George Weston Limited: 2012 Second Quarter Results

Toronto / CA. (gwl) George Weston Limited and its subsidiaries (collectively the Company) is announcing its unaudited results for the twelve weeks ended June 16, 2012.

George Weston Limited´s second quarter 2012 adjusted basic net earnings per common share were 1,06 CAD compared to 1,34 CAD in the same period in 2011, a decrease of 0,28 CAD. The decrease was primarily attributable to a decline in the operating performance of Loblaw Companies Limited. The decline in the operating performance of Loblaw was primarily due to an increase in labour and other operating costs, incremental costs related to investments in information technology («IT») and supply chain, a decline in gross profit and a charge related to the transition of certain Ontario conventional stores to the more cost effective and efficient operating terms of collective agreements ratified in the third quarter of 2010. Increased labour costs and the decline in gross profit included incremental investments in Loblaw´s customer proposition that were not covered by operations.

The Company´s basic net earnings per common share were 0,99 CAD compared to 1,13 CAD in the same period in 2011, a decrease of 0,14 CAD or 12,4 percent. Adjusted basic net earnings per common share declined 0,28 CAD and excluded the year-over-year favourable net impact of certain items, primarily certain foreign currency translation gains and the fair value adjustment of the forward sale agreement for 9,6 million Loblaw common shares, partially offset by the accrual of a multi-employer pension plan (MEPP) withdrawal liability incurred by Weston Foods in the second quarter of 2012. The Company uses non-GAAP financial measures.

Weston Foods

Weston Foods sales in the second quarter of 2012 decreased by 1,7 percent to 400 million CAD from 407 million CAD in the same period in 2011. Foreign currency translation positively impacted sales by approximately 1,6 percent. Excluding this impact, sales decreased 3,3 percent mainly due to a decrease in volumes of 3,9 percent compared to the same period in 2011. Pricing across certain product categories contributed positively to sales growth by 0,6 percent.

Weston Foods operating income in the second quarter of 2012 was twelve million CAD compared to 55 million CAD in the same period in 2011, a decrease of 43 million CAD. The decrease was mainly due to the accrual of a MEPP withdrawal liability of 35 million CAD recorded in the second quarter of 2012.

Weston Foods adjusted operating income remained flat at 65 million CAD in the second quarter of 2012 compared to the same period in 2011. Weston Foods adjusted operating margin was 16,3 percent compared to 16,0 percent in the same period in 2011. Adjusted operating income in the second quarter of 2012 was positively impacted by the benefits realized from productivity improvements and other cost reduction initiatives. These benefits were offset by higher commodity and other input costs and lower sales volumes compared to the same period in 2011.

Loblaw

In the second quarter of 2012, Loblaw continued to execute on its plan. Loblaw began to gain traction on sales, particularly in its core food and drug businesses, as it continued its disciplined approach to improving its customer proposition.

Loblaw sales in the second quarter of 2012 increased by 1,3 percent to 7’375 million CAD from 7’278 million CAD in the same period in 2011. Retail segment sales increased by 1,1 percent and same-store sales growth was 0,2 percent (2011 minus 0,4 percent decline). Sales growth in food was moderate, sales growth in drugstore was modest, gas bar sales declined marginally, sales in general merchandise, excluding apparel, declined moderately and sales in apparel were flat. Loblaw experienced modest average quarterly internal food price inflation during the second quarter of 2012 and moderate average quarterly food price inflation during the second quarter of 2011, lower than the average quarterly national food price inflation of 2,5 percent (2011 minus 4,0 percent) as measured by «The Consumer Price Index for Food Purchased from Stores». In the last twelve months, Loblaw opened 22 corporate and franchise stores and closed seven corporate and franchise stores, resulting in a net increase of 0,4 million square feet or 0,8 percent. Loblaw sales in the second quarter of 2012 were also positively impacted by an increase in revenue from its Financial Services segment, which includes President´s Choice Bank, a subsidiary of Loblaw. The increase in Financial Services segment revenue was primarily driven by higher interchange fee income, interest income and PC Telecom revenues when compared to the same period in 2011.

Loblaw operating income in the second quarter of 2012 was 288 million CAD compared to 343 million CAD in the same period in 2011, a decrease of 55 million CAD. The decrease was mainly due to a decline in adjusted operating income of 76 million CAD, partially offset by the effect of certain prior years´ commodity tax matters of 15 million CAD recorded in the second quarter of 2011.

Loblaw adjusted operating income was 299 million CAD in the second quarter of 2012 compared to 375 million CAD in the same period in 2011, a decrease of 76 million CAD. Loblaw adjusted operating margin was 4,1 percent compared to 5,2 percent in the same period in 2011. The decreases in adjusted operating income and adjusted operating margin were primarily attributable to an increase in labour and other operating costs, incremental costs related to investments in IT and supply chain, a decline in gross profit, a decrease in foreign exchange gains and a charge related to the transition of certain Ontario conventional stores to the more cost effective and efficient operating terms of collective agreements ratified in the third quarter of 2010, partially offset by changes in the value of Loblaw´s investments in its franchise business. Increased labour costs and the decline in gross profit included an estimated five million CAD and ten million CAD, respectively, of incremental investments in Loblaw´s customer proposition that were not covered by operations.

Outlook

This outlook reflects the underlying operating performance of the Company´s operating segments as discussed below.

For the full year 2012, Weston Foods expects to deliver sales in line with 2011. Weston Foods will continue 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.

For the full year 2012, Loblaw estimates operating income to be down year-over-year, with more pressure in the first half of the year, as it does not expect its operations to cover incremental costs related to investments in IT and supply chain and the ongoing investments in its customer proposition.

For the full year 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 and ongoing customer proposition investments at Loblaw.