George Weston: Fourth Quarter and Fiscal Year 2011

Toronto / CA. (gwl) George Weston Limited and its subsidiaries (collectively the Company) is announcing its unaudited results for the fourth quarter of 2011 and the release of its 2011 Annual Report. The Company´s 2011 Annual Report to Shareholders, including the Company´s audited annual consolidated financial statements and Management´s Discussion and Analysis (MD+A) for the fiscal year ended December 31, 2011, is available in the Investor Centre section of the Company´s website.

Consolidated Results Of Operations

George Weston Limited´s fourth quarter 2011 adjusted basic net earnings per common share were 1,01 CAD compared to 0,92 CAD in the same period in 2010, an increase of 0,09 CAD or 9,8 percent. The increase in the fourth quarter of 2011 was due to improved operating results at Weston Foods and a decrease in income tax expense, partially offset by a decline in adjusted operating income at Loblaw Companies Limited compared to the same period in 2010.

As previously noted in the first quarter of 2011, the Company is using three new non-GAAP financial measures: adjusted basic net earnings per common share, adjusted operating income and adjusted Ebitda. Under GAAP, certain expenses and income must be recognized that are not necessarily reflective of the Company´s underlying operating performance. These non-GAAP financial measures exclude the impact of certain items and are used internally 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. Adjusted operating income and adjusted Ebitda exclude restructuring and other charges, a commodity derivatives fair value adjustment at Weston Foods, foreign currency translation gains and losses, the impact of share-based compensation net of equity derivatives, net insurance proceeds recorded by Weston Foods, a gain related to the sale of a portion of a Loblaw property and the effect of certain prior years´ commodity tax matters at Loblaw. Adjusted basic net earnings per common share also exclude the impact of the accounting for Weston Holdings Limited (WHL), a subsidiary of GWL, forward sale agreement for 9,6 million Loblaw common shares and the impact of federal tax legislation changes.

Weston Foods

Unaudited CAD in millions Q4/2011 Q4/2010 FY-2011 FY-2010
Sales 410 CAD 386 CAD 1’772 CAD 1’624 CAD
Operating income 57 CAD 57 CAD 208 CAD 285 CAD
Operating margin 13,9 % 14,8 % 11,7 % 17,5 %
Adjusted operating income 56 CAD 48 CAD 265 CAD 235 CAD
Adjusted operating margin 13,7 % 12,4 % 15,0 % 14,5 %
Adjusted Ebitda 71 CAD 63 CAD 325 CAD 290 CAD
Adjusted Ebitda margin 17,3 % 16,3 % 18,3 % 17,9 %

For the fourth quarter of 2011, Weston Foods sales of 410 million CAD increased by 6,2 percent and volumes decreased by 0,5 percent when compared to the same period in 2010. The acquisition of ACE Bakery Limited on November 01, 2010 positively impacted sales growth and volume by approximately 1,4 percent and 0,8 percent, respectively and foreign currency translation positively impacted sales growth by approximately 0,4 percent. Excluding the acquisition and foreign currency translation, sales increased 4,4 percent due to the positive impact of higher pricing across key product categories of 5,7 percent, partially offset by a decrease in volume of 1,3 percent. Price increases were implemented during 2011 to mitigate higher commodity and fuel costs.

Weston Foods operating income was 57 million CAD in the fourth quarters of both 2011 and 2010 and operating margin was 13,9 percent compared to 14,8 percent in the same period in 2010.

Weston Foods adjusted operating income was 56 million CAD in the fourth quarter of 2011 compared to 48 million CAD in the same period in 2010, an increase of 16,7 percent. Weston Foods adjusted operating margin was 13,7 percent compared to 12,4 percent in the same period in 2010. Adjusted operating income was positively impacted by sales growth mainly as a result of higher pricing in key product categories and the acquisition of ACE and by the benefits realized from productivity improvements and other cost reduction initiatives, which were partially offset by significant increases in commodity and fuel costs in the fourth quarter of 2011, when compared to the same period in 2010. Weston Foods adjusted operating income excludes restructuring and other charges, a commodity derivatives fair value adjustment, the impact of share-based compensation net of equity derivatives and net insurance proceeds.

Loblaw

Loblaw sales in the fourth quarter of 2011 increased by 3,6 percent to 7,4 billion CAD compared to 7,1 billion CAD in the same period in 2010. Same-store retail sales growth was 2,5 percent (2010: 1,6 percent decline), with an extra day of store operations having a positive impact estimated to be between 0,8 percent and 1,0 percent. Sales growth in food was strong, partially driven by the extra day of operations, sales growth in drugstore was flat, gas bar sales growth was strong, sales in general merchandise, excluding apparel, declined marginally and sales growth in apparel was strong. Loblaw experienced moderate average quarterly internal food price inflation during the fourth quarter of 2011, which was lower than the average quarterly national food price inflation of 5,2 percent (2010: 1,5 percent) as measured by «»The Consumer Price Index for Food Purchased from Stores«». Loblaw sales in the fourth quarter of 2011 were also positively impacted by an increase in Financial Services segment revenue driven by increased credit card transaction values resulting in higher interchange fee income when compared to the same period in 2010 and higher PC Telecom revenues as a result of the new Mobile Shop kiosk launch in the fourth quarter of 2011.

Loblaw operating income in the fourth quarter of 2011 decreased by 2,8 percent to 313 million CAD from 322 million CAD in the same period in 2010 and operating margin was 4,2 percent compared to 4,5 percent in the same period in 2010.

Loblaw adjusted operating income was 317 million CAD in the fourth quarter of 2011 compared to 330 million CAD in the same period in 2010, a decrease of 3,9 percent. Loblaw adjusted operating margin was 4,3 percent compared to 4,6 percent in the same period in 2010. The decreases in adjusted operating income and adjusted operating margin were mainly attributable to costs associated with the transition of certain Ontario conventional stores to the more cost effective and efficient operating terms under collective agreements ratified in 2010, the incremental costs related to the investments in information technology (IT) and supply chain, increases in promotional pricing programs and transportation costs, start up costs associated with the launch of Loblaw´s Joe Fresh brand in the United States, the decrease in operating income from Loblaw´s Financial Services segment and fixed asset impairment charges net of recoveries, partially offset by growth and performance of Loblaw´s franchisees, continued labour, supply chain and other operating cost efficiencies, improved control label profitability and improved shrink. Loblaw adjusted operating income excludes other charges and the impact of share-based compensation net of equity derivatives.

Net Interest Expense And Other Financing Charges

Net interest expense and other financing charges in the fourth quarter of 2011 increased by 21 million CAD to 108 million CAD compared to the same period in 2010, primarily due to a 21 million CAD decrease in non-cash income related to the fair value adjustment of WHL´s forward sale agreement for 9,6 million Loblaw common shares. Excluding the impact of the fair value adjustment, net interest expense and other financing charges in the fourth quarter of 2011 was flat when compared to the same period in 2010 reflecting the net impact of a decrease in interest expense due to the repayment by Loblaw of its 350 million CAD; 6,50 percent Medium Term Note in the first quarter of 2011, offset by lower short term interest income due to lower cash and short term investment balances.

Income Taxes

The fourth quarter 2011 effective income tax rate decreased to 29,1 percent from 38,6 percent in the same period in 2010. The decrease in the effective income tax rate in the fourth quarter of 2011 compared to the same period in 2010 was primarily due to the decrease in non-deductible items, a decrease in income tax expense related to certain prior year income tax matters and reductions in the federal and Ontario statutory income tax rates. Changes in federal tax legislation that resulted in the elimination of the Company´s ability to deduct costs associated with cash-settled stock options resulted in a charge of 18 million CAD which was recorded in income tax expense in the fourth quarter of 2010.

Outlook

In 2012, Weston Foods expects to deliver modest sales growth with market conditions expected to remain challenging. Higher commodity and input costs are expected in the first half of 2012 and these higher costs will put increased pressure on operating margins when compared to the same period in 2011. Weston Foods is continuing its efforts to reduce costs through improved efficiencies and ongoing cost reduction initiatives in an effort to achieve full year operating margins in line with those in 2011. In 2012, Loblaw will continue to strengthen its customer proposition, while the completion of its IT systems will remain a key priority. Loblaw expects there to be incremental costs related to net investments in IT and supply chain in 2012, as well as continued investment in its customer proposition. Loblaw does not expect its operations to cover these incremental costs and as a result, anticipates full year 2012 operating income to be down year-over-year, with more pressure in the first half of the year. For 2012, George Weston Limited anticipates adjusted basic net earnings per common share to be down year-over-year, primarily due to the impact of the incremental costs at Loblaw.