Weston Foods: operating income falls in Q3/2008

Toronto / CA. (gwf) Food producer and Loblaw parent George Weston Limited said third-quarter profit was little changed as costs to hedge the price of commodities at its bakery unit wiped out gains at the Loblaw grocery division. North America´s largest baked goods maker said net earnings for the third quarter of 2008 were 179 million CAD, which were consistent with the same period in 2007, and basic net earnings per common share of 1,28 CAD compared to 1,25 CAD for the same period in 2007, an increase of 2,4 percent (The «George Weston Limited – Quarterly Report to Shareholders» is available here).

Sales in Q3/2008 were 10,6 billion CAD compared to 10,2 billion CAD for the same period in 2007, an increase of 4,4 percent. The impact of foreign currency translation on the Weston Foods operating segment negatively impacted consolidated sales growth by approximately 0,1 percent for the third quarter of 2008. Operating income for the third quarter of 2008 was 413 million CAD compared to 376 million CAD in the same period in 2007, an increase of 9,8 percent. Consolidated operating margin of 3,9 percent for the third quarter increased compared to 3,7 percent for the same period in 2007.

Weston Foods

Weston Foods sales for the third quarter of 2008 of 1,4 billion CAD increased 8,5 percent compared to the third quarter of 2007. Foreign currency translation negatively impacted reported sales growth by approximately 0,6 percent. Price increases across key product categories combined with changes in sales mix contributed positively to sales growth by 10,9 percent for the third quarter of 2008. Overall volume decreased by 1,8 percent for the third quarter of 2008 when compared to the same period in 2007, as growth in certain higher margin categories was more than offset by declines in other categories.

Weston Foods operating income for the third quarter of 2008 was 104 million CAD compared to 128 million CAD in the same period in 2007, a decrease of 18,8 percent. Weston Foods operating margin for the third quarter was 7,4 percent compared to 9,9 percent in the same period in 2007. Excluding the impact of restructuring and other charges, the net effect of stock-based compensation and the associated equity derivatives, the commodity derivatives fair value adjustment, the Domtar fair value adjustment and the curtailment of a post-retirement plan, which are more fully described in the MD+A, Weston Foods operating income growth was strong. The commodity derivatives fair value adjustment negatively impacted the year-over-year change in Weston Foods operating income in Q3/2008 by 76 million CAD or 64 percentage points. Weston Foods experienced significant increases in the price of flour, fuel and other input items as compared to the third quarter of 2007, but was able to increase prices and manage its sales mix towards higher margin products to offset the higher costs. The benefits realized from the continued focus on cost reduction initiatives, including restructuring activities, had a positive impact on operating income. In addition, during the third quarter of 2008, a reduction in insurance reserves, as more fully described in the MD+A, resulted in a benefit being recorded in operating income.

Subsequent to the end of the third quarter of 2008, Weston Foods entered into an agreement to sell the net assets of its Dairy and bottling operations in Canada to Saputo Inc. for cash proceeds of 465 million CAD. The sale is subject to regulatory approval and is expected to close before the end of 2008. The Dairy and bottling operations generate approximately 600 million CAD of annual sales and annual EBITDA of approximately 50 million CAD for Weston Foods. At the time the transaction was announced, the Chairman of Weston noted that the transaction will enable the Dairy and bottling business to grow as part of Saputo Inc., Canada’s largest dairy producer. Weston has consistently demonstrated that it is prepared to dispose of assets if it is in the best interests of the Company and its shareholders to do so. The sale is consistent with that approach.

Bakery Segment

Fresh bakery sales increased approximately 13,0 percent in Q3/2008 and 11,3 percent year-to-date compared to the same periods in 2007, driven by price increases in key product categories combined with changes in sales mix. For the third quarter of 2008 and on a year-to-date basis, branded volume increases in the Thomas´ and Arnold brands in the United States and D´Italiano brand in Canada were offset by volume declines in other categories. Sales growth in whole grain and whole wheat products exceeded the sales growth of white flour based products. The introduction of new and expanded products contributed positively to branded sales growth during the third quarter of 2008 and year-to-date.

Fresh-baked sweet goods sales, primarily sold under the Entenmann´s brand, increased approximately 4,2 percent in Q3/2008 and 2,0 percent year-to-date compared to the same periods in 2007, mainly due to price increases and focused promotional activity. For the third quarter of 2008 and on a year-to-date basis, volumes remained lower than 2007 due to softness in certain full-size categories, including the impact of item rationalization, partially offset by volume growth in certain hand-held categories.

Frozen bakery sales increased approximately 6,2 percent in Q3/2008 and 7,3 percent year-to-date compared to the same periods in 2007, driven mainly by price increases combined with changes in sales mix, offset by lower volumes which were negatively impacted by the timing of customer orders in the third quarter of 2007.

Info: The complete press release «George Weston Limited – Quarterly Report to Shareholders» is available here.