2015 Loblaw expects to:

• maintain positive same-store sales and stable gross margin (excluding synergies) in Retail;
• achieve net synergies as a result of the acquisition of Shoppers Drug Mart of approximately 235 million CAD;
• continue to drive net efficiencies across the food retail business by achieving reductions in supply chain, administrative functions and IT, while still investing in key areas, like eCommerce;
• grow adjusted operating income in its food retail business, excluding synergies, and experience a decline in adjusted operating income in its drug retail business, excluding synergies, as a result of investments in key projects and other factors;
• grow consolidated adjusted net earnings available to common shareholders (including synergies) relative to 2014, despite the negative impact in the fourth quarter of healthcare reform, incremental investments in key projects, and lower incremental synergies; and
• invest approximately 1’200 million CAD in capital expenditures.

Loblaw’s expectations continue to include the following:

• competitive intensity expected to remain high, but relatively stable as industry square footage growth in supermarket-type merchandise moderates; and
• continued pressure in our drug retail business from the ongoing impact of healthcare reform.

For the full year 2015, on a full year comparative basis, the Company expects the improvement in adjusted operating income at Loblaw will more than offset the decline in adjusted operating income at Weston Foods.