Weston Foods: profit doubles in third quarter 2010

Toronto / CA. (gwl) George Weston Limited reported a major increase in third quarter 2010 net earnings despite relatively flat sales. The Canadian food processor and distributor says basic net earnings per common share from continuing operations were 1,32 CAD compared to 0,44 CAD for the same period in 2009 – an increase of 0,88 CAD. Of this increase, 0,31 CAD was attributable to improvements in the operating performance of the company´s two operating segments, Weston Foods and Loblaw Companies Limited. Overview:

(unaudited)	16 weeks ended	16 weeks ended		40 weeks ended	40 weeks ended
	2010-10-09	2009-10-10	Change	2010-10-09	2009-10-10	Change
Sales in million CAD	9’884	9’777	1,1 %	24’591	24’283	1,3 %
Operating income in million CAD	490	333	47,1 %	1’153	722	59,7 %
Operating margin	5,0 %	3,4 %		4,7 %	3,0 %
Interest expense and other financing charges in million CAD	100	80	25,0 %	321	264	21,6 %
Net earnings from continuing operations in million CAD	184	71	NM	351	48	NM
Net earnings in million CAD	184	86	NM	351	953	NM
Basic net earnings per common share from continuing operations	1,32 CAD	0,44 CAD	NM	2,46 CAD	0,11	NM
Basic net earnings per common share	1,32 CAD	0,56 CAD	NM	2,46 CAD	7,12 CAD	NM
Ebitda in million CAD	707	530	33,4 %	1’695	1’212	39,9 %
Ebitda margin	7,2 %	5,4 %		6,9 %	5,0 %
Net debt in million CAD	431	233	85,0 %	431	233	85,0 %

The Company achieved strong financial results in operating performance at Weston Foods and Loblaw despite a marginal increase in sales of 1,1 percent to 9’884 million CAD compared to 9’777 million CAD in the same period in 2009. Operating income for the third quarter of 2010 was 490 million CAD compared to 333 million CAD in the same period in 2009, an increase of 157 million CAD or 47,1 percent. Consolidated operating margin for the third quarter of 2010 was 5,0 percent compared to 3,4 percent for the same period in 2009.

Weston Foods operating income was positively impacted by the benefits realized from productivity improvements and other cost reduction initiatives, lower input costs and lower legal and restructuring charges, which were partially offset by the impact of lower pricing in certain product categories. Weston Foods brand and product development efforts continue in an effort to improve overall sales, while its focus on plant and distribution optimization along with other ongoing cost reduction initiatives continue to ensure a low cost operating structure.

The improvement in operating income at Loblaw was primarily attributable to continued buying synergies, disciplined vendor management, improved control label profitability and inventory management and a stronger Canadian Dollar, partially offset by increased transportation costs, incremental costs related to the investment in information technology and supply chain, the cost in connection with the ratification of new collective agreements and increased labour costs. Loblaw continues to make progress towards the final stages of its renewal program in a market which remains highly competitive and under deflationary pressures. These factors, combined with the significant risk and cost associated with the major systems and infrastructure programs Loblaw is undertaking, will continue to put future sales and margins increasingly under pressure.

Interest expense and other financing charges for the third quarter of 2010 increased by 20 million CAD to 100 million CAD from 80 million CAD in the third quarter of 2009 primarily due to an increase in the non-cash charge related to the fair value adjustment of Weston Holdings Limited´s forward sale agreement for 9,6 million CAD Loblaw common shares of 36 million CAD when compared to the same period in 2009, partially offset by a loss of eight million CAD recorded in the third quarter of 2009 related to the redemption of the George Weston Limited 12,7 percent Promissory Notes. Excluding the impact of these items, interest expense and other financing charges for the third quarter of 2010 decreased by eight million CAD compared to the third quarter of 2009.

Weston Foods

As a result of the Company´s ongoing review of its strategic options, the Company recently completed two bakery acquisitions. On September 24, 2010 the Company purchased Keystone for approximately 188 million CAD (186 million USD). Keystone is a U.S. manufacturer and supplier of frozen cupcakes, donuts and cookies. The results of Keystone operations from the date of acquisition were included in the Company´s third quarter operating results and were not significant to consolidated net earnings from continuing operations. Subsequent to the end of the third quarter of 2010, the Company announced and completed the acquisition of ACE Bakery Limited, a manufacturer and supplier of artisan and European-style rustic bread varieties for 110 million CAD.

Weston Foods sales for the third quarter of 2010 of 494 million CAD decreased 1,6 percent compared to the same period in 2009. Foreign currency translation negatively impacted sales by approximately 2,0 percent, while the Keystone acquisition positively impacted sales growth by approximately 1,1 percent. Of the remaining decline of 0,7 percent, approximately 1,0 percent was attributable to lower pricing in certain product categories. Volume increased in the third quarter of 2010 by 1,5 percent when compared to the same period in 2009, of which 1,2 percent was attributable to the acquisition of Keystone.

Weston Foods operating income was 111 million CAD in the third quarter of 2010 compared to 36 million CAD in the same period in 2009. Operating margin was 22,5 percent for the third quarter of 2010 compared to 7,2 percent in the third quarter of 2009. Excluding the impact of the effect of stock-based compensation net of equity derivatives and the commodity derivatives fair value adjustment, which are more fully described in the MD+A, Weston Foods operating income was strong when compared to the same period in 2009. Operating income was positively impacted by the benefits realized from productivity improvements and other cost reduction initiatives, lower input costs and lower legal and restructuring charges, which were partially offset by the impact of lower pricing in certain product categories.

Loblaw

Loblaw sales for the third quarter of 2010 of 9’593 million CAD increased 1,3 percent compared to the third quarter of 2009. Sales in the third quarter of 2010 were positively impacted by 1,7 percent by the acquisition of T+T Supermarket Inc., which was completed at the end of the third quarter of 2009. Sales in food were flat, sales in drugstore declined marginally, sales growth in apparel was strong while sales of other general merchandise declined significantly and gas bar sales increased significantly.

Loblaw operating income for the third quarter of 2010 was 388 million CAD compared to 376 million CAD in the same period in 2009, an increase of 3,2 percent. Loblaw operating margin was 4,0 percent for both the third quarter of 2010 and for the third quarter of 2009. Excluding the impact of the effect of stock-based compensation net of equity forwards and the asset impairment charge due to the closure of a distribution centre in Quebec, operating income improved as a result of continued buying synergies, disciplined vendor management, improved control label profitability and inventory management and a stronger Canadian Dollar, partially offset by increased transportation costs, incremental costs related to the investment in information technology and supply chain, the cost in connection with the ratification of new collective agreements and increased labour costs.

Outlook

The consolidated results of George Weston Limited will continue to reflect the operating performance of both the Weston Foods and Loblaw operating businesses for the remainder of 2010. In addition, the Company´s results will be subject to earnings volatility caused by the impact of changes in U.S. foreign currency exchange rates on a portion of the U.S. Dollar denominated cash and short term investments. Earnings volatility may also result from other non-operating factors including commodity prices and their impact on the Company´s commodity derivatives, the Loblaw common share price and its impact on the forward sale agreement for 9,6 million Loblaw common shares and short term interest rates.

For the remainder of 2010, Weston Foods expects continued strong operating performance with earnings reflecting seasonally lower operating margins and a modest contribution from the two recently completed bakery acquisitions. The Company continues its ongoing efforts to reduce costs through improved efficiencies and productivity. The Company remains focused on growing sales by optimizing product mix and product innovation to meet changing consumer buying preferences.

Loblaw continues to make progress towards the final stages of its overall renewal program. As a result of buying efficiencies related to its information technology and infrastructure initiatives and adjustments to the timing of certain phases of those initiatives, Loblaw now expects the impact to 2010 operating income of the incremental infrastructure and information technology costs to be lower than previously anticipated. The costs and risks associated with these investments combined with deflationary pressures and heightened competition will continue to challenge sales and margins.

Info: George Weston Limited continues to assess opportunities for the deployment of its significant holdings of cash and short term investments – the company said in its statement «George Weston Limited Q3 2010 – Quarterly Report to Shareholders».