George Weston Limited: Reports Q3-2016 Results

Toronto / CA. (gwl) George Weston Limited announced its consolidated unaudited results for the 16 weeks ended October 08, 2016.

GWL’s 2016 Third Quarter Report to Shareholders 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.

Pavi Binning, President and Chief Executive Officer, George Weston Limited, commented that «George Weston Limited’s third quarter results reflect each of the Company’s operating segment’s ability to execute on their strategic priorities. Loblaw continued to gain momentum, improving sales performance, while remaining focused on its financial plan. Weston Foods delivered results in line with expectations driven by volume growth and productivity improvements as it continued to invest in the business».

2016 Third Quarter Highlights

(unaudited) (million CAD except where otherwise indicated) For the periods ended as indicated 16 Weeks Ended 40 Weeks Ended
2016-10-08 2015-10-10 Change 2016-10-08 2015-10-10 Change
Sales CAD 14’605 CAD 14’386 1.5% CAD 36’480 CAD 35’646 2.3%
Adjusted Ebitda(1) CAD 1’242 CAD 1’117 11.2% CAD 3’113 CAD 2’880 8.1%
Adjusted Ebitda margin(1) 8.5% 7.8% 8.5% 8.1%
Net earnings attributable to shareholders
of the Company CAD 268 CAD 161 66.5% CAD 458 CAD 379 20.8%
Net earnings available to common shareholders
of the Company CAD 254 CAD 147 72.8% CAD 424 CAD 345 22.9%
Adjusted net earnings available to common
shareholders of the Company(1) CAD 266 CAD 212 25.5% CAD 634 CAD 534 18.7%
Diluted net earnings per common share (CAD) CAD 1.97 CAD 1.15 71.3% CAD 3.28 CAD 2.68 22.4%
Adjusted diluted net earnings per common share(1)(CAD) CAD 2.06 CAD 1.65 24.8% CAD 4.92 CAD 4.15 18.6%

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Consolidated Results of Operations

Adjusted net earnings available to common shareholders of the Company(1) increased by 54 million CAD (0.41 CAD per common share) to 266 million CAD (2.06 CAD per common share) in the third quarter of 2016 compared to the same period in 2015. The improvement was primarily due to an increase in Loblaw Companies Limited earnings, driven by the improved performance of its Retail segment and the favourable impact of a decrease in depreciation and amortization. Adjusted net earnings available to common shareholders of the Company(1) also included the positive contribution from the increase in the Company’s ownership interest in Loblaw, as a result of Loblaw’s share repurchases.

Net earnings available to common shareholders of the Company increased by 107 million CAD (0.82 CAD per common share) to 254 million CAD (1.97 CAD per common share) in the third quarter of 2016 compared to the same period in 2015. The increase in net earnings available to common shareholders of the Company was primarily as a result of the improvement in operating performance, as described above, and the favourable year-over-year net impact of the following significant items:

  • the favourable impact of a decrease in restructuring and other related charges of 113 million CAD (0.37 CAD per common share);
  • the favourable impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of 45 million CAD (0.26 CAD per common share); and
  • the favourable impact of the fair value adjustment of the Trust Unit liability of 47 million CAD (0.08 CAD per common share);

partially offset by,

  • the unfavourable impact of lower foreign currency translation of 35 million CAD (0.29 CAD per common share).

Reportable Operating Segments

The Company has two reportable operating segments, Loblaw and Weston Foods. The Company also holds cash, short term investments and an effective interest in Choice Properties Real Estate Investment Trust of 6 percent. Loblaw has three reportable operating segments including retail businesses, a bank and Choice Properties. Loblaw provides Canadians with grocery, pharmacy, health and beauty, apparel, general merchandise, retail banking, credit card services, insurance and wireless mobile products and services. Loblaw also holds an 83 percent effective interest in Choice Properties, which owns, leases and manages income-producing commercial properties. The Weston Foods operating segment includes a leading fresh bakery business in Canada and frozen, artisan bakery and biscuit businesses throughout North America.

Weston Foods Segment Results

(unaudited) (million CAD except where otherwise indicated) For the periods ended as indicated 16 Weeks Ended 40 Weeks Ended
2016-10-08 2015-10-10 Change 2016-10-08 2015-10-10 Change
Sales CAD 673 CAD 649 3.7% CAD 1’731 CAD 1’617 7.1%
Adjusted Ebitda(1) CAD 101 CAD 97 4.1% CAD 223 CAD 218 2.3%
Adjusted Ebitda margin(1) 15.0% 14.9% 12.9% 13.5%
Depreciation and amortization(i) CAD 33 CAD 32 3.1% CAD 84 CAD 69 21.7%
(i) Depreciation and amortization in the third quarter of 2016 includes 3 million CAD (2015 – 5 million CAD) of accelerated depreciation related to restructuring and other charges.

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Sales: Weston Foods sales in the third quarter of 2016 were 673 million CAD, an increase of 24 million CAD, or 3.7 percent, compared to the same period in 2015, primarily due to an increase in volumes. Foreign currency translation had a nominal positive impact on sales compared to the third quarter of 2015.

Adjusted Ebitda(1): Weston Foods adjusted Ebitda(1) in the third quarter of 2016 was 101 million CAD, an increase of 4 million CAD, or 4.1 percent, compared to the same period in 2015. The increase was driven by the positive impact of the increase in sales and productivity improvements, partially offset by continued investments in the business.

Adjusted Ebitda margin(1) in the third quarter of 2016 improved slightly to 15.0 percent compared to 14.9 percent in the same period in 2015.

Depreciation and Amortization: Weston Foods depreciation and amortization was 33 million CAD in the third quarter of 2016, an increase of 1 million CAD compared to the same period in 2015. Depreciation and amortization included 3 million CAD (2015 – 5 million CAD) of accelerated depreciation related to the planned closures of bread, pie and cake manufacturing facilities. Excluding these amounts, depreciation and amortization increased in the third quarter of 2016 by 3 million CAD 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. In the third quarter of 2016, Weston Foods recorded a net gain of 4 million CAD (2015 – charge of 14 million CAD) driven by the disposal of land and building, partially offset by restructuring and other charges, including 3 million CAD (2015 – 5 million CAD) of accelerated depreciation. These charges primarily relate to restructuring plans to close manufacturing facilities in Canada and the U.S. with production transferring to other facilities.

Inventory loss: In the third quarter of 2016, Weston Foods’ damaged inventory of 6 million CAD (5 million USD) was written-off and was recorded in selling, general and administrative expenses (SG+A) in the Company’s consolidated statement of earnings. An insurance claim is in progress and proceeds are expected to be recorded as the claim progresses. Additional losses or charges associated with this inventory will be recorded as incurred.

Loblaw Segment Results

(unaudited) (million CAD except where otherwise indicated) For the periods ended as indicated 16 Weeks Ended 40 Weeks Ended
2016-10-08 2015-10-10 Change 2016-10-08 2015-10-10 Change
Sales CAD 14’143 CAD 13’946 1.4% CAD 35’255 CAD 34’529 2.1%
Retail gross profit(i) CAD 3’718 CAD 3’560 4.4% CAD 9’305 CAD 8’895 4.6%
Adjusted Ebitda(1) CAD 1’141 CAD 1’020 11.9% CAD 2’890 CAD 2’662 8.6%
Adjusted Ebitda margin(1) 8.1% 7.3% 8.2% 7.7%
Depreciation and amortization(ii) CAD 464 CAD 477 (2.7)% CAD 1’178 CAD 1’216 (3.1)%
(i) Loblaw Retail gross profit in the third quarter of 2016 includes the impact of certain items described in the Retail Gross Profit section below that are excluded from adjusted Ebitda(1).
(ii) Depreciation and amortization in the third quarter of 2016 includes 164 million CAD (2015 – 164 million CAD) of amortization of intangible assets acquired with Shoppers Drug Mart Corporation.

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Overall Loblaw Performance : Loblaw adjusted Ebitda(1) increased by 121 million CAD in the third quarter of 2016 compared to the same period in 2015, primarily driven by Retail. Excluding the impact of consolidated franchises, Retail adjusted Ebitda(1) increased by 105 million CAD driven by higher sales, stable gross margins and lower SG+A.

Sales, Retail gross profit, and adjusted Ebitda(1) in the third quarter of 2016 included the impacts of the consolidation of franchises, as set out in «Loblaw Other Business Matters».

Sales: Loblaw sales in the third quarter of 2016 were 14’143 million CAD, an increase of 197 million CAD compared to the same period in 2015, primarily driven by Retail. Retail sales increased by 176 million CAD, or 1.3 percent, compared to the same period in 2015 and included food retail sales of 10’278 million CAD (2015 – 10’178 million CAD) and drug retail sales of 3’613 million CAD (2015 – 3’537 million CAD).

Excluding the consolidation of franchises, Retail sales increased by 74 million CAD primarily driven by the following factors:

  • food retail same-store sales growth was 0.8 percent. Loblaw’s food retail average quarterly internal food price index declined and was lower than the average quarterly national food price inflation of 0.2 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 2.8 percent, including same-store pharmacy sales growth of 1.6 percent and front store same-store sales growth of 3.9 percent; and
  • in the last 12 months, Retail net square footage decreased by 0.2 million square feet, or 0.3 percent, primarily driven by Loblaw’s store closure plan announced in 2015.

Retail Gross Profit: Loblaw Retail gross profit in the third quarter of 2016 was 3’718 million CAD, an increase of 158 million CAD compared to the same period in 2015 and included a net gain of 4 million CAD (2015 – nil) primarily related to the receipt of partial proceeds from Loblaw’s insurance claim related to retail locations in Fort McMurray impacted by the wildfire.

Excluding this impact, Retail gross profit increased 154 million CAD to 3’714 million CAD and Retail gross profit percentage of 26.7 percent increased by 70 basis points compared to the third quarter of 2015. Excluding the consolidation of franchises, Retail gross profit percentage was 26.1 percent, an increase of 30 basis points compared to the third quarter of 2015. Food retail promotional investment drove margins lower, however drug retail pharmacy margins improved and offset the impacts of promotional investments. Retail gross profit percentage improved largely due to improvements in shrink compared to the same period in 2015.

Adjusted Ebitda(1): Loblaw adjusted Ebitda(1) in the third quarter of 2016 was 1’141 million CAD, an increase of 121 million CAD compared to the same period in 2015, primarily driven by Retail. Retail adjusted Ebitda(1) increased 111 million CAD driven by an increase in Retail gross profit, as described above, partially offset by an increase in Retail SG+A of 43 million CAD. Retail SG+A as a percentage of sales was 18.9 percent, an increase of 10 basis points compared to the third quarter of 2015. Excluding the consolidation of franchises, Retail SG+A as a percentage of sales was 18.2 percent, an improvement of 50 basis points compared to the third quarter of 2015, driven by the following factors:

  • the positive impact of Loblaw’s store closure plan announced in 2015;
  • favourable changes in the value of Loblaw’s investments in its franchise business;
  • favourable year-over-year foreign exchange impacts; and
  • the favourable impact related to settlement of collective agreements in the third quarter of 2015.

Loblaw adjusted Ebitda(1) in the third quarter of 2016 also included the increase in Financial Services adjusted Ebitda(1) of 5 million CAD and the increase in Choice Properties adjusted Ebitda(1) of 5 million CAD.

The increase in Financial Services adjusted Ebitda(1) was driven by the growth in the credit card portfolio and higher Mobile Shop sales. The increase in Choice Properties adjusted Ebitda(1) was driven by an increase in base rent and net recoveries of property tax and operating costs from existing properties.

Depreciation and Amortization: Loblaw’s depreciation and amortization was 464 million CAD in the third quarter of 2016, a decrease of 13 million CAD compared to the same period in 2015. The decline in depreciation and amortization was primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the second quarter of 2016.

Depreciation and amortization in the third quarter of 2016 included 164 million CAD (2015 – 164 million CAD) of amortization of intangible assets acquired with Shoppers Drug Mart.

Loblaw Other Business Matters

Consolidation of Franchises: Loblaw has more than 500 franchise food retail stores in its network. As at the end of the third quarter of 2016, 165 of these stores were consolidated for accounting purposes under a new, simplified franchise agreement implemented in 2015.

Loblaw will convert franchises to the Franchise Agreement as existing agreements expire, at the end of which all franchises will be consolidated. The following table presents the franchises consolidated in the third quarter of 2016 and the total impact of the consolidated franchises:

(unaudited) (million CAD) For the periods ended as indicated 16 Weeks Ended
2016-10-08 2015-10-10
Number of Consolidated Franchise stores, beginning of period 132 16
Add: Number of Consolidated Franchise stores in the period 33 27
Number of Consolidated Franchise stores, end of period 165 43
Sales CAD 125 CAD 23
Retail gross profit 120 21
Adjusted Ebitda(1) (6)
Depreciation and amortization 7 2
Net loss attributable to Non-Controlling Interest (7) (6)

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Outlook (2)

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. Management now expects to make capital investments of approximately 210 million CAD in 2016 compared to 275 million CAD previously stated. Depreciation is projected to increase in 2016 when compared to 2015, and more than offset the improvement in adjusted Ebitda(1). The competitive retail landscape continues to intensify, particularly in fresh bakery and this will put added pressure on the business.

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(1);
  • 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.

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