2014

George Weston Limited Reports a 4.8% Increase in Adjusted Basic Net Earnings Per Common Share(1) for the Second Quarter of 2013(2).

TORONTO, July 30, 2013 /CNW/ - George Weston Limited (TSX: WN) ("GWL") today announced its consolidated unaudited results for the 12 weeks ended June 15, 2013.

The 2013 Second Quarter Report to Shareholders of George Weston Limited and its subsidiaries, together referred to as the "Company", including the Company's unaudited interim period condensed consolidated financial statements and Management's Discussion and Analysis ("MD&A") for the 12 and 24 weeks ended June 15, 2013, is available in the Investor Centre section of the Company's website at www.weston.ca and has been filed with the System for Electronic Document Analysis and Retrieval ("SEDAR") and will be available at www.sedar.com.

2013 Second Quarter Summary

  • Adjusted basic net earnings per common share(1) growth of 4.8% to $1.10 from $1.05 in the second quarter of 2012.
  • Adjusted operating income(1) growth of 7.7% to $392 million.
  • Sales growth of 2.2% to $7,792 million.

"George Weston Limited's second quarter delivered operating results in line with expectations. GWL's investment in Choice Properties REIT, which recently completed its initial public offering, and GWL's financial support for Loblaw's acquisition of Shoppers Drug Mart underscore our strong belief in their ability to create value for George Weston Limited's shareholders. We are well positioned in Loblaw, Weston Foods, and Choice Properties REIT to continue delivering shareholder value", said W. Galen Weston, Executive Chairman, George Weston Limited.

CONSOLIDATED RESULTS OF OPERATIONS                                          
(unaudited)                                          
($ millions except where otherwise indicated)   12 Weeks Ended             24 Weeks Ended            
                                           
For the periods ended as indicated   Jun. 15, 2013     Jun. 16, 2012(3)     Change     Jun. 15, 2013     Jun. 16, 2012(3)     Change
Sales   $ 7,792     $ 7,627     2.2%     $ 15,286     $ 14,851     2.9%
Operating income   $ 378     $ 323     17.0%     $ 760     $ 597     27.3%
Adjusted operating income(1)   $ 392     $ 364     7.7%     $ 715     $ 675     5.9%
Adjusted operating margin(1)     5.0%       4.8%             4.7%       4.5%      
Adjusted EBITDA(1)   $ 598     $ 556     7.6%     $ 1,118     $ 1,051     6.4%
Adjusted EBITDA margin(1)     7.7%       7.3%             7.3%       7.1%      
Net interest expense and other financing charges   $ 150     $ 77     94.8%     $ 234     $ 127     84.3%
Income taxes   $ 64     $ 53     20.8%     $ 137     $ 111     23.4%
Net earnings attributable to shareholders of the Company   $ 98     $ 135     (27.4)%     $ 260     $ 256     1.6%
Basic net earnings per common share ($)   $ 0.69     $ 0.98     (29.6)%     $ 1.88     $ 1.84     2.2%
Adjusted basic net earnings per common share(1) ($)   $ 1.10     $ 1.05     4.8%     $ 1.98     $ 1.91     3.7%
Free cash flow(1)   $ 409     $ 363     12.7%     $ 32     $ (25)     228.0%
                                     

 

Pavi Binning, President, George Weston Limited, commented that "We are pleased with the second quarter's operating results. Loblaw delivered good sales and operating performance and made progress in executing its strategy. Weston Foods achieved improved sales volume growth over last year, while operating results improved modestly as we continued to invest in growth, marketing and innovation".

The Company's second quarter 2013 adjusted basic net earnings per common share(1) were $1.10 compared to $1.05 in the same period in 2012, an increase of $0.05. The increase was primarily attributable to the improvement in the operating performance of Loblaw Companies Limited ("Loblaw"), partially offset by a higher effective income tax rate(4).

The Company's basic net earnings per common share were $0.69 compared to $0.98 in the same period in 2012. The decrease included the year-over-year unfavourable impact of certain items, including the impact of the forward sale agreement for 9.6 million Loblaw common shares and certain foreign currency translation, partially offset by the favourable impact of the multi-employer pension plan ("MEPP") withdrawal liability incurred by Weston Foods in the second quarter of 2012.

Subsequent to the end of the second quarter of 2013, Choice Properties Real Estate Investment Trust ("Choice Properties") completed a $460 million Initial Public Offering ("IPO"), a public offering of $600 million aggregate principal amount of senior unsecured debentures (the "Debentures"), and issued $200 million of trust units (the "Units") to GWL as described in the "Choice Properties Real Estate Investment Trust" section of this News Release.

Loblaw recently entered into a definitive agreement to acquire all of the outstanding common shares of Shoppers Drug Mart Corporation ("Shoppers Drug Mart") for $33.18 in cash plus 0.5965 of a Loblaw common share per each Shoppers Drug Mart common share, on a fully pro-rated basis. Based on Loblaw's closing common share price on July 12, 2013, this would represent a purchase price of approximately $12.4 billion. Concurrently, GWL agreed to subscribe for $500 million of additional Loblaw common shares, as described in the "Agreement to Acquire Shoppers Drug Mart Corporation" section of this News Release.

The Company uses non-GAAP financial measures. See the "Non-GAAP Financial Measures" section of this News Release for more information on these non-GAAP financial measures.

REPORTABLE OPERATING SEGMENTS

Weston Foods                                
(unaudited)                                
($ millions except where otherwise indicated)   12 Weeks Ended     24 Weeks Ended  
                                 
For the periods ended as indicated   Jun. 15, 2013     Jun. 16, 2012     Jun. 15, 2013     Jun. 16, 2012  
Sales   $ 413     $ 400     $ 837     $ 825  
Operating income   $ 64     $ 12     $ 112     $ 72  
Adjusted operating income(1)   $ 66     $ 65     $ 125     $ 124  
Adjusted operating margin(1)     16.0%       16.3%       14.9%       15.0%  
Adjusted EBITDA(1)   $ 81     $ 78     $ 154     $ 151  
Adjusted EBITDA margin(1)     19.6%       19.5%       18.4%       18.3%  
                               

 

Weston Foods sales in the second quarter of 2013 increased by 3.3% to $413 million from $400 million and volumes increased by 0.7% compared to the same period in 2012.  Excluding the impact of the loss of certain frozen products that Weston Foods distributed on behalf of certain customers in 2012 and foreign currency translation, sales increased 4.5% due to the combined positive impact of pricing and changes in sales mix of 3.0% and an increase in volume of 1.5%.

Weston Foods operating income in the second quarter of 2013 was $64 million compared to $12 million in the same period in 2012, an increase of $52 million. The increase was primarily due to the favourable year-over-year impact of the MEPP withdrawal liability of $35 million recorded in the second quarter of 2012 and the fair value adjustment of commodity derivatives.

Weston Foods adjusted operating income(1) in the second quarter of 2013 was $66 million compared to $65 million in the same period in 2012. Weston Foods adjusted operating margin(1) for the second quarter of 2013 decreased to 16.0% from 16.3% in the same period in 2012. Adjusted operating income(1) was positively impacted by higher pricing in key product categories, higher sales volumes, and the benefits realized from productivity improvements and other cost reduction initiatives. These benefits were partially offset by higher commodity and other input costs and increased investments in growth, marketing and innovation compared to the same period in 2012.

Loblaw                                
(unaudited)                                
($ millions except where otherwise indicated)   12 Weeks Ended     24 Weeks Ended  
                                 
For the periods ended as indicated   Jun. 15, 2013     Jun. 16, 2012     Jun. 15, 2013     Jun. 16, 2012  
Sales   $ 7,520     $ 7,375     $ 14,722     $ 14,312  
Operating income   $ 320     $ 288     $ 627     $ 525  
Adjusted operating income(1)   $ 326     $ 299     $ 590     $ 551  
Adjusted operating margin(1)     4.3%       4.1%       4.0%       3.8%  
Adjusted EBITDA(1)   $ 517     $ 478     $ 964     $ 900  
Adjusted EBITDA margin(1)     6.9%       6.5%       6.5%       6.3%  
                               

 

Investments made to advance Loblaw's customer proposition again translated into improved same-store sales performance in an intense competitive environment. Better mix and good expense management enabled Loblaw to deliver improved operating performance during the quarter.

Loblaw sales in the second quarter of 2013 increased by 2.0% to $7,520 million from $7,375 million in the same period in 2012. Loblaw's Retail segment sales increased by 1.9% and same-store sales growth was 1.1% (2012 - 0.2%). Loblaw's average quarterly internal food price index was flat (2012 - modest inflation) during the second quarter of 2013, which was lower than the average quarterly national food price inflation of 1.5% (2012 - 2.5%) as measured by "The Consumer Price Index for Food Purchased from Stores". In the last twelve months, corporate and franchise store square footage increased 0.8%. Loblaw sales in the second quarter of 2013 were also positively impacted by an increase in revenue from its Financial Services segment, which includes President's Choice Bank, a subsidiary of Loblaw.

Loblaw operating income in the second quarter of 2013 was $320 million compared to $288 million in the same period in 2012, an increase of $32 million. Loblaw adjusted operating income(1) increased by $27 million to $326 million in the second quarter of 2013 compared to $299 million in the same period in 2012. Adjusted operating margin(1) was 4.3% compared to 4.1% in the same period in 2012.

The increase in adjusted operating income(1) was primarily attributable to increased gross profit from Loblaw's Retail segment and the impact of foreign exchange, partially offset by increased operating costs, including depreciation and amortization. An improvement in Loblaw's Financial Services segment also contributed to the increase and was mainly attributable to higher revenue, operational efficiencies and lower costs related to the renegotiation of vendor contracts, partially offset by investments in the Mobile Shop business.

NET INTEREST EXPENSE AND OTHER FINANCING CHARGES
In the second quarter of 2013, net interest expense and other financing charges increased by $73 million to $150 million compared to the same period in 2012. Net interest expense and other financing charges are impacted by the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares. This fair value adjustment had an unfavourable year-over-year impact of $74 million in the second quarter of 2013.

Excluding this impact, net interest expense and other financing charges decreased by $1 million in the second quarter of 2013 compared to the same period in 2012.

INCOME TAXES
In the second quarter of 2013, income tax expense increased to $64 million from $53 million in the same period in 2012. The effective income tax rate increased to 28.1% in the second quarter of 2013 from 21.5% in the same period in 2012, primarily due to an increase in non-deductible amounts, including non-deductible foreign currency translation losses (2012 - non-taxable foreign currency translation gains) and a decrease in income tax recoveries related to prior year tax matters.

CHOICE PROPERTIES REAL ESTATE INVESTMENT TRUST
Subsequent to the end of the second quarter of 2013, in connection with its acquisition of approximately $7 billion of properties and related assets from Loblaw, Choice Properties completed a $460 million IPO of Units, which included the exercise of a $60 million over-allotment option. In addition, Choice Properties issued $200 million of Units to GWL at a price of $10.00 per Unit.

As a result of its $200 million direct investment, GWL holds 20,000,000 Units and a 5.6% effective interest in Choice Properties. After the exercise of the over-allotment option, Loblaw held approximately 81.7% effective interest in Choice Properties through ownership of 21,500,000 Units and 272,497,871 Class B Limited Partnership units, which are economically equivalent to and exchangeable for Units.

At closing, Loblaw recorded transaction costs of approximately $40 million in net interest expense and other financing charges related to the completion of the IPO.

Concurrent with the offering of Units, Choice Properties completed a public offering of the Debentures. The Debentures were comprised of $400 million Series A Debentures with a 5-year term and a coupon of 3.554% per annum, and $200 million Series B Debentures with a 10-year term and a coupon of 4.903% per annum. A portion of the debt offering proceeds were used to replenish the cash used to repay the United States ("U.S.") $150 million private placement ("USPP") note that matured during the second quarter of 2013 and to early-settle the remaining U.S. $150 million USPP note during the third quarter of 2013, including the associated early-settlement costs of approximately $18 million, which will be recorded in net interest expense and other financing charges.

AGREEMENT TO ACQUIRE SHOPPERS DRUG MART CORPORATION
Subsequent to the end of the second quarter of 2013, Loblaw entered into a definitive agreement to acquire all of the outstanding common shares of Shoppers Drug Mart for $33.18 in cash plus 0.5965 of a Loblaw common share per each Shoppers Drug Mart common share, on a fully pro-rated basis. Based on Loblaw's closing common share price on July 12, 2013, this would represent a purchase price of approximately $12.4 billion. The Company anticipates that the transaction will be completed within six to seven months. Completion is subject to various approvals, including Shoppers Drug Mart shareholder and court approvals, compliance with the Competition Act (Canada) and other regulatory approvals as well as certain other closing conditions customary in transactions of this nature.

As part of Loblaw's financing, GWL has agreed to subscribe for approximately $500 million of additional Loblaw common shares at a price of $47.55 per common share. The proceeds from this subscription will be used to finance a portion of the cash consideration payable to shareholders of Shoppers Drug Mart.

In connection with this agreement, Loblaw entered into committed bank facilities. These committed facilities consist of a $3.5 billion term loan and a $1.6 billion bridge loan that will only be utilized upon completion of the acquisition. As a result of the agreement and related commitments, Dominion Bond Rating Service ("DBRS") placed the credit ratings of GWL, Loblaw and Choice Properties under review with developing implications and Standard & Poor's ("S&P") placed GWL, Loblaw and Choice Properties on credit watch with negative implications associated with its Loblaw review. The Company expects DBRS and S&P to complete their reviews in the upcoming weeks.

OUTLOOK(2)
The outlook reflects the underlying operating performance of the Company's operating segments as discussed below.

For full year 2013, Weston Foods sales growth is expected to be moderate due to a combination of pricing and modest volume growth. Adjusted operating margins(1) are expected to remain in line with 2012 as Weston Foods invests in growth, marketing and innovation.

Loblaw continued to make progress in executing its strategy in the second quarter. The resulting improvement in year-to-date financial performance compared to the first half of 2012, in addition to updated expectations for the remainder of the year, has led management to expect mid-single digit growth in adjusted operating income(1) in 2013. This revised outlook compares to the prior expectation for modest, or low-single digit growth and excludes the impact of the $61 million restructuring charge recorded in the fourth quarter of 2012, the $51 million gain recorded in the first quarter of 2013 associated with amendments to certain defined benefit plans, and the costs associated with the creation and recently completed IPO of Choice Properties and the recently announced Shoppers Drug Mart agreement.

Loblaw's information technology ("IT") infrastructure implementation and related costs, as well as investments in price, assortment and labour, are expected to be offset by operating efficiencies.

The Canadian retail environment remains competitive and Loblaw continues to expect sales growth in 2013 to be moderated by ongoing competitor square footage expansions, a new competitor's entry into the market and generic drug deflation.

FORWARD-LOOKING STATEMENTS
This News Release contains forward-looking statements about the Company's objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects and opportunities. Specific forward-looking statements in this News Release include, but are not limited to, statements with respect to the Company's anticipated future results, status and impact of IT systems implementation, the Canadian retail environment and future plans. These specific forward-looking statements are contained throughout this News Release including, without limitation, in the "Outlook" section. Forward-looking statements are typically identified by words such as "expect", "anticipate", "believe", "foresee", "could", "estimate", "goal", "intend", "plan", "seek", "strive", "will", "may" and "should" and similar expressions, as they relate to the Company and its management.

Forward-looking statements reflect the Company's current estimates, beliefs and assumptions, which are based on management's perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The Company's expectation of operating and financial performance in 2013 is based on certain assumptions including assumptions about revenue growth, anticipated cost savings and operating efficiencies, no unanticipated changes in the effective income tax rates, no unexpected adverse events or costs related to Loblaw's investments in IT and supply chain, and no significant unanticipated increase in the price of commodities and other input costs at Weston Foods that it will not be able to offset. The Company's estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and as such, are subject to change. The Company can give no assurance that such estimates, beliefs and assumptions will prove to be correct.

Numerous risks and uncertainties could cause the Company's actual results to differ materially from the estimates, beliefs and assumptions expressed or implied in the forward-looking statements, including, but not limited to:

  • failure to realize anticipated results, including revenue growth, anticipated cost savings or operating efficiencies from the Company's major initiatives, including those from restructuring;
  • failure to realize benefits from investments in the Company's IT systems, including the Company's systems implementation, or unanticipated results from these initiatives;
  • the inability of the Company's IT infrastructure to support the requirements of the Company's business;
  • unanticipated results associated with the Company's strategic initiatives and the impact of acquisitions or dispositions of businesses on the Company's future revenues and earnings;
  • heightened competition, whether from current competitors or new entrants to the marketplace;
  • changes in economic conditions including the rate of inflation or deflation, changes in interest and foreign currency exchange rates and changes in derivative and commodity prices;
  • public health events;
  • risks associated with product defects, food safety and product handling;
  • failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements which could lead to work stoppages;
  • the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
  • the impact of potential environmental liabilities;
  • failure to respond to changes in consumer tastes and buying patterns;
  • reliance on the performance and retention of third-party service providers including those associated with the Company's supply chain and apparel business;
  • supply and quality control issues with vendors;
  • changes to the regulation of generic prescription drug prices and the reduction of reimbursement under public drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
  • changes in the Company's income, commodity, other tax and regulatory liabilities including changes in tax laws, regulations or future assessments;
  • any requirement of the Company to make contributions to its registered funded defined benefit pension plans or the multi-employer pension plans in which it participates in excess of those currently contemplated;
  • the risk that the Company would experience a financial loss if its counterparties fail to meet their obligations in accordance with the terms and conditions of their contracts with the Company;
  • the inability of Loblaw to collect on its credit card receivables;
  • the failure of Choice Properties to execute its plan and realize its forecasted results; and
  • the failure to complete the acquisition of Shoppers Drug Mart or to realize the anticipated strategic benefits or operational, competitive or cost synergies.

This is not an exhaustive list of the factors that may affect the Company's forward-looking statements. Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the "Enterprise Risks and Risk Management" section of the MD&A included in the Company's 2013 Second Quarter Report to Shareholders and Section 13, "Enterprise Risks and Risk Management", of the MD&A included in the Company's 2012 Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company's expectations only as of the date of this News Release. Except as required by law, the Company does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

NON-GAAP FINANCIAL MEASURES
The Company uses the following non-GAAP financial measures: adjusted operating income and adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin, adjusted basic net earnings per common share and free cash flow. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance of the Company for the reasons outlined below.

Certain expenses and income that must be recognized under GAAP are not necessarily reflective of the Company's underlying operating performance. For this reason, management uses certain non-GAAP financial measures to exclude the impact of these items when analyzing consolidated and segment underlying operating performance. These non-GAAP financial measures are also helpful in assessing underlying operating performance on a consistent basis.

From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring. Loblaw does not report its results of operations on an adjusted basis, however the Company excludes the impact of certain Loblaw items, as applicable, when reporting its consolidated and segment results.

These non-GAAP financial measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies, and they should not be construed as an alternative to other financial measures determined in accordance with GAAP.

Adjusted Operating Income and Adjusted EBITDA
The Company believes adjusted operating income is useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business. The Company believes adjusted EBITDA is also useful in assessing the underlying operating performance of the Company's ongoing operations and in assessing the Company's ability to generate cash flows to fund its cash requirements, including its capital investment program.

The following tables reconcile adjusted operating income and adjusted EBITDA to GAAP net earnings attributable to shareholders of the Company reported for the periods ended as indicated.

    12 Weeks Ended  
                                                 
                Jun. 15, 2013         Jun. 16, 2012(i)
(unaudited)
($ millions)
  Weston
Foods
  Loblaw   Other(ii)   Consolidated     Weston
Foods 
  Loblaw   Other(ii)   Consolidated
Net earnings attributable to shareholders of the Company                     $ 98                     $ 135
Add impact of the following:                                                
Non-controlling interests                       66                       58
Income taxes                       64                       53
Net interest expense and other financing charges                       150                       77
Operating income (loss)   $ 64   $ 320   $ (6)   $ 378       $ 12   $ 288   $ 23   $ 323
Add (deduct) impact of the following:                                                
Restructuring and other charges(iii)     1                 1       5     6           11
Fair value adjustment of commodity derivatives at Weston Foods     (1)                 (1)     7                  7
Share-based compensation net of equity derivatives     2     6           8       6     5           11
MEPP withdrawal liability incurred by Weston Foods                             35                 35
Foreign currency translation loss (gain)                 6     6                 (23)     (23)
Adjusted operating income   $ 66   $ 326   $     $ 392      $ 65   $ 299     $     $ 364
Depreciation and amortization     15     191           206       13     179           192
Adjusted EBITDA   $ 81   $ 517   $     $ 598     $ 78   $ 478   $     $ 556
                                             

(i)      Certain 2012 figures have been restated due to the implementation of revised International Accounting Standard ("IAS") 19, "Employee Benefits". See note 2 of the Company's condensed consolidated financial statements included in the 2013 Second Quarter Report to Shareholders.
(ii)      Operating income in the second quarter of 2013 included a loss of $6 million (2012 - gain of $23 million) related to the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and short term investments held by foreign operations.
(iii)      Restructuring and other charges included $1 million (2012 - $1 million) of accelerated depreciation incurred by Weston Foods. Other charges at Loblaw in the second quarter of 2012 of $6 million related to changes in Loblaw's distribution network.

 

    24 Weeks Ended  
                                                   
              Jun. 15, 2013         Jun. 16, 2012(i)
(unaudited)
($ millions)
  Weston
Foods
  Loblaw   Other(ii)   Consolidated     Weston
Foods 
  Loblaw   Other(ii)   Consolidated
Net earnings attributable to shareholders of the Company                     $  260                       $ 256
Add impact of the following:                                                  
Non-controlling interests                       129                         103
Income taxes                       137                         111
Net interest expense and other financing charges                       234                         127
Operating income   $ 112   $ 627   $ 21   $ 760       $ 72   $ 525   $     $ 597
Add (deduct) impact of the following:                                                  
Restructuring and other charges(iii)     2                 2       6     9           15
Fair value adjustment of commodity derivatives at Weston Foods     7                 7       4                 4
Share-based compensation net of equity derivatives     4     14           18       7     17           24
Defined benefit plan amendments           (51)             (51)                          
MEPP withdrawal liability incurred by Weston Foods                               35                 35
Foreign currency translation gain                 (21)     (21)                            
Adjusted operating income   $ 125   $ 590   $     $ 715       $ 124   $ 551   $     $ 675
Depreciation and amortization     29     374           403       27     349           376
Adjusted EBITDA   $ 154   $ 964   $     $ 1,118       $ 151   $ 900   $     $ 1,051
                                               
(i)      Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's condensed consolidated financial statements included in the 2013 Second Quarter Report to Shareholders.
(ii)      Year-to-date operating income included a gain of $21 million (2012 - nominal gain) related to the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and short term investments held by foreign operations.
(iii)      Year-to-date restructuring and other charges included $2 million (2012 - $1 million) of accelerated depreciation incurred by Weston Foods. Year-to-date other charges at Loblaw in 2012 of $9 million related to changes in Loblaw's distribution network.

 

The year-over-year changes in the following items influenced operating income in the second quarter of 2013:

Restructuring and other charges  The Company continuously evaluates strategic and cost reduction initiatives related to its store infrastructure, 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. The details of restructuring and other charges are included in the "Reportable Operating Segments" section of the MD&A included in the Company's 2013 Second Quarter Report to Shareholders.

Fair value adjustment of commodity derivatives at Weston Foods  Weston Foods is exposed to commodity price fluctuations primarily as a result of purchases of certain raw materials, fuels and utilities. In accordance with the Company's risk management policy, Weston Foods enters into commodity derivatives to reduce the impact of price fluctuations in forecasted raw material purchases over a specified period of time. These commodity derivatives are not acquired for trading or speculative purposes. Pursuant to Weston Foods' derivative instruments accounting policy, certain changes in fair value, which include realized and unrealized gains and losses related to future purchases of raw materials, are recorded in operating income. In the second quarter of 2013, Weston Foods recorded income of $1 million (2012 - charge of $7 million) related to the fair value adjustment of exchange traded commodity derivatives. Despite the impact of accounting for these commodity derivatives on the Company's reported results, the derivatives have the economic impact of largely mitigating the associated risks arising from price fluctuations in the underlying commodities during the period that the commodity derivatives are held.

Share-based compensation net of equity derivatives GWL and Glenhuron Bank Limited ("Glenhuron") held equity derivatives to partially hedge the impact of increases in the value of GWL and Loblaw common shares on share-based compensation cost. The amount of net share-based compensation cost recorded in operating income has historically been mainly dependent upon changes in the value of GWL and Loblaw common shares and the number and vesting of Restricted Share Units ("RSUs") and Performance Share Units ("PSUs") relative to the number of common shares underlying the equity derivatives. In the first quarter of 2013, GWL and Glenhuron settled their remaining equity derivative contracts and the RSU and PSU plans were amended to require settlement in common shares rather than in cash. As a result of the settlements and plan amendments, the components of share-based compensation and their exposure to changes in the value of GWL and Loblaw common shares have changed. In order to assess consolidated and segment operating performance on a consistent basis, management continues to exclude the impact of share-based compensation from operating income. In the second quarter of 2013, a charge of $8 million (2012 - $11 million) was recorded related to share-based compensation net of equity derivatives.

Multi-employer pension plan withdrawal liability incurred by Weston Foods  In the second quarter of 2012, Weston Foods recorded a charge of $35 million related to its withdrawal from one of the U.S. MEPPs in which it participated.

Foreign currency translation losses and gains  The Company's consolidated financial statements are expressed in Canadian dollars. A portion of the Company's (excluding Loblaw's) net assets are denominated in U.S. dollars and as a result, the Company is exposed to foreign currency translation losses and gains. The impact of foreign currency translation on a portion of the U.S. dollar denominated net assets, primarily cash and short term investments held by foreign operations, is recorded in operating income. In the second quarter of 2013, a foreign currency translation loss of $6 million (2012 - gain of $23 million) was recorded in operating income as a result of the appreciation (2012 - depreciation) of the Canadian dollar.

Adjusted Basic Net Earnings per Common Share
The Company believes adjusted basic net earnings per common share is useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business.

The following table reconciles adjusted basic net earnings per common share to GAAP basic net earnings per common share reported for the periods ended as indicated.

(unaudited)   12 Weeks Ended     24 Weeks Ended    
                                           
($)   Jun. 15, 2013 Jun. 16, 2012(i)       Jun. 15, 2013 Jun. 16, 2012(i)
Basic net earnings per common share   $ 0.69       $ 0.98       $ 1.88     $   1.84
Add (Deduct) impact of the following(ii):                        
Fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares   0.34     (0.09)       0.31       (0.34)
Restructuring and other charges         0.05       0.01       0.07
Fair value adjustment of commodity derivatives at Weston Foods   (0.01)       0.04       0.04       0.02
Share-based compensation net of equity derivatives   0.03       0.08       0.08       0.15
Defined benefit plan amendments               (0.18)            
MEPP withdrawal liability incurred by Weston Foods         0.17               0.17
Foreign currency translation loss (gain)   0.05       (0.18)       (0.16)              
Adjusted basic net earnings per common share   $ 1.10       $ 1.05       $ 1.98     $   1.91
                             
(i)      Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's condensed consolidated financial statements included in the 2013 Second Quarter Report to Shareholders.
(ii)      Net of interest, income taxes and non-controlling interests, as applicable.

 

In addition to the items described in the "Adjusted Operating Income and Adjusted EBITDA" section above, the year-over-year changes in the following item also influenced basic net earnings per common share in the second quarter of 2013:

Fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares  The fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares is non-cash and is included in consolidated net interest expense and other financing charges. The adjustment is determined by changes in the value of the underlying Loblaw common shares. In the second quarter of 2013, a charge of $0.34 (2012 - income of $0.09) was recorded in net interest expense and other financing charges as a result of the increase (2012 - decrease) in the market price of Loblaw common shares.

Free Cash Flow
In the first quarter of 2013, the Company refined its definition of free cash flow as calculated below. The Company believes that this definition of free cash flow is the appropriate measure in assessing the Company's cash available for additional funding and investing activities.

The following table reconciles free cash flow to GAAP measures reported for the periods ended as indicated.

(unaudited)   12 Weeks Ended     24 Weeks Ended
                                         
($ millions)   Jun. 15, 2013   Jun. 16, 2012     Jun. 15, 2013   Jun. 16, 2012
Cash flows from operating activities   $ 633       663       $ 613       $ 625  
Change in credit card receivables   104       71       (26)       (43)  
Less: Interest paid   115       117       208       209  
   Fixed asset purchases   213       254       347       398  
Free cash flow   $ 409      $   363       $ 32       $ (25)  
                             

 

SELECTED FINANCIAL INFORMATION
The following includes selected quarterly financial information which is prepared by management in accordance with International Financial Reporting Standards ("IFRS") and is based on the Company's 2013 Second Quarter Report to Shareholders. This financial information does not contain all disclosures required by IFRS, and accordingly, this financial information should be read in conjunction with the Company's 2012 Annual Report and 2013 Second Quarter Report to Shareholders available in the Investor Centre section of the Company's website at www.weston.ca.

Condensed Consolidated Statements of Earnings

(unaudited)                        
(millions of Canadian dollars 12 Weeks Ended 24 Weeks Ended          
                                           
  except where otherwise indicated) Jun. 15, 2013 Jun. 16, 2012(3)     Jun. 15, 2013 Jun. 16, 2012(3)
Revenue   $ 7,792       $ 7,627       $ 15,286       $ 14,851    
Operating Expenses                        
  Cost of inventories sold   5,866       5,751       11,491       11,173    
  Selling, general and administrative expenses   1,548       1,553       3,035       3,081    
    7,414       7,304       14,526       14,254    
Operating Income   378       323       760       597    
Net Interest Expense and Other Financing Charges   150       77       234       127    
Earnings Before Income Taxes   228       246       526       470    
Income Taxes   64       53       137       111    
Net Earnings   164       193       389       359    
Attributable to:                        
  Shareholders of the Company   98       135       260       256    
  Non-Controlling Interests   66       58       129       103    
Net Earnings   $ 164       $ 193       $ 389       $ 359    
Net Earnings per Common Share ($)                        
Basic   $ 0.69       $ 0.98       $ 1.88       $ 1.84    
Diluted   $ 0.68       $ 0.97       $ 1.86       $ 1.83    
                         

 

Condensed Consolidated Balance Sheets

(unaudited) As at
(millions of Canadian dollars) Jun. 15, 2013 Jun. 16, 2012(3)     Dec. 31, 2012(3)
ASSETS                  
Current Assets                  
  Cash and cash equivalents   $ 1,028       $ 1,559       $ 1,589    
  Short term investments   2,457       2,042       2,138    
  Accounts receivable   598       557       559    
  Credit card receivables   2,279       2,058       2,305    
  Inventories   2,129       1,996       2,132    
  Income taxes recoverable         53       37    
  Prepaid expenses and other assets   157       154       83    
  Assets held for sale   26       23       30    
Total Current Assets   8,674       8,442       8,873    
Fixed Assets   9,436       9,219       9,452    
Investment Properties   97       95       100    
Goodwill and Intangible Assets   1,577       1,587       1,571    
Deferred Income Taxes   313       336       316    
Security Deposits   315       341       348    
Franchise Loans Receivable   365       358       363    
Other Assets   679       822       781    
Total Assets   $ 21,456       $ 21,200       $ 21,804    
LIABILITIES                  
Current Liabilities                  
  Trade payables and other liabilities   $ 3,620       $ 3,587       $ 3,937    
  Provisions   97       71       123    
  Income taxes payable   2                
  Short term debt   1,339       1,299       1,319    
  Long term debt due within one year   1,325       226       672    
Total Current Liabilities   6,383       5,183       6,051    
Provisions   96       88       94    
Long Term Debt   5,450       6,633       6,261    
Deferred Income Taxes   151       167       160    
Other Liabilities   827       1,090       943    
Capital Securities   223       222       223    
Total Liabilities   13,130       13,383       13,732    
EQUITY                  
Share Capital   967       950       953    
Contributed Surplus   48       21       28    
Retained Earnings   4,841       4,594       4,736    
Accumulated Other Comprehensive Loss   (16)       (10)       (24)    
Total Equity Attributable to Shareholders of the Company   5,840       5,555       5,693    
Non-Controlling Interests   2,486       2,262       2,379    
Total Equity   8,326       7,817       8,072    
Total Liabilities and Equity   $ 21,456       $ 21,200       $ 21,804    
                   

 

Condensed Consolidated Statements of Cash Flow

(unaudited) 12 Weeks Ended   24 Weeks Ended
                                               
(millions of Canadian dollars) Jun. 15, 2013   Jun. 16, 2012(3)     Jun. 15, 2013   Jun. 16, 2012(3)
Operating Activities                          
  Net earnings     $ 164   $ 193       $ 389       $ 359
  Income taxes     64     53       137       111
  Net interest expense and other                                                     
     financing charges     150       77       234       127
  Depreciation and amortization     207       193       405       377
  Foreign currency translation loss (gain)     6       (23)       (21)        
  Gain on defined benefit plan amendments                 (51)        
  Income taxes paid     (66)       (63)       (118)       (136)
  Interest received     18       25       31       34
  Settlement of derivatives     8             (37)          
  Change in credit card receivables     (104)       (71)       26       43
  Change in non-cash working capital     188       292       (382)       (288)
  Fixed asset and other related impairments     6             6       3
  Gain on disposal of assets           (2)       (1)       (2)
  Other     (8)       (11)       (5)       (3)
Cash Flows from Operating Activities     633       663       613       625
Investing Activities                          
  Fixed asset purchases     (213)       (254)       (347)       (398)
  Change in short term investments     (51)       217       (286)       320
  Business acquisition                 (9)          
  Proceeds from fixed asset sales     9       15       11         16
  Change in franchise investments and                                        
     other receivables     17       20       25       3
  Change in security deposits     (13)       12       36       26
  Intangible asset additions           (41)       (9)       (41)
  Other                 (3)        
Cash Flows used in Investing Activities     (251)       (31)       (582)       (74)
Financing Activities                        
  Change in bank indebtedness           1                 (3)
  Change in short term debt     9       9       20       19
  Long term debt  - Issued           14       10       37
    - Retired     (198)       (44)       (224)       (73)
  Share capital  - Issued     13             13          
    - Purchased and                          
        held in trust                 (15)          
    - Retired                 (42)          
  Subsidiary share capital - Issued     44       2       55       4
    - Purchased and                          
         held in trust                 (46)          
    - Retired           (2)             (4)
  Interest paid     (115)       (117)       (208)       (209)
  Dividends   - To common shareholders     (48)       (46)       (97)       (92)
    - To preferred shareholders     (8)       (11)       (19)       (22)
    - To minority shareholders     (23)       (22)       (46)       (22)
Cash Flows used in Financing Activities     (326)       (216)       (599)       (365)
Effect of foreign currency exchange rate                          
changes on cash and cash equivalents       (3)       9       7       1
Change in Cash and Cash Equivalents     53       425       (561)       187
Cash and Cash Equivalents, Beginning                                
  of Period     975       1,134       1,589       1,372
Cash and Cash Equivalents, End of Period     $ 1,028       $ 1,559       $ 1,028       $ 1,559
                                             

 

2013 SECOND QUARTER REPORT TO SHAREHOLDERS
The Company's 2012 Annual Report and 2013 Second Quarter Report to Shareholders are available in the Investor Centre section of the Company's website at www.weston.ca and have been filed with SEDAR and will be available at www.sedar.com.

INVESTOR RELATIONS
Shareholders, security analysts and investment professionals should direct their requests to Mr. Geoffrey H. Wilson, Senior Vice President, Financial Control and Investor Relations, at the Company's Executive Office or by e-mail at investor@weston.ca.

Additional financial information has been filed electronically with the Canadian securities regulatory authorities in Canada through SEDAR. This News Release includes selected information on Loblaw, a 62.8%-owned public reporting subsidiary company with shares trading on the Toronto Stock Exchange. For information regarding Loblaw, readers should also refer to the materials filed by Loblaw with the Canadian securities regulatory authorities from time to time. These filings are also maintained at Loblaw's corporate website at www.loblaw.ca.

CONFERENCE CALL AND WEBCAST PRESENTATION
George Weston Limited will host a conference call as well as an audio webcast on Tuesday, July 30, 2013 at 11:00 a.m. (EST). To access via tele-conference, please dial (647) 427-7450. The playback will be available two hours after the event at (416) 849-0833, passcode: 99837590#. To access via audio webcast, please visit the Investor Centre section of www.weston.ca. Pre-registration will be available.

   
Footnote Legend
   
(1) See non-GAAP financial measures.
(2) This News Release contains forward-looking information. See Forward-Looking Statements of this News Release for a discussion of material factors that could cause actual results to differ materially from the forecasts and projections herein and of the material factors, estimates, beliefs and assumptions that were applied in presenting the conclusions, forecasts and projections presented herein. This News Release must be read in conjunction with George Weston Limited's filings with securities regulators made from time to time, all of which can be found at www.weston.ca and www.sedar.com.
(3) Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's condensed consolidated financial statements included in the 2013 Second Quarter Report to Shareholders.
(4) Effective income tax rate excludes the tax impact of items excluded from adjusted basic net earnings per common share(1).
   

SOURCE George Weston Limited



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