George Weston Limited: Reports Q4-2019 Results

Toronto / CA. (gwl) George Weston Limited (GWL) announced its consolidated unaudited results for the 12 weeks ended December 31, 2019. GWL’s 2019 Annual Report includes the Company’s audited annual consolidated financial statements and Management’s Discussion and Analysis (MD+A) for the fiscal year ended December 31, 2019. The 2019 Annual Report has been filed on SEDAR and is available at sedar.com and in the Investor Centre section of the Company’s website at weston.ca.

Galen G. Weston, Chairman and Chief Executive Officer, George Weston Limited, commented that «George Weston’s businesses performed well during the fourth quarter. Loblaw improved its sales trajectory, achieved its financial metrics and continued to invest in strategic growth areas. Choice Properties continued to deliver stable and consistent results, and Weston Foods demonstrated solid performance with its business having stabilized in 2019.»

2019 fourth quarter highlights

Net earnings available to common shareholders of the Company were USD 433 million, an increase of USD 162 million compared to the same period in 2018. The increase was due to an improvement of USD 30 million in the underlying operating performance of the Company and the positive year-over-year net impact of adjusting items totaling USD 132 million which includes the following:

  • the favourable year-over-year impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw Companies Limited (Loblaw) common shares of USD 135 million; and
  • the favourable year-over-year impact of the fair value adjustment of the Trust Unit liability of USD 104 million;

partially offset by,

  • the unfavourable year-over-year impact of the remeasurement of deferred tax balances of USD 62 million; and
  • the unfavourable year-over-year impact of asset impairments, net of recoveries, of USD 31 million.

Adjusted net earnings available to common shareholders of the Company(1) were USD 262 million. In comparison to the same period in 2018, this represented an increase of USD 30 million, or 12.9 percent. The increase was primarily due to the improvement in the underlying operating performance of the Company, the increased ownership in Loblaw as a result of Loblaw share repurchases and the positive contribution from a full year of direct ownership in Choice Properties Real Estate Investment Trust (Choice Properties).

Consolidated results of operations

Unless otherwise indicated, the Company’s results include:

  • the impact of the implementation of International Financial Reporting Standards 16 «Leases» (IFRS 16), as set out in the «Consolidated Other Business Matters» section below;
  • the impact of the acquisition of Canadian Real Estate Investment Trust (CREIT) by Choice Properties in the second quarter of 2018;
  • the year-over-year impact of the fair value adjustment of the Trust Unit liability as a result of the significant changes in Choice Properties’ unit price, recorded in net interest expense and other financing charges. The Company’s results are impacted by market price fluctuations of Choice Properties’ Trust Units on the basis that the Trust Units held by unitholders, other than the Company, are redeemable for cash at the option of the holder. The Company’s financial results are negatively impacted when the Trust Unit price rises and positively impacted when the Trust Unit price declines; and
  • the dilutive impact on both the Company’s diluted net earnings per common share and adjusted diluted net earnings per common share(1) as a result of the issuance of approximately 26.6 million common shares in connection with a reorganization in November 2018, as set out in the «Consolidated Other Business Matters» section below.
(unaudited)
(USD millions except where otherwise indicated) Quarters Ended Years Ended
For the periods ended as indicated 2019-12-31 2018-12-31 USD Change % Change 2019-12-31 2018-12-31 USD Change % Change
Sales USD 12,107 USD 11,717 USD 390 3.3 % USD 50,109 USD 48,568 USD 1,541 3.2 %
Operating income USD 718 USD 690 USD 28 4.1 % USD 2,958 USD 2,585 USD 373 14.4 %
Adjusted Ebitda(1) USD 1,351 USD 1,146 USD 205 17.9 % USD 5,483 USD 4,528 USD 955 21.1 %
Adjusted Ebitda margin(1) 11.2% 9.8% 10.9% 9.3%
Net earnings attributable to shareholders of the Company USD 443 USD 281 USD 162 57.7 % USD 242 USD 574 USD (332) (57.8) %
Net earnings available to common shareholders of the Company USD 433 USD 271 USD 162 59.8 % USD 198 USD 530 USD (332) (62.6) %
Adjusted net earnings available to common shareholders of the Company(1) USD 262 USD 232 USD 30 12.9 % USD 1,117 USD 908 USD 209 23.0 %
Diluted net earnings per common share (USD) USD 2.81 USD 1.86 USD 0.95 51.1 % USD 1.26 USD 3.99 USD (2.73) (68.4) %
Adjusted diluted net earnings per common share(1) (USD) USD 1.69 USD 1.59 USD 0.10 6.3 % USD 7.24 USD 6.85 USD 0.39 5.7 %

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Net earnings available to common shareholders of the Company in the fourth quarter of 2019 were USD 433 million, an increase of USD 162 million, or 59.8 percent, compared to the same period in 2018. The increase included the favourable year-over-year net impact of adjusting items totaling USD 132 million and the improvement in underlying operating performance of USD 30 million, as described below.

  • The positive year-over-year net impact of certain adjusting items totaling USD 132 million was primarily due to:
    • the favourable year-over-year impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of USD 135 million; and
    • the favourable year-over-year impact of the fair value adjustment of the Trust Unit Liability of USD 104 million;

partially offset by,

    • the unfavourable year-over-year impact of the remeasurement of deferred tax balances of USD 62 million; and
    • the unfavourable year-over-year impact of asset impairments, net of recoveries of USD 31 million.
  • The improvement in underlying operating performance of USD 30 million was primarily due to:
    • the favourable underlying operating performance of Loblaw;
    • a decrease in income tax expense;
    • the positive contribution from the increase in the Company’s ownership interest in Loblaw, as a result of Loblaw share repurchases;
    • the positive contribution from the Company’s direct ownership interest in Choice Properties, as a result of the reorganization in November 2018; and
    • the favourable underlying operating performance of Weston Foods after excluding the prior year impact of a net gain related to the sale leaseback of a property;

partially offset by,

    • an increase in adjusted net interest expenses and other financing charges(1) as described in the «Consolidated Other Business Matters» section below.

Adjusted net earnings available to common shareholders of the Company(1) in the fourth quarter of 2019 were USD 262 million, an increase of USD 30 million, or 12.9 percent, due to the improvement in underlying operating performance described above. Adjusted net earnings available to common shareholders of the Company(1) included the favourable impact of IFRS 16 of USD 2 million in the fourth quarter of 2019.

Diluted net earnings per common share in the fourth quarter of 2019 were USD 2.81, an increase of USD 0.95 per common share compared to the same period in 2018. The increase was mainly due to:

  • the favourable year-over-year impact of adjusting items totaling USD 0.85 per common share, primarily due to the following:
    • the favourable year-over-year impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of USD 0.91 per common share; and
    • the favourable year-over-year impact of the fair value adjustment of the Trust Unit Liability of USD 0.63 per common share;

partially offset by,

    • the unfavourable impact of the remeasurement of deferred tax balances of USD 0.43 per common share; and
    • the unfavourable year-over-year impact of asset impairments, net of recoveries of USD 0.20 per common share.
  • the improvement in the underlying operating performance of USD 0.10 per common share.

Adjusted diluted net earnings per common share(1) in the fourth quarter of 2019 were USD 1.69, an increase of USD 0.10 per common share, or 6.3 percent, compared to the same period in 2018. The increase was due to the improvement in the underlying operating performance described above, partially offset by the dilutive impact of the Company’s issuance of common shares in connection with the reorganization. IFRS 16 had a nominal impact on adjusted diluted net earnings per common share(1) in the fourth quarter of 2019.

Consolidated other business matters

IFRS 16 Implementation

In 2016, the IASB issued IFRS 16, replacing International Accounting Standard 17, «Leases» (IAS 17) and related interpretations. The standard introduced a single, on-balance sheet recognition and measurement model for lessees, eliminating the distinction between operating and finance leases. The Company implemented the standard on January 1, 2019 using the modified retrospective approach. As a result, the Company’s 2019 results incorporate lease accounting under IFRS 16. Prior year results have not been restated. See Section 11 «Accounting Standard Implemented» of the MD+A in the Company’s 2019 Annual Report for more information on the implementation of IFRS 16.

The implementation of IFRS 16 significantly increased the assets and liabilities on the Company’s Consolidated Balance Sheet and changed the timing and presentation of lease-related expenses in the Company’s results. The Company recorded a right-of-use asset of USD 4.1 billion and a lease liability of USD 5.1 billion under the new standard. Under IFRS 16, the depreciation expense on right-of-use assets and interest expense on lease liabilities replaced rent expense, which was previously recognized on a straight-line basis in operating income under IAS 17 over the term of a lease.

The following table provides the year-over-year impacts of the implementation of IFRS 16 on the consolidated results of the Company in the fourth quarter of 2019 and year-to-date:

12 Weeks 52 Weeks
(USD millions except where otherwise indicated) Change Change
Favourable/(unfavourable) Loblaw Weston Foods Other and Intersegment Total(i) Loblaw Weston Foods Other and Intersegment Total(i)
Operating income USD 73 USD USD (26) USD 47 USD 334 USD 4 USD (134) USD 204
Adjusted Ebitda(1) 285 2 (117) 170 1,239 12 (526) 725
Net interest expense and other financing charges (78) (1) 33 (46) (348) (3) 169 (182)
Depreciation and amortization (212) (2) 91 (123) (905) (8) 392 (521)
Net earnings available to common shareholders of the Company (2) (1) 5 2 (6) 25 19
Diluted net earnings per common share (USD) (0.01) (0.01) 0.03 0.01 (0.04) 0.16 0.12
(i) Includes nominal year-over-year impact in the fourth quarter of 2019 and year-to-date from Choice Properties.

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Loblaw’s Spin-out of Choice Properties Real Estate Investment Trust

On November 1, 2018, the Company and Loblaw completed a reorganization under which Loblaw distributed its approximate 61.6 percent effective interest in Choice Properties to the Company on a tax-free basis to Loblaw and its Canadian shareholders. In connection with the reorganization, Loblaw minority shareholders received 0.135 of a common share of the Company for each common share of Loblaw held, which was equivalent to the market value of their pro rata interest in Choice Properties as at the announcement date of the spin-out, and as part of the reorganization the Company received Loblaw’s approximate 61.6 percent effective interest in Choice Properties. Following the reorganization, Loblaw no longer retained its interest in Choice Properties and as a result, Loblaw ceased to consolidate its equity interest in Choice Properties. Choice Properties became a separate reportable operating segment of the Company. In connection with the reorganization, the Company issued approximately 26.6 million common shares to Loblaw minority shareholders.

The issuance of approximately 26.6 million common shares in connection with the reorganization had a dilutive impact on both the Company’s diluted net earnings per common share and adjusted diluted net earnings per common share(1) in 2019 and 2018.

The Company continues to be controlled by W. Galen Weston who, directly and indirectly through entities which he controls, owns approximately 53.2 percent of the outstanding common shares of the Company.

Offering of Trust Units

In the second quarter of 2019, Choice Properties completed an offering of 30,042,250 trust units (the «Units») at a price of USD 13.15 per Unit, for aggregate gross proceeds of approximately USD 395 million, and net proceeds of approximately USD 381 million (the «Offering»). The Offering consisted of 26,237,250 Units sold to a syndicate of underwriters and 3,805,000 Units purchased by the Company for approximately USD 50 million. Choice Properties incurred issuance costs of USD 14 million recorded in net interest expense and other financing charges.

Choice Properties’ Portfolio Transaction

On September 30, 2019, Choice Properties sold a portfolio of 30 properties across Canada to a third party for aggregate consideration of USD 426 million. The portfolio consisted of 27 Loblaw stand-alone retail properties and 3 Loblaw distribution centres. On consolidation, the transaction was not recognized as a sale of assets as under the terms of the leases, Loblaw did not relinquish control of the properties for purposes of IFRS 16 and IFRS 15. Instead, the proceeds were recognized as a financial liability on the Company’s consolidated balance sheet as at the end of the third quarter of 2019. For tax purposes, this transaction was treated as a sale and income tax expense reflects the benefit from the non-taxable portion of the gain from the sale of the portfolio of properties by Choice Properties.

As a result of the increase in taxable income from the sale transactions in 2019, the Board of Trustees of Choice Properties declared a special non-cash distribution in the form of Trust Units on December 31, 2019. On consolidation, distributions made by Choice Properties to unitholders other than the Company are reported as interest expense and other financing charges. As a result, the Company recorded USD 18 million in the fourth quarter of 2019 in Other and Intersegment.

Reportable operating segments

The Company operates through its three reportable operating segments, Loblaw, Choice Properties and Weston Foods. Other and Intersegment includes eliminations, intersegment adjustments related to consolidation and cash and short term investments held by the Company. Effective in the first quarter of 2019, all other company level activities that are not allocated to the reportable operating segments, such as interest expense, corporate activities and administrative costs are included in Other and Intersegment. Weston Foods and Other and Intersegment comparative figures have been restated to conform to the current year presentation.

Loblaw has two reportable operating segments, Retail and Financial Services. Loblaw provides Canadians with grocery, pharmacy, health and beauty, apparel, general merchandise and financial services.

Choice Properties owns, manages and develops a high-quality portfolio of commercial retail, industrial, office and residential properties across Canada.

Weston Foods is a North American bakery making bread, rolls, cupcakes, donuts, biscuits, cakes, pies, cones and wafers, artisan baked goods and more.

Loblaw Segment Results

(unaudited)
(USD millions except where otherwise indicated) Quarters Ended Years Ended
For the periods ended as indicated 2019-12-31 2018-12-31 USD Change % Change 2019-12-31 2018-12-31 USD Change % Change
Sales USD 11,590 USD 11,218 USD 372 3.3 % USD 48,037 USD 46,693 USD 1,344 2.9 %
Operating income USD 539 USD 443 USD 96 21.7 % USD 2,262 USD 1,915 USD 347 18.1 %
Adjusted Ebitda(1) USD 1,203 USD 893 USD 310 34.7 % USD 4,904 USD 3,520 USD 1,384 39.3 %
Adjusted Ebitda margin(1) 10.4% 8.0% 10.2% 7.5%
Depreciation and amortization(i) USD 589 USD 356 USD 233 65.4 % USD 2,524 USD 1,497 USD 1,027 68.6 %
(i) Depreciation and amortization includes USD 116 million (2018 – USD 120 million) in the fourth quarter of 2019 and USD 508 million (2018 – USD 521 million) year-to-date of amortization of intangible assets acquired with Shoppers Drug Mart Corporation (Shoppers Drug Mart).

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Unless otherwise indicated, Loblaw’s segment results include the impacts of spin-out related incremental depreciation, the implementation of IFRS 16 and the consolidation of franchises. For further details, see the «Consolidated Other Business Matters» section.

Sales

Loblaw sales in the fourth quarter of 2019 were USD 11,590 million, an increase of USD 372 million, or 3.3 percent, compared to the same period in 2018, primarily driven by Retail. Retail sales increased by USD 345 million, or 3.1 percent, compared to the same period in 2018 and included food retail sales of USD 7,960 million (2018 – USD 7,750 million) and drug retail sales of USD 3,361 million (2018 – USD 3,226 million). Excluding the consolidation of franchises, Retail sales increased by USD 294 million, or 2.7 percent, primarily driven by the following factors:

  • food retail same-store sales growth was 1.9 percent. After excluding the favourable impact of the timing of Thanksgiving, food retail same-store sales growth was approximately 0.8 percent. The timing of Thanksgiving had a nominal impact on food retail same-store sales growth in the fourth quarter of 2018. Food retail basket size increased and traffic increased in the quarter;
  • Loblaw’s food retail average article price was 0.8 percent (2018 – 2.3 percent), which reflects the price inflation on the specific mix of goods sold in Loblaw’s stores in the quarter. The average quarterly national food price inflation was 3.7 percent (2018 – inflation of 1.7 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; and
  • drug retail same-store sales growth was 3.9 percent, including pharmacy same-store sales growth of 6.1 percent and front store same-store sales growth of 2.2 percent. The timing of Thanksgiving had a nominal impact on the drug retail same-store sales growth in the fourth quarter of 2019 and 2018.

In 2019, 15 food and drug stores were opened and 6 food and drug stores were closed, resulting in a net increase in Retail square footage of 0.4 million square feet, or 0.6 percent.

Operating income

Loblaw operating income in the fourth quarter of 2019 was USD 539 million, an increase of USD 96 million, or 21.7 percent, compared to the same period in 2018. The increase included the favourable impact of IFRS 16 of approximately USD 73 million and the total unfavourable impact of spin-out related depreciation of approximately USD 21 million. Normalized for these impacts, operating income increased by USD 44 million primarily driven by the favourable year-over-year net impact of adjusting items totaling USD 23 million and the improvement in underlying operating performance of USD 21 million described below:

  • the favourable year-over-year net impact of adjusting items totaling USD 23 million was primarily due to the following:
    • the favourable year-over-year impact of the fair value adjustment on investment properties of USD 17 million;
    • the favourable year-over-year impact of the fair value adjustment of derivatives of USD 13 million;
    • the favourable impact of a net gain on sale of non-operating properties of USD 8 million;
    • the favourable impact associated with a prior period item of USD 7 million; and
    • the favourable year-over-year impact of transaction and other related costs in connection with Loblaw’s spin-out of Choice Properties of USD 2 million;

partially offset by,

    • the unfavourable year-over-year impact of restructuring and other related costs of USD 28 million.
  • the improvement in underlying operating performance of USD 21 million was primarily due to Financial Services, partially offset by Retail, including the unfavourable contribution from the consolidation of franchises of USD 13 million.

Adjusted Ebitda(1)

Loblaw adjusted Ebitda(1) in the fourth quarter of 2019 was USD 1,203 million, an increase of USD 310 million, or 34.7 percent, compared to the same period in 2018 and included the favourable impact of IFRS 16 of approximately USD 285 million. Normalized for the impact of IFRS 16, adjusted Ebitda(1)increased by USD 25 million, or 2.8 percent, primarily due to improvements in Financial Services, partially offset by Retail.

Retail adjusted Ebitda(1) was USD 1,135 million, an increase of USD 280 million compared to the same period in 2018 and included the favourable impact of IFRS 16 of approximately USD 285 million. Normalized for this impact, Retail adjusted Ebitda(1) decreased by USD 5 million, or 0.6 percent driven by an increase in Retail selling, general and administrative expenses (SG+A), partially offset by an increase in Retail gross profit.

  • Retail gross profit percentage of 29.8 percent was flat compared to the same period in 2018. Excluding the consolidation of franchises, Retail gross profit percentage was 27.7 percent, a decrease of 10 basis points compared to the fourth quarter of 2018. Margins were negatively impacted by the mix within drug retail and the pricing strategy in food retail.
  • Retail SG+A increased by USD 116 million compared to the same period in 2018. Normalized for the impact of IFRS 16 and the consolidation of franchises, Retail SG+A increased by USD 62 million and SG+A as a percentage of sales was 20.2 percent, flat compared to the fourth quarter of 2018, primarily driven by Process and Efficiency initiatives, offset by strategic growth investments.

Financial Services adjusted Ebitda(1) increased by USD 30 million compared to the same period in 2018, primarily driven by revenue growth, lower operating costs including investments in digital strategy and lower customer acquisition costs, partially offset by higher credit losses and an associated increase to the forward-looking allowance for credit card receivables.

Loblaw adjusted Ebitda(1) in the fourth quarter of 2019 was not impacted by any sale and leaseback of properties to Choice Properties (2018 – gain of USD 8 million).

Depreciation and Amortization

Loblaw’s depreciation and amortization in the fourth quarter of 2019 was USD 589 million, an increase of USD 233 million compared to the same period in 2018 and included the unfavourable impact of IFRS 16 of approximately USD 212 million and the total unfavourable impact of spin-out related depreciation of approximately USD 21 million. Normalized for these impacts, depreciation and amortization was flat compared to the fourth quarter of 2018. Included in depreciation and amortization is the amortization of intangible assets acquired with Shoppers Drug Mart of USD 116 million (2018 – USD 120 million).

Loblaw Other Business Matters

Spin-out of Choice Properties: Impact on Loblaw Results As a result of the reorganization, buildings owned by Choice Properties and leased by Loblaw are accounted for as leases and no longer accounted for as owned property by Loblaw. The building components associated with these leases post spin-out are classified as leasehold improvements and depreciated over the lesser of the lease term and useful life up to 25 years. The remaining average lease term on the leases related to these leasehold improvements is approximately 10 years. Loblaw’s 2019 fourth quarter financial results included depreciation and amortization of USD 21 million (USD 91 million year-to-date).

Process and Efficiency: Loblaw continues to execute on a multi-year plan, initiated in 2018, that focuses on improving processes and generating efficiencies across administrative, store and distribution network infrastructure. Many initiatives are underway to reduce the complexity and cost of business operations, ensuring a low cost operating structure that allows for continued investments in Loblaw’s strategic growth areas. Loblaw’s management anticipates investing capital as well as recording restructuring and other charges related to these initiatives in 2020, and beyond. In the fourth quarter of 2019, Loblaw recorded approximately USD 24 million (USD 74 million year-to-date) of restructuring and other related costs, primarily related to Process and Efficiency initiatives.

Subsequent to year end 2019, Loblaw announced the future closure of two distribution centres in Laval and Ottawa. Loblaw is investing to build a modern and efficient expansion to its Cornwall distribution centre to serve its food and drug retail businesses in Ontario and Quebec. Over the next two years, the distribution centres in Laval and Ottawa will be transferring their volumes to Cornwall. Loblaw expects to incur additional restructuring costs in 2020 and 2021 related to these closures.

Consolidation of Franchises: Loblaw has more than 500 franchise food retail stores in its network. As at year end 2019, 470 of these stores were consolidated for accounting purposes under a simplified franchise agreement (Franchise Agreement) implemented in 2015.

Consolidation of franchises in the fourth quarter of 2019 resulted in a year-over-year increase in revenue of USD 51 million, a decrease in adjusted Ebitda(1) of USD 7 million, an increase in depreciation and amortization of USD 6 million and a decrease in net earnings attributable to non-controlling interests of USD 10 million.

Choice Properties Segment Results

(unaudited)
(USD millions except where otherwise indicated) Quarters Ended Years Ended
For the periods ended as indicated 2019-12-31 2018-12-31 USD Change % Change 2019-12-31 2018-12-31 USD Change % Change
Revenue USD 318 USD 323 USD (5) (1.5) % USD 1,289 USD 1,148 USD 141 12.3 %
Net interest (income) expense and other financing charges(i) USD (74) USD (80) USD 6 7.5 % USD 1,472 USD (57) USD 1,529 2,682.5 %
Net income USD 294 USD 281 USD 13 4.6 % USD (581) USD 650 USD (1,231) (189.4) %
Funds from operations(1)(ii) USD 166 USD 172 USD (6) (3.5) % USD 680 USD 604 USD 76 12.6 %
(i) Net interest expense and other financing charges includes a fair value adjustment on Exchangeable Units.
(ii) Funds from operations is calculated in accordance with the Real Property Association of Canada’s White Paper on Funds from Operations + Adjusted Funds from Operations for IFRS issued in February 2019. Funds from operations for the year ended 2018 includes the accelerated amortization of debt premium of USD 37 million, an exception to the White Paper definition.

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Revenue

Revenue in the fourth quarter of 2019 was USD 318 million, a decrease of USD 5 million, or 1.5 percent, compared to the same period in 2018, and included USD 178 million (2018 – USD 189 million) generated from tenants within Loblaw’s Retail segment. The decrease in revenue was primarily driven by:

  • Choice Properties’ portfolio transaction as described in the «Consolidated Other Business Matters» section of this News Release;

partially offset by,

  • additional revenue generated from properties acquired in 2018 and 2019 and from tenant openings in newly developed leasable space; and
  • an increase in base rent and operating cost recoveries from existing properties.

Net Interest Income and Other Financing Charges

Net interest income and other financing charges in the fourth quarter of 2019 was USD 74 million, compared to USD 80 million in the same period in 2018. The change of USD 6 million was primarily driven by:

  • the unfavourable year-over-year impact of the fair value adjustment on Class B LP units (Exchangeable Units) of USD 8 million; and
  • higher interest expense resulting from the issuance of new senior unsecured debentures;

partially offset by,

  • lower interest expense resulting from the repayments made on the term loans.

Net income

Net income in the fourth quarter of 2019 was USD 294 million, an increase of USD 13 million compared to the same period in 2018. The increase was primarily driven by:

  • the favourable year-over-year impact of the fair value adjustment on investment properties; and
  • the favourable year-over-year impact of acquisition and other costs related to the acquisition of CREIT;

partially offset by,

  • the unfavourable impact of higher interest expense and other financing charges described above.

Funds from Operations(1)

Funds from Operations(1) in the fourth quarter of 2019 was USD 166 million, a decrease of USD 6 million compared to the same period in 2018, primarily driven by the decrease in revenue due to Choice Properties’ portfolio transaction, partially offset by growth in net operating income attributable to properties acquired in 2018 and 2019 and from tenant openings in newly developed leasable space.

Choice Properties Other Business Matters

Investment Property Transactions: During 2019, Choice Properties acquired eight investment properties and a financial real estate asset for an aggregate purchase price of USD 149 million, excluding transaction costs. Of the eight investment properties acquired during 2019, five investment properties were acquired from third-party vendors, for an aggregate purchase price of USD 77 million, excluding transaction costs, which was settled by an assumption of a USD 14 million mortgage, settlement of mortgages receivable of USD 25 million, with the remainder in cash. During 2019, Choice Properties acquired one property from Weston Foods and two properties and one financial real estate asset from Loblaw, for an aggregate purchase price of USD 72 million, excluding transaction costs, fully settled in cash.

During 2019, Choice Properties had six disposition transactions for an aggregate selling price of USD 468 million, excluding transaction costs, which were settled in cash. These disposition activities included the sale of:

  • a portfolio of 30 properties across Canada to a third-party for aggregate consideration of USD 426 million, excluding transaction costs. The portfolio consisted of 27 Loblaw stand-alone retail properties and 3 Loblaw distribution centres;
  • retail property in Cowansville, Quebec, which had a Loblaw lease for USD 1 million, excluding transaction costs. Concurrent with the sale, Choice Properties recognized lease surrender income of USD 2 million upon disposition, which was settled in cash;
  • development lands in Brampton, Ontario and in Strathcona County, Alberta for USD 31 million, excluding transaction costs;
  • retail property in Red Deer, Alberta, which had a Loblaw lease for USD 9 million, excluding transaction costs; and
  • land parcel at retail property in Olds, Alberta for USD 1 million, excluding transaction costs.

Weston Foods Segment Results

(unaudited)
(USD millions except where otherwise indicated) Quarters Ended Years Ended
For the periods ended as indicated 2019-12-31 2018-12-31(3) USD Change % Change 2019-12-31 2018-12-31(3) USD Change % Change
Sales USD 522 USD 507 USD 15 3.0 % USD 2,155 USD 2,122 USD 33 1.6 %
Operating income USD 27 USD 30 USD (3) (10.0) % USD 72 USD 92 USD (20) (21.7) %
Adjusted Ebitda(1) USD 56 USD 59 USD (3) (5.1) % USD 223 USD 233 USD (10) (4.3) %
Adjusted Ebitda margin(1) 10.7% 11.6% 10.3% 11.0%
Depreciation and amortization(i) USD 36 USD 28 USD 8 28.6 % USD 147 USD 130 USD 17 13.1 %
(i) Depreciation and amortization includes USD 3 million (2018 – nominal) in the fourth quarter of 2019 and USD 9 million (2018 – USD 9 million) year-to-date in 2019 of accelerated depreciation related to restructuring and other related costs.

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Sales

Weston Foods sales in the fourth quarter of 2019 were USD 522 million, an increase of USD 15 million, or 3.0 percent, compared to the same period in 2018. Sales included the negative impact of foreign currency translation of approximately 0.2 percent. Excluding the unfavourable impact of foreign currency translation, sales increased by 3.2 percent. Sales were impacted by an increase in volumes and the combined positive impact of pricing and changes in sales mix, partially offset by the unfavourable impact of product rationalization.

Operating income

Weston Foods operating income in the fourth quarter of 2019 was USD 27 million, a decrease of USD 3 million, or 10.0 percent, compared to the same period in 2018. Normalized for the nominal impact of IFRS 16 and the prior year impact of a net gain of USD 10 million related to the sale leaseback of a property, operating income increased by USD 7 million. The increase included the favourable year-over-year net impact of adjusting items totaling USD 5 million, and the improvement in the underlying operating performance of USD 2 million. The year-over-year net impact of adjusting items included the following:

  • the favourable year-over-year impact of restructuring and other related costs of USD 8 million; and
  • the favourable year-over-year impact of the fair value adjustment of derivatives of USD 1 million;

partially offset by,

  • the unfavourable year-over-year impact of inventory losses, net of recoveries, of USD 4 million.

Adjusted Ebitda(1)

Weston Foods adjusted Ebitda(1) in the fourth quarter of 2019 was USD 56 million, a decrease of USD 3 million or 5.1 percent, compared to the same period in 2018. Normalized for the favourable impact of IFRS 16 of approximately USD 2 million and the prior year impact of a net gain of USD 10 million related to the sale leaseback of a property, adjusted Ebitda(1) increased by USD 5 million. The increase was driven by productivity improvements and the net benefits realized from Weston Foods’ transformation program, partially offset by an increase in performance related compensation accruals and higher input costs.

Weston Foods adjusted Ebitda margin(1) in the fourth quarter of 2019 decreased to 10.7 percent compared to 11.6 percent in the same period in 2018. Normalized for the favourable impact of IFRS 16 and the prior year impact of a net gain related to the sale leaseback of a property, adjusted Ebitda margin(1) increased by 60 basis points to 10.3 percent in the fourth quarter of 2019 compared to 9.7 percent in the same period in 2018, driven by the factors described above.

Depreciation and Amortization

Weston Foods depreciation and amortization in the fourth quarter of 2019 was USD 36 million, an increase of USD 8 million compared to the same period in 2018. Normalized for the unfavourable impact of IFRS 16 of approximately USD 2 million, depreciation and amortization increased by USD 6 million. Depreciation and amortization in the fourth quarter of 2019 included USD 3 million (2018 – nominal) of accelerated depreciation related to Weston Foods’ transformation program. Excluding this amount and the impact of IFRS 16, depreciation and amortization in the fourth quarter of 2019 increased by USD 3 million due to capital investments.

Weston Foods Other Business Matters

Restructuring and other related costs: 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 fourth quarter of 2019, Weston Foods recorded a net gain of USD 4 million (2018 – costs of USD 4 million) related to restructuring activities driven by a gain on sale of an unprofitable facility in Canada, partially offset by reorganization costs from the transformation program. Year-to-date, charges of USD 11 million (2018 – USD 33 million) were primarily related to the reorganization costs from the transformation program.

Outlook(2)

For 2020, the Company expects adjusted net earnings(1) to increase due to the results from its operating segments as described below.

Loblaw is focused on its strategic framework, delivering best in food and health and beauty, using data driven insights underpinned by process and efficiency excellence. This framework is supported by Loblaw’s financial plan of maintaining market share, with positive same-store sales and stable gross margin, creating efficiencies to deliver operating leverage, investing for the future and returning capital to shareholders.

Loblaw will remain focused on delivering Process and Efficiency improvements to offset increasing costs and to fund continued incremental investments in infrastructure and to support its strategic growth areas of Everyday Digital Retail, Connected Healthcare and Payments + Rewards.

In 2020, on a full-year comparative basis, excluding the impact of the 53rd week, Loblaw expects to:

  • deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive market;
  • deliver positive adjusted net earnings(1) growth;
  • invest approximately USD 1.1 billion in capital expenditures, net of proceeds from property disposals; and
  • return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

Choice Properties’ real estate platform is positioned to deliver both income stability and long term growth for its investors, underpinned by disciplined financial management. Choice Properties’ income producing property portfolio provides a solid foundation for stable cash flows through effective management and portfolio diversification. The portfolio is diversified by both geography and product type including retail, industrial, office and residential assets. Overall, Choice Properties expects its income producing portfolio will continue to operate at high occupancy levels and deliver low single digits same asset NOI growth. Development initiatives provide the opportunity to add high quality real estate by focusing primarily on retail intensification projects which provide incremental growth to existing sites, to larger, more complex major mixed-use developments which Choice Properties expects will drive net asset value growth in the future.

In 2020, Choice Properties will continue to improve its portfolio quality and seek out opportunities, when available, to strengthen its balance sheet by extending debt maturities with longer term debt.

Weston Foods is focused on becoming a premier North American bakery and delivering solid financial results. In 2020, Weston Foods will continue to focus on growing its core business, selectively investing in key categories and markets, and strengthening key operational processes.

In 2020, Weston Foods expects:

  • sales will be modestly higher compared to full year 2019, after excluding the impact of foreign currency translation and the impact of the 53rd week in 2020;
  • adjusted Ebitda(1) will be higher compared to 2019;
  • investment in capital expenditures to decrease to approximately USD 185 million; and
  • depreciation will increase compared to 2019.

Declaration of quarterly dividends

Subsequent to the end of the fourth quarter of 2019, the Company’s Board of Directors declared a quarterly dividend on GWL Common Shares, Preferred Shares, Series I, Preferred Shares, Series III, Preferred Shares, Series IV and Preferred Shares, Series V payable as follows:

Common Shares USD 0.525 per share payable April 1, 2020, to shareholders of record as of March 15, 2020;
Preferred Shares, Series I USD 0.3625 per share payable March 15, 2020, to shareholders of record as of February 29, 2020;
Preferred Shares, Series III USD 0.3250 per share payable April 1, 2020, to shareholders of record as of March 15, 2020;
Preferred Shares, Series IV USD 0.3250 per share payable April 1, 2020, to shareholders of record as of March 15, 2020; and
Preferred Shares, Series V USD 0.296875 per share payable April 1, 2020, to shareholders of record as of March 15, 2020.

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Non-gaap financial measures

The Company uses non-GAAP financial measures as it believes these measures provide useful information to both management and investors with regard to accurately assessing the Company’s financial performance and financial condition.

Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and income that must be recognized under GAAP when analyzing underlying consolidated and segment operating performance, as the excluded items are not necessarily reflective of the Company’s underlying operating performance and make comparisons of underlying financial performance between periods difficult. The Company excludes additional items if it believes doing so would result in a more effective analysis of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring.

These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies, and should not be construed as an alternative to other financial measures determined in accordance with GAAP.

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