George Weston: Fresh baking profit down in Q2/2009

Toronto / CA. (gwl) George Weston Limited´s second quarter 2009 basic net loss per common share from continuing operations was 0,05 CAD compared to basic net earnings per common share from continuing operations of 0,60 CAD for the same period in 2008. Included in this loss is a charge of 0,61 CAD per common share related to unrealized foreign exchange losses associated with a portion of the Company´s (excluding Loblaw´s) US-Dollar denominated cash and short term investments and a charge of 0,28 CAD per common share related to the extinguishment of a portion of the GWL 12,7 percent Promissory Notes. Excluding these foreign exchange losses, the loss on the extinguishment of a portion of the GWL 12,7 percent Promissory Notes and other items specifically identified below and in the MD+A, the Company´s performance in the second quarter of 2009 was strong compared to the second quarter of 2008.

Loblaw is progressing in its turnaround efforts, balancing improvements in its food offering, product innovation and customer value while at the same time managing store renovations and infrastructure improvements. Weston Foods brand and product development efforts continue, while its continuing focus on plant and distribution optimization along with other ongoing cost reduction initiatives continue to ensure a low cost operating structure.

As disclosed previously, the fresh bread and baked goods business in the United States (U.S. fresh bakery business) was sold during the first quarter of 2009. The results and the gain on the sale of the U.S. fresh bakery business have been reflected separately as discontinued operations in the current and comparative results. Accordingly, all comparisons of continuing operating results below exclude the results of the U.S. fresh bakery business.

The results of Weston Foods´ dairy and bottling operations, which were sold in the fourth quarter of 2008, are not reported as discontinued operations, in accordance with Canadian generally accepted accounting principles, due to Loblaw´s continuing purchases of product from the dairy and bottling operations. Therefore, the results of the dairy and bottling operations up to the date of sale, are included in net earnings from continuing operations in the comparative period.

Sales in the second quarter of 2009 were 7,5 billion CAD compared to 7,3 billion CAD for the same period in 2008, an increase of 2,2 percent.

Operating income for the second quarter of 2009 was 288 million CAD compared to 307 million CAD in the same period in 2008, a decrease of 6,2 percent. Operating margin of 3,8 percent for the second quarter decreased compared to 4,2 percent for the same period in 2008. Year-over-year changes in the following items together with additional factors outlined in the MD+A influenced the Company´s operating income in the second quarter of 2009 compared to the same period in 2008:

• a charge of 90 million CAD (2008 – nil) related to unrealized foreign exchange losses associated with a portion of the Company´s (excluding Loblaw´s) US-Dollar denominated cash and short term investments. The effect on basic net earnings per common share from continuing operations was a charge of 0,61 CAD (2008 – nil);
• income of 11,0 million CAD (2008 – 13,0 million CAD) related to the effect of stock-based compensation net of equity derivatives of both GWL and Loblaw. The effect on basic net earnings per common share from continuing operations was income of 0,05 CAD (2008 – income of 0,05 CAD);
• income of 20,0 million CAD (2008 – a charge of 15,0 million CAD) related to the commodity derivatives fair value adjustment at Weston Foods. The effect on basic net earnings per common share from continuing operations was income of 0,10 CAD (2008 – a charge of 0,08 CAD);
• nil (2008 – income of 11,0 million CAD) related to the income of Weston Foods´ dairy and bottling operations. The effect on basic net earnings per common share from continuing operations was nil (2008 – income of 0,06 CAD); and
• nil (2008 – income of 7,0 million CAD) related to the redemption of the remaining GWL three percent Exchangeable Debentures and the sale of the Domtar (Canada) Paper Inc. shares. The effect on the basic net earnings per common share from continuing operations was income of nil (2008 – 0,04 CAD).

After the sale of the U.S. fresh bakery business in January 2009, Dunedin Holdings S.a r.l., a subsidiary of GWL, and certain of its affiliates became integrated foreign subsidiaries for accounting purposes. Subsequent to January 21, 2009, gains and losses arising from the translation of the USD denominated assets of these integrated foreign subsidiaries have been and will continue to be included in net earnings. As a result, operating income for the second quarter of 2009 included 90 million CAD (2008 – nil) of foreign exchange losses associated with the Company´s (excluding Loblaw´s) USD denominated cash and short term investments held in integrated foreign subsidiaries.

Excluding the impact of the specific items noted above, operating income in the second quarter of 2009 was strong compared to the same period in 2008, with growth at Loblaw being partially offset by a decrease at Weston Foods. Second quarter results at Loblaw were positively influenced by its focus on initiatives to improve buying synergies, disciplined vendor management and the efficiency of Loblaw´s transportation logistics, as well as lower labour and warehousing costs, sales mix, successful promotional campaigns and inflation. The positive impact of these factors was partially offset by costs related to Loblaw´s previously announced incremental investment in information technology and supply chain. The decrease at Weston Foods was mainly due to higher restructuring costs, higher pension costs and the timing of certain expenses. Pricing and other actions mitigated the impact of higher costs related to certain ingredients, primarily flour and oils, and other input costs.

Interest expense and other financing charges for the second quarter of 2009 increased 34,9 percent to 147 million CAD from 109 million CAD in 2008, primarily due to the loss on the extinguishment of a portion of the GWL 12,7 percent Promissory Notes of 41 million CAD (2008 – nil), which resulted in a basic net earnings per common share charge of 0,28 CAD (2008 – nil), and an increased non-cash charge related to the accounting for GWL´s forward sale agreement of 9,6 million CAD Loblaw common shares of 33 million CAD (2008 – 27 million CAD), which resulted in a basic net earnings per common share non-cash charge of 0,19 CAD (2008 – 0,15 CAD).

The effective income tax rate increased to 43,3 percent in the second quarter of 2009 compared to 28,3 percent in the second quarter of 2008. The increase was mainly the result of the foreign exchange losses associated with a portion of the Company´s (excluding Loblaw´s) US-Dollar denominated cash and short term investments.

Net Debt (excluding Exchangeable Debentures)

The Company´s net debt (excluding Exchangeable Debentures)at June 20, 2009 was 369 million CAD compared to 4’549 million CAD at June 14, 2008. Of the 4’180 million CAD reduction, the proceeds from the sale of the U.S. fresh bakery business accounted for 3’092 million CAD, the proceeds from the sale of Weston Foods´ dairy and bottling operations in the fourth quarter of 2008 accounted for 467 million CAD, the proceeds from the issuance of capital securities by Loblaw in the third quarter of 2008 accounted for 218 million CAD, and the proceeds from securitization of PC Bank receivables accounted for 300 million CAD. These changes were offset in part by the redemption of capital securities by GWL for 265 million CAD. All other factors, including foreign exchange, accounted for 368 million CAD.

Operating Segments

Weston Foods: Weston Foods sales for the second quarter of 2009 of 395 million CAD decreased 21,2 percent compared to the second quarter of 2008. The sale of the dairy and bottling operations in the fourth quarter of 2008 negatively impacted sales growth by approximately 27,4 percent, while foreign currency translation and the timing of Easter positively impacted sales growth by approximately 4,4 percent and 0,7 percent, respectively. The combined effect of price increases across key product categories in 2008 and changes in sales mix was a positive impact of 1,5 percent for the second quarter of 2009. Volume declined 42,8 percent for the second quarter of 2009 when compared to the same period in 2008, of which 43,0 percent was due to the sale of the dairy and bottling operations, while the timing of Easter had a positive impact of 0,6 percent on volumes.

Weston Foods operating income for the second quarter of 2009 was 56 million CAD compared to 45 million CAD in the same period in 2008. Operating margin for the second quarter was 14,2 percent compared to 9,0 percent in the same period in 2008. Excluding the impact of the effect of stock-based compensation net of equity derivatives, the commodity derivatives fair value adjustment, the income of Weston Foods´ dairy and bottling operations, and the redemption of the remaining outstanding GWL three percent Exchangeable Debentures and the sale of the Domtar (Canada) Paper Inc. shares, all of which are more fully described in the MD+A, Weston Foods operating income decreased mainly due to higher restructuring costs, higher pension costs and the timing of certain expenses. Operating income was positively impacted by sales growth primarily due to the combined effect of price increases implemented in 2008 and changes in sales mix, productivity improvements and the benefits realized from the continued focus on cost reduction initiatives. Pricing and other actions mitigated the impact of higher costs related to certain ingredients, primarily flour and oils, and other input costs.

Loblaw: Sales for the second quarter of 2009 increased 2,8 percent or 196 million CAD to 7,2 billion CAD compared to the second quarter of 2008. Same-store sales in the quarter increased by 2,5 percent. Sales and same-store sales growth in the second quarter of 2009 were positively impacted by approximately 0,8 percent due to the shift in Easter holiday sales into the second quarter of 2009. Sales growth was negatively impacted by 0,5 percent due to the sale of Loblaw´s food service business in the fourth quarter of 2008. In the second quarter, sales growth in both food and drugstore were strong, sales growth in apparel was modest while sales of other general merchandise continued to decline due to lower discretionary consumer spending and reductions in assortment and square footage. Gas bar sales declined in the second quarter as a result of lower retail gas prices, despite moderate volume growth.

Info: George Weston Limited – Quarterly Report to Shareholders.