Canada Bread: Reports Results for the First Quarter 2011

Toronto / CA. (cb) Canada Bread Company Limited reported its financial results for the first quarter ended March 31, 2011. Highlights include: Adjusted Operating Earnings were 16,7 million CAD compared to 20,6 million CAD last year. Adjusted EPS of 0,56 CAD was unchanged from the prior year. Net earnings declined to a loss of 1,0 million CAD, largely due to 20,1 million CAD in pre-tax restructuring costs.

«The decline in operating earnings in the quarter was largely due to a lag in implementing pricing to offset rising costs. With these price increases in effect at the end of the quarter, we expect our margins to strengthen», said Richard Lan, President and CEO. «We are also encouraged by early signs of improved performance in our U.K. bakery operations. With high impact marketing, targeted product innovation and overhead cost reductions, we expect continued improvement in this business».

Financial Overview

Sales for the first quarter decreased by three percent to 371,8 million CAD compared to 381,9 million CAD in the prior year, largely due to the sale of the fresh sandwich product line in February of 2011. Excluding this sale and the currency translation on U.K. and U.S. sales from a stronger Canadian Dollar, sales were consistent with prior year.

Adjusted Operating Earnings for the first quarter decreased 19 percent to 16,7 million CAD from 20,6 million CAD in the prior year. Earnings in fresh bakery declined mostly due to higher wheat costs as price increases were only effected at the end of the quarter. Lower volumes in the North American frozen bakery business also impacted results. Performance in the U.K. bakery business improved due to a significant increase in bagel volumes, driven by a successful marketing campaign and product innovation in the category. Management expects performance to continue to improve through the remainder of 2011.

Adjusted EPS of 0,56 CAD, which included 2,4 million CAD (0,10 CAD per share) related to tax benefits associated with a prior acquisition, was unchanged from the prior year. Net earnings in the quarter decreased to a loss of 1,0 million CAD (0,04 CAD per share) from 13,0 million CAD (0,51 CAD per share) in the first quarter of 2010. Net earnings in quarter include 20,1 million CAD of pre-tax costs related to restructuring activities.

On February 18, 2011, the Company completed the sale of its fresh sandwich product line for 8,0 million CAD, subject to post closing adjustments.

Business Segment Review

Fresh Bakery: includes fresh bakery products, including breads, rolls, bagels, sweet goods and fresh pasta and sauces sold to retail, foodservice and convenience channels. It includes national brands such as Dempster´s(R) and Olivieri(R) and many leading regional brands.

First quarter sales of 255,1 million CAD were slightly lower than sales of 257,2 million CAD in the same period last year. Excluding the impact of the sale of the Company´s fresh sandwich product line, sales increased two percent compared to prior year. The increase in sales is due to the benefit of price increases implemented in the later part of 2010. Fresh bakery volumes in the quarter increased by one percent.

Adjusted Operating Earnings in the quarter decreased by 14 percent to 18,0 million CAD compared to 20,9 million CAD last year. During the quarter, the fresh bakery operation was significantly exposed to higher wheat prices, with a lag in pricing to offset these inflationary pressures. Price increases were implemented at the end of the quarter and have begun to positively affect margins going forward. These were in part offset by the benefit derived from the sale of the Company´s fresh sandwich product line during the quarter.

A significant element of the Company´s value creation plan is the construction of the new fresh bakery in Hamilton, Ontario to benefit from scale efficiencies, reduce overhead costs and support future growth. This new bakery is on schedule to begin initial production in July 2011.

During the quarter, the Company announced plans to close a fresh bakery facility located in Delta, B.C., in November 2011. Production will be consolidated at the Company´s other bakeries in Langley, B.C. and Edmonton, Alberta. At the same time, an investment of approximately 11,0 million CAD will be made to expand the Edmonton bakery to support increased tortilla production, where the Company has a leading market position and brand.

Frozen Bakery: Includes frozen bakery products, including frozen par-baked bakery products, specialty and artisan breads and bagels sold to retail, foodservice and convenience channels in North America and the U.K. It includes national brands such as Tenderflake(R) and New York Bakery Co(TM).

Frozen Bakery sales for the quarter decreased by six percent to 116,7 million CAD from 124,7 million CAD last year. Excluding the currency translation differences on sales in the U.S. and U.K., sales declined by four percent, predominantly as a result of lower volumes, which was partially offset by the positive impact of price increases implemented across its bakery operations. The North American frozen bakery business continued to experience weaker volumes due to changes implemented by certain retail customers earlier in 2010. Progress has been made in securing new business, which is expected to strengthen volumes in 2011. In the U.K., bagel volume increased significantly with the re-launch of the New York Bakery brand bagels, although overall volumes for the U.K. bakery were lower than last year.

Adjusted Operating Earnings in the quarter were a loss of 1,3 million CAD compared to a loss of 0,3 million CAD last year, driven by lower volumes and the rapid rise in wheat prices. In the first quarter of 2011, the Company re-launched its New York Bakery brand to support market growth in the bagel category, which has led to significant increases in volumes and improved margins in the U.K. bakery business. These benefits were largely offset by the significant advertising and promotion expenses associated with the re-launch.

In March 2011, the Company closed a sub-scale bakery in Laval, Quebec and transferred production to other bakeries where there was available capacity. Also in the first quarter of 2011, the Company entered into an agreement to sell a bakery facility in Cumbria, United Kingdom.

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