George Weston Limited: Reports Q2-2016 Results

Toronto / CA. (gwl) George Weston Limited announced its consolidated unaudited results for the 12 weeks ended June 18, 2016.

GWL’s 2016 Second 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 second quarter results reflect the Company’s operating segments’ progress on their strategic priorities. Loblaw achieved its target of annualized synergies of 300 million CAD since the acquisition of Shoppers Drug Mart and grew earnings as it delivered same-store sales growth, stable gross margins and efficiencies. Weston Foods delivered sales and volume growth and results in line with expectations».

2016 Second Quarter Highlights (unaudited)

(million CAD except where otherwise indicated)			12 Weeks Ended								24 Weeks Ended
For the periods ended as indicated			June 18, 2016			June 20, 2015			Change		June 18, 2016			June 20, 2015			Change
Sales			CAD	11’075		CAD	10’851		2.1%		CAD	21’875		CAD	21’260		2.9%
Adjusted Ebitda			CAD	981		CAD	913		7.4%		CAD	1’871		CAD	1’763		6.1%
Adjusted Ebitda margin				8.9%			8.4%					8.6%			8.3%
Net earnings attributable to shareholders
	of the Company		CAD	143		CAD	51		180.4%		CAD	190		CAD	218		(12.8)%
Net earnings available to common shareholders
	of the Company		CAD	133		CAD	41		224.4%		CAD	170		CAD	198		(14.1)%
Adjusted net earnings available to common
	shareholders of the Company		CAD	200		CAD	170		17.6%		CAD	368		CAD	322		14.3%
Diluted net earnings per common share (CAD)			CAD	1.04		CAD	0.31		235.5%		CAD	1.31		CAD	1.53		(14.4)%
Adjusted diluted net earnings per common share (CAD)			CAD	1.56		CAD	1.32		18.2%		CAD	2.85		CAD	2.50		14.0%

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Consolidated Results of Operations

Adjusted net earnings available to common shareholders of the Company increased by 30 million CAD (0.24 CAD per common share) to 200 million CAD (1.56 CAD per common share) in the second 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, the positive contribution from incremental net synergies, and the favourable impact of a decrease in depreciation and amortization. Adjusted net earnings available to common shareholders of the Company 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 92 million CAD (0.73 CAD per common share) to 133 million CAD (1.04 CAD per common share) in the second quarter of 2016 compared to the same period in 2015. The increase in net earnings available to common shareholders of the Company was 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 the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of 65 million CAD (0.37 CAD per common share);
• the favourable impact of a prior year statutory corporate income tax rate change of 45 million CAD (0.19 CAD per common share); and
• the favourable impact of lower foreign currency translation losses of 10 million CAD (0.07 CAD per common share); partially offset by,
• the unfavourable impact of the fair value adjustment of the Trust Unit liability of 95 million CAD (0.14 CAD per common share).

Reportable Operating Segments (unaudited)

Weston Foods Segment Results

(million CAD except where otherwise indicated)		12 Weeks Ended								24 Weeks Ended
For the periods ended as indicated		June 18, 2016			June 20, 2015			Change		June 18, 2016			June 20, 2015			Change
Sales		CAD	496		CAD	464		6.9%		CAD	1’058		CAD	968		9.3%
Adjusted Ebitda		CAD	59		CAD	58		1.7%		CAD	122		CAD	121		0.8%
Adjusted Ebitda margin			11.9%			12.5%					11.5%			12.5%
Depreciation and amortization(i)		CAD	24		CAD	19		26.3%		CAD	51		CAD	37		37.8%

(i)	Depreciation and amortization in the second quarter of 2016 includes CAD2 million (2015 – nil) of accelerated depreciation related to restructuring and other charges.

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Sales  Weston Foods sales in the second quarter of 2016 were 496 million CAD, an increase of 32 million CAD, or 6.9 percent, compared to the same period in 2015. Sales included the positive impact of foreign currency translation of approximately 2.6 percent. Excluding the impact of foreign currency translation, sales increased by 4.3 percent primarily due to an increase in volumes. The timing of Easter had a nominal impact when compared to 2015.

Adjusted Ebitda  Weston Foods adjusted Ebitda in the second quarter of 2016 was 59 million CAD, an increase of 1 million CAD, or 1.7 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 and new plant costs.

Adjusted Ebitda margin in the second quarter of 2016 was 11.9 percent compared to 12.5 percent in the same period in 2015. The decline in adjusted Ebitda margin was mainly due to incremental investments in the business and new plant costs.

Depreciation and Amortization  Weston Foods depreciation and amortization was 24 million CAD in the second quarter of 2016, an increase of 5 million CAD compared to the same period in 2015. Depreciation and amortization in the second quarter of 2016 included 2 million CAD (2015 – nil) of accelerated depreciation related to the planned closures of pie and cake manufacturing facilities. Excluding this amount, depreciation and amortization increased 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. Restructuring activities related to these initiatives are ongoing and in the second quarter of 2016, Weston Foods recorded restructuring and other charges of 5 million CAD (2015 – nil), including 2 million CAD (2015 – nil) 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.

Loblaw Segment Results

(million CAD except where otherwise indicated)

12 Weeks Ended

24 Weeks Ended

For the periods ended as indicated

June 18, 2016

June 20, 2015

Change

June 18, 2016

June 20, 2015

Change

Sales

CAD

10’731

CAD

10’535

1.9%

CAD

21’112

CAD

20’583

2.6%

Retail gross profit(i)

CAD

2’811

CAD

2’711

3.7%

CAD

5’587

CAD

5’335

4.7%

Adjusted Ebitda

CAD

922

CAD

855

7.8%

CAD

1’749

CAD

1’642

6.5%

Adjusted Ebitda margin

8.6%

8.1%

8.3%

8.0%

Depreciation and amortization(ii)

CAD

346

CAD

369

(6.2)%

CAD

714

CAD

739

(3.4)%

(i)	Loblaw Retail gross profit in the second quarter of 2016 includes the impact of certain items described in the Retail Gross Profit section below that are excluded from adjusted Ebitda.
(ii)	Depreciation and amortization includes 123 million CAD (2015 – 124 million CAD) of amortization of intangible assets acquired with Shoppers Drug Mart Corporation (“Shoppers Drug Mart”).

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Loblaw has three reportable operating segments: Retail, Financial Services and Choice Properties Real Estate Investment Trust (Choice Properties). Loblaw is one reportable operating segment of GWL.

Overall Loblaw Performance  Loblaw adjusted Ebitda increased by 67 million CAD in the second quarter of 2016 compared to the same period in 2015, primarily driven by Retail. The increase in Retail adjusted Ebitda was primarily driven by higher sales, incremental net synergies and improvements in selling general and administrative expenses (SG+A) as a percentage of sales. The increase in Loblaw adjusted Ebitda in the second quarter of 2016 also included the improved performance in Financial Services.

During the second quarter of 2016, Loblaw achieved its target of annualized synergies of 300 million CAD since the acquisition of Shoppers Drug Mart.

Sales  Loblaw sales in the second quarter of 2016 were 10’731 million CAD, an increase of 196 million CAD compared to the same period in 2015, primarily driven by Retail. Retail sales increased by 176 million CAD, or 1.7 percent, compared to the same period in 2015 and included food retail sales of 7’718 million CAD (2015 – 7’629 million CAD) and drug retail sales of 2’776 million CAD (2015 – 2’689 million CAD).

The increase in Retail sales was primarily due to the following factors:

• food retail same-store sales growth was 0.4 percent. The timing of Easter had a negative impact of approximately 1.0 percent. Loblaw’s food retail average quarterly internal food price index was slightly lower than the average quarterly national food price inflation of 1.8 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 4.0 percent, including same-store pharmacy sales growth of 3.6 percent and front store same-store sales growth of 4.3 percent. The timing of Easter had a negative impact on front store same-store sales of approximately 1.0 percent; and
• in the last 12 months, there was a decrease in Retail net square footage of 0.4 million square feet, or 0.6 percent, primarily driven by Loblaw’s store closure plan announced in 2015. Loblaw’s store closure plan had a negative impact on sales of approximately 75 million CAD.

Retail gross profit and adjusted Ebitda in the second quarter of 2016 included the impacts related to the franchises consolidated in the quarter, as set out in «Loblaw Other Business Matters».

Retail Gross Profit  Loblaw Retail gross profit in the second quarter of 2016 was 2’811 million CAD, an increase of 100 million CAD compared to the same period in 2015 and included the unfavourable year-over-year net impact of the following:

• a charge of 9 million CAD related to inventory losses and related costs at retail locations in Fort McMurray impacted by the wildfire;
• a charge of 4 million CAD related to inventory impairment as a result of Loblaw’s revised plans to restructure certain drug retail ancillary assets that were previously marketed for sale; and
• a charge of 2 million CAD related to restructuring and other charges; partially offset by,
• a prior year charge of 8 million CAD related to apparel inventory.

Excluding these impacts, Retail gross profit increased 107 million CAD to 2’826 million CAD and Retail gross profit percentage of 26.9 percent increased by 50 basis points compared to the second quarter of 2015. Excluding the consolidation of franchises, Retail gross profit percentage was 26.4 percent, an increase of 10 basis points compared to the second quarter of 2015, driven by the achievement of operational synergies and strong drug retail front store margins, partially offset by food retail promotional investment.

Adjusted Ebitda  Loblaw adjusted Ebitda in the second quarter of 2016 was 922 million CAD, an increase of 67 million CAD compared to the same period in 2015, primarily driven by Retail. Retail adjusted Ebitda increased 61 million CAD driven by an increase in Retail gross profit, as described above, partially offset by an increase in Retail SG+A of 46 million CAD. Retail SG+A as a percentage of sales was 18.6 percent, an increase of 10 basis points compared to the second quarter of 2015. Excluding the consolidation of franchises, SG+A as a percentage of sales was 18.0 percent, an improvement of 40 basis points compared to the second quarter of 2015, driven by the positive impact of Loblaw’s store closure plan announced in 2015 and operational efficiencies in retail stores.

Loblaw adjusted Ebitda in the second quarter of 2016 also included the increase in Financial Services adjusted Ebitda of 6 million CAD primarily driven by higher interest and net interchange income attributable to the growth in credit card receivables and higher Mobile Shop sales.

Depreciation and Amortization  Loblaw’s depreciation and amortization was 346 million CAD in the second quarter of 2016, a decrease of 23 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.

Depreciation and amortization in the second quarter of 2016 included 123 million CAD (2015 – 124 million CAD) of amortization of intangible assets acquired with Shoppers Drug Mart.

Loblaw Other Business Matters

Gas Bar Network  In the second quarter of 2016, Loblaw began engaging with potential buyers for the sale of its gas bar operations. The gas bar network is comprised of approximately 200 retail fuel sites. On an annual basis, the gas bar operations sell approximately 1’700 million litres of gas and generate sales of approximately 1’600 million CAD.

Consolidation of Franchises  Loblaw has more than 500 franchise stores in its network. As of the end of the second quarter of 2016, 132 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 second quarter of 2016 and the total impact of the consolidated franchises:

(million CAD)	12 Weeks Ended
For the periods ended as indicated	June 18, 2016			June 20, 2015
Number of Consolidated Franchise stores, beginning of period		115
Add: Number of Consolidated Franchise stores in the period		17			16
Number of Consolidated Franchise stores, end of period		132			16
Sales	CAD	75		CAD	5
Retail gross profit		75			5
Adjusted Ebitda					(2)
Depreciation and amortization		4
Net income (loss) attributable to Non-Controlling Interest		(5)			1

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Retail locations in Fort McMurray  In the second quarter of 2016, 10 Loblaw retail locations in Fort McMurray were impacted by a wildfire that caused an evacuation of the city. During the second quarter of 2016, Loblaw recognized a charge of approximately 12 million CAD related to inventory losses, site clean-up and restoration costs at these locations. An insurance claim is in progress and proceeds are expected to be recorded as the claim progresses.

Loblaw estimates the financial impact to Retail results in the second quarter of 2016 from the temporary closure of these retail locations as follows: a decrease in sales of approximately 25 million CAD and a decrease in adjusted Ebitda of approximately 6 million CAD. Loblaw maintains business interruption insurance and expects that certain losses will be recoverable under this insurance coverage.

Restructuring and other related charges  In the second quarter of 2016, Loblaw recorded an additional charge related to store closures of approximately 43 million CAD. This amount was primarily related to the closure of the remaining Joe Fresh retail location in the U.S.

Drug Retail Ancillary Assets  In 2015, Loblaw began actively marketing the sale of certain assets of the Shoppers Drug Mart ancillary healthcare business and recorded asset impairments on these assets and other related restructuring charges. In the second quarter of 2016, Loblaw signed agreements for the sale of a portion of these assets and ceased actively marketing the remaining assets and restructured those assets as part of ongoing operations. As a result, Loblaw recorded a charge of 4 million CAD related to inventory impairment and reversals of 8 million CAD of previous asset impairments and restructuring and other related charges in the second quarter and year-to-date.

Outlook

Weston Foods expects sales growth generated by new capacity and productivity improvements to drive an increase in adjusted Ebitda in 2016 when compared to 2015. The increase in adjusted Ebitda 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 275 million CAD in 2016 compared to 300 million CAD previously stated. Depreciation is projected to increase in 2016 when compared to 2015, and largely offset the improvement in adjusted Ebitda. The competitive retail landscape continues to intensify and this may 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;
• 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.