George Weston Limited Reports 2016 First Quarter Results

Toronto / CA. (gwl) George Weston Limited announced its consolidated unaudited results for the 12 weeks ended March 26, 2016. GWL’s 2016 First Quarter Report to Shareholders has been filed with Sedar and is available at sedar.com and in the Investor Centre section of the Company’s website at weston.ca. «Both of the Company’s operating segments continued to execute on their strategic priorities in the first quarter of 2016. We remain confident in the Company’s ability to deliver long term growth and profitability and George Weston Limited announced a dividend increase for the fourth consecutive year», said W. Galen Weston, Executive Chairman, George Weston Limited.

2016 First Quarter Highlights

(unaudited in million CAD except where otherwise indicated)		12 Weeks Ended
For the periods ended as indicated		March 26, 2016			March 28, 2015			Change
Sales		CAD	10’800		CAD	10’409		3.8%
Adjusted Ebitda		CAD	890		CAD	850		4.7%
Adjusted Ebitda margin			8.2%			8.2%
Net earnings attributable to shareholders of the Company		CAD	47		CAD	167		(71.9)%
Net earnings available to common shareholders of the Company		CAD	37		CAD	157		(76.4)%
Adjusted net earnings available to common shareholders of the Company		CAD	168		CAD	152		10.5%
Diluted net earnings per common share (CAD)		CAD	0.29		CAD	1.23		(76.4)%
Adjusted diluted net earnings per common share (CAD)		CAD	1.31		CAD	1.19		10.1%

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Pavi Binning, President and Chief Executive Officer, George Weston Limited, commented that «George Weston Limited’s first quarter results came in as expected. Loblaw continued to execute against its financial plan and remains confident in its ability to fund growth initiatives despite a highly competitive retail environment and the continued pressure of healthcare reform. 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 16 million CAD (0.12 CAD per common share) to 168 million CAD (1.31 CAD per common share) in the first quarter of 2016 compared to the same period in 2015. The improvement was primarily due to an increase in Loblaw Companies Limited earnings, driven by the results of its Retail segment including the positive contribution from incremental net synergies.

Net earnings available to common shareholders of the Company decreased by 120 million CAD (0.94 CAD per common share) to 37 million CAD (0.29 CAD per common share) in the first quarter of 2016 compared to the same period in 2015. The decrease in net earnings available to common shareholders of the Company was as a result of the increase in operating performance, as described above, being more than offset by the unfavourable year-over-year impact of the following significant items:

• the unfavourable impact of foreign currency translation losses of 77 million CAD (0.53 CAD per common share); and
• the unfavourable impact of an increase in net interest expense and other financing charges primarily due to the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of 85 million CAD (0.48 CAD per common share).

Reportable Operating Segments

Weston Foods Segment Results

(unaudited in million CAD except where otherwise indicated)		12 Weeks Ended									Change
For the periods ended as indicated		March 26, 2016					March 28, 2015
Sales		CAD	562				CAD	504			11.5%
Adjusted Ebitda		CAD	63				CAD	63
Adjusted Ebitda margin				11.2%					12.5%
Depreciation and amortization		CAD	27				CAD	18			50.0%

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Sales:  Weston Foods sales in the first quarter of 2016 were 562 million CAD, an increase of 58 million CAD, or 11.5 percent, compared to the same period in 2015. Sales included the positive impact of foreign currency translation of approximately 6.7 percent. Excluding the impact of foreign currency translation, sales increased by 4.8 percent primarily due to an increase in volumes and the combined positive impact of pricing and changes in sales mix. The timing of Easter had a nominal impact when compared to 2015.

Adjusted Ebitda:  Weston Foods adjusted Ebitda in the first quarter of 2016 was flat at 63 million CAD, compared to the same period in 2015. The positive impact of the increase in sales and productivity improvements was offset by higher input costs, continued investments in the business and new plant costs.

Adjusted Ebitda margin in the first quarter of 2016 was 11.2 percent compared to 12.5 percent in the same period in 2015. The decline in adjusted Ebitda margin in the first quarter of 2016 was due to incremental investments in the business and new plant costs.

Depreciation and Amortization:  Weston Foods depreciation and amortization was 27 million CAD in the first quarter of 2016, an increase of 9 million CAD compared to the same period in 2015. Depreciation and amortization included 6 million CAD (2015: nil) of accelerated depreciation related to the planned closures of pie and cake manufacturing facilities. Excluding this amount, depreciation and amortization increased 3 million CAD 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 first quarter of 2016, Weston Foods recorded restructuring and other charges of 9 million CAD (2015: 4 million CAD), including 6 million CAD (2015: nil) of accelerated depreciation. These charges primarily relate to restructuring plans to close manufacturing facilities in Canada and the United States (U.S.) with production transferring to other facilities.

Loblaw Segment Results

(unaudited in million CAD except where otherwise indicated)		12 Weeks Ended								Change
For the periods ended as indicated		March 26, 2016				March 28, 2015
Sales		CAD	10’381			CAD	10’048			3.3%
Retail gross profit(i)		CAD	2’776			CAD	2’624			5.8%
Adjusted Ebitda		CAD	827			CAD	787			5.1%
Adjusted Ebitda margin		8.0%				7.8%
Depreciation and amortization(ii)		CAD	368			CAD	370			(0.5)%

(i)	Loblaw Retail gross profit includes a charge of 1 million CAD (2015: nil) related to restructuring and other charges.
(ii)	Depreciation and amortization includes 124 million CAD (2015: 124 million CAD) of amortization of intangible assets acquired with Shoppers Drug Mart Corporation.

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Overall Loblaw Performance:  Loblaw adjusted Ebitda increased by 40 million CAD in the first quarter of 2016 compared to the same period in 2015, primarily driven by Retail. Retail adjusted Ebitda growth was driven by higher sales, including the positive impact of Easter, incremental net synergies, an increase in Retail gross profit rate and improvements in selling, general and administrative expenses (SG+A) excluding the impact of consolidated franchises. Retail adjusted Ebitda included the positive impact of 28 million CAD in incremental net synergies.

Sales:  Loblaw sales in the first quarter of 2016 were 10’381 million CAD, an increase of 333 million CAD compared to the same period in 2015, primarily driven by Retail. Retail sales increased by 324 million CAD, or 3.3 percent, compared to the same period in 2015 and included food retail sales of 7’390 million CAD (2015: 7’234 million CAD) and drug retail sales of 2’764 million CAD (2015: 2’596 million CAD).

The increase in Retail sales was primarily due to the following factors:

• food retail same-store sales growth was 2.0 percent. The timing of Easter had a positive impact of approximately 1.0 percent. Loblaw’s food retail average quarterly internal food price index was moderately higher than the average quarterly national food price inflation of 4.3 percent as measured by «The Consumer Price Index for Food Purchased from Stores» (CPI). CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores;
• drug retail same-store sales growth was 6.3 percent, including same-store pharmacy sales growth of 4.2 percent and front store same-store sales growth of 8.2 percent. The timing of Easter had a positive impact on front store same-store sales of approximately 1.9 percent; and
• in the last 12 months, there was a decrease in Retail net square footage of 0.2 million square feet, or 0.3 percent, primarily driven by Loblaw’s store closure plan announced in 2015.

Retail gross profit and adjusted Ebitda in the first quarter of 2016 included the impacts related to the franchises consolidated in the quarter, as set out in «Loblaw Other Business Matters».

Retail Gross Profit:  Loblaw Retail gross profit in the first quarter of 2016 was 2’776 million CAD, an increase of 152 million CAD compared to the same period in 2015 and included the unfavourable year-over-year impact of a charge of 1 million CAD related to restructuring and other charges.

Excluding this impact, Retail gross profit increased 153 million CAD to 2’777 million CAD. Retail gross profit percentage was 27.3 percent, an increase of 60 basis points compared to the same period in 2015. Excluding the consolidation of franchises, Retail gross profit percentage was 26.9 percent, an increase of 20 basis points compared to the same period in 2015 driven by the achievement of operational synergies and an increase in underlying Retail gross margin, partially offset by the impact of healthcare reform.

Adjusted Ebitda:  Loblaw adjusted Ebitda in the first quarter of 2016 was 827 million CAD, an increase of 40 million CAD compared to the same period in 2015, primarily driven by Retail. Retail adjusted Ebitda increased 41 million CAD driven by an increase in Retail gross profit, as described above, partially offset by an increase in Retail SG+A of 112 million CAD. Retail SG+A as a percentage of sales was 19.6 percent, an increase of 40 basis points compared to the first quarter of 2015. Excluding the consolidation of franchises, as a percentage of sales, SG+A was 19.1 percent, an improvement of 10 basis points compared to the same period in 2015 with higher store and store support costs being more than offset by the achievement of operational synergies and favourable foreign exchange impacts.

Depreciation and Amortization:  Loblaw’s depreciation and amortization was 368 million CAD in the first quarter of 2016, a decrease of 2 million CAD compared to the same period in 2015, and included 124 million CAD (2015: 124 million CAD) of amortization of intangible assets related to the acquisition of Shoppers Drug Mart. The decline in depreciation and amortization was driven by lower depreciation on older supply chain assets.

Loblaw Other Business Matters

Consolidation of Franchises:   As at the end of the first quarter of 2016, Loblaw consolidated 115 franchise stores, which included 30 additional franchises and 85 stores consolidated in 2015. Loblaw recorded the incremental impact of the 115 consolidated franchise stores as follows:

unaudited in million CAD	12 Weeks Ended
For the period ended as indicated	March 26, 2016
Sales		CAD	64
Retail gross profit		59
Adjusted Ebitda		(6)
Depreciation and amortization		4
Net loss attributable to Non-Controlling Interest		(9)

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Loblaw operates more than 500 franchise stores, including the 115 consolidated franchise stores, under the new and existing franchise agreements. Loblaw will continue to convert franchises to the new, simplified franchise agreement as the existing agreements expire.

Outlook

Weston Foods expects sales growth generated by new capacity and productivity improvements to drive an increase in adjusted Ebitda in 2016 when compared to 2015. The increase in adjusted Ebitda is expected to be greater in the second half of the year as new plant capacity and capability come on-line. Depreciation is projected to increase in 2016 when compared to 2015, and largely offset the improvement in adjusted Ebitda. Management expects to make capital investments of approximately 300 million CAD in 2016.

Loblaw remains focused on its strategic framework, 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 returning capital to shareholders. In 2016, Loblaw expects to:

• deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive grocery market and with continued negative pressure from healthcare reform;
• grow adjusted net earnings;
• invest approximately 1.3 billion CAD in capital expenditures, including 1.0 billion CAD in its Retail segment; and
• return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

For 2016, the Company expects growth in net earnings to be driven by an increase in net earnings at Loblaw, and the positive impact of the Company’s increased ownership in Loblaw as a result of Loblaw’s share repurchases.