George Weston Limited: Reports 2015 Fourth Quarter and Fiscal Year Ended December 31, 2015 Results

Toronto / CA. (gwl) George Weston Limited announced its consolidated unaudited results for the 12 weeks ended December 31, 2015. GWL’s 2015 Annual Report includes the Company’s audited annual consolidated financial statements and Management’s Discussion and Analysis (MD+A) for the fiscal year ended December 31, 2015. The 2015 Annual Report 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. As a result of the Company’s reporting calendar, the fourth quarter and full year 2014 included an extra week of operations (the 53rd week) compared to 2015.

«We are pleased with George Weston Limited’s performance in 2015 as both of the Company’s operating segments continued to execute on their strategic priorities. Progress in 2015 reinforces our confidence that the Company is well-positioned for stable, long term growth and profitability», said W. Galen Weston, Executive Chairman, George Weston Limited.

2015 Fourth Quarter Highlights

(unaudited)				Quarters		Ended						Years		Ended
(millions CAD except where otherwise indicated)				Dec. 31, 2015			Dec. 31, 2014				Dec. 31, 2015				Dec. 31, 2014
For the periods ended as indicated				(12 weeks)			(13 weeks)		Change			(52 weeks)			(53 weeks)		Change
Sales				CAD	11’248		CAD	11’734		(4.1)%		CAD	46’894		CAD	43’918		6.8%
	Sales excluding 53rd week			CAD	11’248		CAD	10’925		3.0%		CAD	46’894		CAD	43’109		8.8%
Adjusted Ebitda(1)				CAD	946		CAD	1’022		(7.4)%		CAD	3’826		CAD	3’530		8.4%
	Adjusted Ebitda(1) excluding 53rd week			CAD	946		CAD	945		0.1%		CAD	3’826		CAD	3’453		10.8%
Adjusted Ebitda margin(1)				8.4%			8.7%					8.2%			8.0%
Net earnings attributable to shareholders
	of the Company			CAD	148		CAD	161		(8.1)%		CAD	527		CAD	126		318.3%
Net earnings available to common
	shareholders of the Company			CAD	138		CAD	151		(8.6)%		CAD	483		CAD	82		489.0%
	Net earnings available to common shareholders
	of the Company excluding 53rd week(i)			CAD	138		CAD	122		13.1%		CAD	483		CAD	53		811.3%
Adjusted net earnings available to common
	shareholders of the Company(1)			CAD	183		CAD	202		(9.4)%		CAD	717		CAD	680		5.4%
	Adjusted net earnings available to common
	shareholders of the Company(1) excluding 53rd week(i)			CAD	183		CAD	173		5.8%		CAD	717		CAD	651		10.1%
Basic net earnings per common share (in CAD)				CAD	1.08		CAD	1.18		(8.5)%		CAD	3.78		CAD	0.64		490.6%
	Basic net earnings per common share (in CAD)
	excluding 53rd week(i)			CAD	1.08		CAD	0.95		13.7%		CAD	3.78		CAD	0.41		822.0%
Adjusted basic net earnings per common share(1) (in CAD)				CAD	1.43		CAD	1.58		(9.5)%		CAD	5.61		CAD	5.32		5.5%
	Adjusted basic net earnings per common share(1) (in CAD)
	excluding 53rd week(i)			CAD	1.43		CAD	1.35		5.9%		CAD	5.61		CAD	5.09		10.2%

(i)	The impact of the 53rd week on net earnings available to common shareholders of the Company is estimated based on applying the 2014 effective tax rate to the 53rd week net earnings before income taxes of 77 million CAD, net of non-controlling interest.

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Pavi Binning, President and Chief Executive Officer, George Weston Limited, commented that «George Weston Limited’s fourth quarter results came in as expected. Loblaw continued to execute on its strategic priorities, delivering positive same-store sales and stable margins amidst a competitive retail environment and continued pressures from healthcare reform. Weston Foods delivered sales growth and financial performance in line with expectations as it continued to invest in the business and execute on its priorities».

Consolidated results of operations

The 53rd week of 2014 resulted in an additional 809 million CAD of sales, 77 million CAD of operating income, and estimated impacts on net earnings available to common shareholders and basic net earnings per common share of 29 million CAD and 0.23 CAD per share, respectively.

Adjusted net earnings available to common shareholders of the Company(1) decreased by 19 million CAD (0.15 CAD per common share) to183 million CAD (1.43 CAD per common share) in the fourth quarter of 2015 compared to the same period in 2014. The decrease included the negative year-over-year impact of the 53rd week of 29 million CAD (0.23 CAD per common share). Excluding the 53rd week, adjusted net earnings available to common shareholders of the Company(1) increased 10 million CAD (0.08 CAD per common share) primarily due to:

• consistent underlying operating performance at Loblaw, partially offset by a decline in the underlying operating performance at Weston Foods;
• a reduction in depreciation and amortization primarily driven by Loblaw’s Retail segment due to an increase in the estimated useful life of certain information technology (IT) systems and lower depreciation on older IT and other store assets, partially offset by an increase in depreciation and amortization at Weston Foods due to investments in capital; and
• a reduction in adjusted net interest expense and other financing charges(1) driven by lower interest on long term debt as a result of repayments on Loblaw’s unsecured term loan facility, obtained in connection with the acquisition of Shoppers Drug Mart Corporation (Shoppers Drug Mart).

Net earnings available to common shareholders of the Company decreased by 13 million CAD (0.10 CAD per common share) to 138 million CAD (1.08 CAD per common share) in the fourth quarter of 2015 compared to the same period in 2014. The decrease included the negative year-over-year impact of the 53rd week. Excluding the 53rd week, net earnings available to common shareholders of the Companyincreased 16 million CAD (0.13 CAD per common share). In addition to the items described above, the increase in net earnings available to common shareholders of the Company included the favourable year-over-year net impact of the following significant items:

• the favourable impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of 68 million CAD (0.40 CAD per common share);
• the favourable impact of a charge incurred in the fourth quarter of 2014 of 69 million CAD (0.17 CAD per common share) related to the fair value increment on the acquired inventory sold associated with the acquisition of Shoppers Drug Mart; and
• the favourable impact of higher foreign currency translation gains of 22 million CAD (0.10 CAD per common share);
  partially offset by,
• the unfavourable impact of the impairment of Loblaw’s drug retail business ancillary assets held for sale in the fourth quarter of 2015 of 112 million CAD (0.28 CAD per common share);
• the unfavourable impact of Loblaw’s accelerated finalization of transitioning of certain grocery stores to more cost effective and efficient operating terms under collective agreements (Labour Agreements) in the fourth quarter of 2015 of 55 million CAD (0.14 CAD per common share);
• the unfavourable impact of a charge related to inventory measurement and other conversion differences associated with the conversion of Loblaw’s franchise grocery stores to new IT systems in the fourth quarter of 2015 of 33 million CAD (0.09 CAD per common share); and
• the unfavourable impact of Loblaw’s modifications to certain franchise fee arrangements with franchisees of certain franchise banners of 32 million CAD (0.08 CAD per common share).

Reportable operating segments

(unaudited)

Quarters

Ended

Years

Ended

(millions CAD except where otherwise indicated)

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2015

Dec. 31, 2014

For the periods ended as indicated

(12 weeks)

(13 weeks)

Change

(52 weeks)

(53 weeks)

Change

Sales

CAD

527

CAD

469

12.4%

CAD

2’144

CAD

1’923

11.5%

Sales excluding 53rd week

CAD

527

CAD

438

20.3%

CAD

2’144

CAD

1’892

13.3%

Adjusted Ebitda(1)

CAD

67

CAD

74

(9.5)%

CAD

285

CAD

311

(8.4)%

Adjusted Ebitda(1) excluding 53rd week

CAD

67

CAD

68

(1.5)%

CAD

285

CAD

305

(6.6)%

Adjusted Ebitda margin(1)

12.7%

15.8%

13.3%

16.2%

Depreciation and amortization(i)

CAD

25

CAD

17

47.1%

CAD

94

CAD

70

34.3%

(i)	Depreciation and amortization in the fourth quarter of 2015 and year-to-date includes 6 million CAD (2014 – nil) and 11 million CAD (2014 – nil), respectively, of accelerated depreciation recorded as restructuring and other charges.

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Sales: Weston Foods sales in the fourth quarter of 2015 were 527 million CAD, an increase of 58 million CAD, or 12.4 percent, compared to the same period in 2014. The increase included the negative year-over-year impact of the 53rd week of 31 million CAD. Excluding the 53rd week, sales increased by 89 million CAD, or 20.3 percent and included the positive impact of foreign currency translation of approximately 10.3 percent. Excluding the impact of foreign currency translation and the 53rd week, sales increased by 10.0 percent primarily due to the combined positive impact of pricing and changes in sales mix, and an increase in volumes.

Adjusted Ebitda(1): Weston Foods adjusted Ebitda(1) in the fourth quarter of 2015 was 67 million CAD, a decrease of 7 million CAD compared to the same period in 2014. The decrease included the negative year-over-year impact of the 53rd week of 6 million CAD. Excluding the 53rd week, adjusted Ebitda(1) decreased by 1 million CAD. Despite the increase in sales, adjusted Ebitda(1) declined primarily due to higher input costs, new plant costs and investments in the business.

Adjusted Ebitda margin(1): in the fourth quarter of 2015 was 12.7 percent compared to 15.8 percent in the same period in 2014. The decline in adjusted Ebitda margin(1) in the fourth quarter of 2015 was due to the factors impacting adjusted Ebitda(1), as described above.

Depreciation and Amortization: Weston Foods depreciation and amortization was 25 million CAD in the fourth quarter of 2015, an increase of 8 million CAD compared to 2014. Depreciation and amortization included 6 million CAD (2014 – nil) of accelerated depreciation related to the planned closures of cake manufacturing facilities approved in 2015. Excluding this amount, the increase in the fourth quarter of 2015 was 2 million CAD and 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 2015, Weston Foods recorded restructuring and other charges in the fourth quarter of 2015 and year-to-date of 8 million CAD (2014 – 2 million CAD) and 26 million CAD (2014 – 7 million CAD), including 6 million CAD (2014 – nil) and 11 million CAD (2014 – nil) of accelerated depreciation, respectively. These charges primarily relate to restructuring plans approved in 2015 to close three cake manufacturing facilities in Canada and the United States (U.S.). Weston Foods expects that these closures will be completed by the end of the second quarter of 2016 with production transferring to other facilities.

Loblaw Segment Results

(unaudited)

Quarters

Ended

Years

Ended

(millions CAD except where otherwise indicated)

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2015

Dec. 31, 2014

For the periods ended as indicated

(12 weeks)

(13 weeks)

Change

(52 weeks)

(53 weeks)

Change

Sales

CAD

10’865

CAD

11’413

(4.8)%

CAD

45’394

CAD

42’611

6.5%

Sales excluding 53rd week

CAD

10’865

CAD

10’624

2.3%

CAD

45’394

CAD

41’822

8.5%

Retail gross profit(i)

CAD

2’794

CAD

2’925

(4.5)%

CAD

11’689

CAD

9’734

20.1%

Retail gross profit(i) excluding 53rd week

CAD

2’794

CAD

2’725

2.5%

CAD

11’689

CAD

9’534

22.6%

Adjusted Ebitda(1)

CAD

879

CAD

948

(7.3)%

CAD

3’541

CAD

3’219

10.0%

Adjusted Ebitda(1) excluding 53rd week

CAD

879

CAD

877

0.2%

CAD

3’541

CAD

3’148

12.5%

Adjusted Ebitda margin(1)

8.1%

8.3%

7.8%

7.6%

Depreciation and amortization(ii)

CAD

376

CAD

393

(4.3)%

CAD

1’592

CAD

1’472

8.2%

(i)

Retail gross profit includes a charge of 46 million CAD related to the impairment of drug retail ancillary assets held for sale and a charge of 4 million CAD related to inventory measurement and other conversion differences for Loblaw’s franchise grocery stores in the fourth quarter of 2015. Retail gross profit includes a charge of 69 million CAD in the fourth quarter of 2014 related to the recognition of the fair value increment on the acquired Shoppers Drug Mart inventory sold.

(ii)

Depreciation and amortization includes 124 million CAD (2014 – 124 million CAD) in the fourth quarter of 2015 and 536 million CAD (2014 – 417 million CAD) year-to-date of amortization of intangible assets acquired with Shoppers Drug Mart.

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Sales: Loblaw sales in the fourth quarter of 2015 were 10’865 million CAD, a decrease of 548 million CAD compared to the same period in 2014, primarily driven by Retail. The decrease in Retail sales included the negative year-over-year impact of the 53rd week of 789 million CAD. Excluding the 53rd week, Retail sales increased by 231 million CAD, or 2.2 percent, compared to the same period in 2014 and included food retail sales of 7’631 million CAD (2014 – 7’536 million CAD) and drug retail sales of 2’975 million CAD (2014 – 2’839 million CAD).

The increase in Retail sales on a comparable 12 week basis was primarily due to the following factors:

• food retail same-store sales growth was 2.4 percent. Loblaw’s food retail average quarterly internal food price index was moderately higher than the average quarterly national food price inflation of 4.1 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 5.0 percent, including same-store pharmacy sales growth of 4.2 percent and same-store front store sales growth of 5.7 percent; and
• in the last 12 months, there was a decrease in Retail net square footage of 0.1 million square feet, or 0.1 percent, primarily driven by Loblaw’s store closure plan announced during 2015.

In 2014, Loblaw modified its fee arrangements with the franchisees of certain franchise banners. The modified arrangements resulted in an annual reduction of food retail sales and gross profit, with a corresponding decrease in selling, general and administrative expenses (SG+A). In the fourth quarter of 2015, the modified arrangements had a negative impact of 32 million CAD to food retail sales and gross profit, with an offsetting positive impact to SG+A. In 2016, Loblaw will implement these modified fee arrangements with the remaining franchise banners. In 2016, the incremental annual impact of modified fee arrangements to the remaining franchise banners is expected to result in a negative impact to food retail sales and gross profit of approximately 60 million CAD, with an offsetting positive impact to SG+A.

Retail Gross Profit: Loblaw Retail gross profit in the fourth quarter of 2015 was 2’794 million CAD, a decrease of 131 million CAD compared to the same period in 2014. The decrease included the negative year-over-year impact of the 53rd week of 200 million CAD. Excluding the 53rd week, Retail gross profit increased 69 million CAD and included the favourable year-over-year net impact of the following items:

• a prior year charge of 69 million CAD related to the recognition of the fair value increment on the acquired Shoppers Drug Mart inventory sold;
  partially offset by,
• a charge of 46 million CAD related to the impairment of Loblaw’s drug retail ancillary assets held for sale in the fourth quarter of 2015; and
• a charge of 4 million CAD related to inventory measurement and other conversion differences for Loblaw’s franchise grocery stores in the fourth quarter of 2015.

Excluding the 53rd week and the favourable year-over-year net impact of the items noted above, Retail gross profit increased 50 million CAD compared to the same period in 2014. Retail gross profit percentage of 26.8 percent decreased by 10 basis points in the fourth quarter of 2015, and was impacted by:

• a positive impact of approximately 30 basis points from the consolidation of franchises, which commenced in the second quarter of 2015; and
• a negative impact of approximately 30 basis points from the modifications to certain franchise fee arrangements.

Excluding these impacts, Retail gross profit percentage decreased 10 basis points and included the following:

• a decline in drug retail gross profit percentage, primarily due to the impact of healthcare reform;
  partially offset by,
• the achievement of operational synergies in both food and drug retail.

Adjusted Ebitda(1): Loblaw adjusted Ebitda(1) in the fourth quarter of 2015 was 879 million CAD, a decrease of 69 million CAD compared to the same period in 2014. The decrease included the negative year-over-year impact of the 53rd week of 71 million CAD. Excluding the 53rd week, adjusted Ebitda(1) increased 2 million CAD and included an increase in adjusted Ebitda(1) at Choice Properties Real Estate Investment Trust (Choice Properties) (net of intersegment eliminations) partially offset by a decline in Retail adjusted Ebitda(1). Retail adjusted Ebitda(1) decreased 3 million CAD driven by an increase in SG+A of 53 million CAD, or 10 basis points, partially offset by an increase in Retail gross profit, as described above. As a percentage of sales, the increase in SG+A was impacted by the following:

• a positive impact of approximately 30 basis points from the modifications to certain franchise fee arrangements; and
• a negative impact of approximately 30 basis points from the consolidation of franchises.

Excluding these impacts, as a percentage of sales, SG+A was essentially flat compared to the same period in 2014 and included the following:

• non-recurring transactions that had positive impacts in the prior year;
• unfavourable foreign exchange impacts; and
• higher store and store support costs;
  partially offset by,
• favourable changes in the fair value of Loblaw’s investments in its franchise business.

Depreciation and Amortization Loblaw’s depreciation and amortization was 376 million CAD in the fourth quarter of 2015, a decrease of 17 million CAD compared to the same period in 2014, and included 124 million CAD (2014 – 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:

• an increase in the estimated useful life of certain IT systems; and
• lower depreciation on older IT and other store assets.

Loblaw Other Business Matters

Impairment of Drug Retail Ancillary Assets Held for Sale: During 2015, Loblaw commenced actively marketing the sale of certain assets of its Shoppers ancillary healthcare businesses. As a result, Loblaw recorded a charge of 112 million CAD in the fourth quarter of 2015 associated with the write-down of the assets and other related restructuring charges. Of the 112 million CAD charge, 46 million CAD was recognized in Retail gross profit and the remainder in Retail SG+A. Subsequent to the end of 2015, Loblaw signed an agreement for the sale of certain of these assets. Loblaw expects the annualized impact of the divestitures to be a decrease in Retail sales of approximately 245 million CAD and an increase in operating income of 14 million CAD.

Inventory Measurement: As of the end of 2015, Loblaw had completed the conversion of all of its franchised grocery stores to a new IT system that includes a perpetual inventory system. The remeasurement of inventory owned by the franchises as a result of implementing the system resulted in a decrease in inventory value of 33 million CAD in the fourth quarter of 2015. The remeasurement resulted in a charge of 4 million CAD in Retail gross profit related to consolidated franchises and 29 million CAD to Retail SG+A related to non-consolidated franchises.

Consolidation of Franchises: In 2015, Loblaw implemented a new, simplified franchise agreement (Franchise Agreement) for its franchised food retail stores. For financial reporting purposes, the franchise stores subject to the Franchise Agreement were consolidated. All new franchises will be subject to the Franchise Agreement. Existing franchises will be converted to the Franchise Agreement as their existing agreements expire. As at year end 2015, 85 franchises were consolidated and the impacts of the consolidation were as follows:

(unaudited)		2015					2015
(millions CAD)		(12 weeks)					(52 weeks)
Sales		CAD	28				CAD	56
Retail gross profit		32					58
Adjusted Ebitda(1)		(4)					(12)
Depreciation and amortization		3						5
Net loss attributable to Non-Controlling Interest		(3)					(9)

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Loblaw expects that the impact in 2016 of new and current consolidated franchises will be incremental Retail sales of approximately 320 million CAD, an increase to adjusted Ebitda(1) of approximately 40 million CAD and an increase in depreciation and amortization of approximately 20 million CAD.

Closure of Certain Unprofitable Retail Locations: In 2015, Loblaw finalized a plan that will result in the closure of 52 unprofitable retail locations across a range of banners and formats. Loblaw expects that the closures will be completed by the end of the second quarter of 2016. On an annualized basis, the closures will decrease sales by approximately 300 million CAD but will result in a favourable impact of approximately 30 million CAD to operating income and 5 million CAD to depreciation and amortization.

The restructuring and other related costs associated with the plan are expected to total approximately 133 million CAD. Loblaw recorded a recovery of 7 million CAD in the fourth quarter of 2015 and a charge of 124 million CAD year-to-date. The charge included 92 million CAD for severance and lease termination costs and 39 million CAD for asset impairments associated with these retail locations. Loblaw expects approximately 9 million CAD to be recognized as the remaining stores close.

During 2015, 33 of the 52 planned Loblaw retail locations were closed.

Accelerated Finalization of Labour Agreements: Over the past five years, Loblaw has been transitioning stores to more cost effective and efficient operating terms under Labour Agreements. Loblaw was committed to the transition and accordingly accelerated the finalization of these Labour Agreements for the majority of the remaining stores in the fourth quarter of 2015. Loblaw incurred a charge of approximately 55 million CAD in Retail SG+A related to the completion of this process in the fourth quarter of 2015.

Outlook

Weston Foods expects sales growth generated by new capacity and productivity improvements to drive an increase in adjusted Ebitda(1) in 2016 when compared to 2015. The increase in adjusted Ebitda(1) 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(1). 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.