George Weston: posted big jump in net earnings in Q1/2009

Toronto / CA. (gwl) The first quarter 2009 was an exciting and historic quarter for George Weston Limited, with the sale of the fresh bread and baked goods business in the United States («U.S. fresh bakery business») resulting in a considerable gain for the Company. This transaction, together with the sale of Weston´s Canadian dairy and bottling operations in the fourth quarter of 2008, means that the Company is in a very strong position from a financial liquidity perspective – an enviable position in uncertain economic times, George Weston Limited said in a statement.

Loblaw remains on track and is continuing to focus on store enhancements, product innovation, infrastructure improvements, customer value and improving its food offering. Weston Foods brand and product development efforts continue, while its continuing focus on plant and distribution optimization along with other ongoing cost reduction initiatives continue to ensure a low cost operating structure.

The sale of Weston Foods´ U.S. fresh bakery business to Grupo Bimbo, S.A.B. de C.V. for gross and net proceeds of approximately 2,5 billion USD, including approximately 125 million USD for interest bearing assets, closed on January 21, 2009. The sale resulted in a gain of 1,0 billion CAD before the reversal of the associated cumulative foreign currency translation loss. The reversal of this cumulative foreign currency translation loss, which was previously reflected in accumulated other comprehensive loss, reduced the gain by 110 million CAD for a net gain on the sale of 921 million CAD (883 million CAD after income taxes). The gain is subject to normal post closing working capital and other adjustments, which are expected to be finalized in the second quarter of 2009. The results of the U.S. fresh bakery business up to the date of sale and the gain on the sale have been reflected separately as discontinued operations in the current and comparative results, and accordingly all comparisons of operating results exclude the results of the U.S. fresh bakery business.

The results of Weston Foods´ dairy and bottling operations, which were sold on December 01, 2008, are not reported as discontinued operations due to Loblaw´s continuing purchases of product from the dairy and bottling operations. Therefore, the results of the dairy and bottling operations up to the date of sale, are included in net earnings from continuing operations in the comparative period and are included in the discussion of continuing operating results below.

Consolidated Results of Operations

(unaudited) millions except where otherwise indicated		12 Weeks Ended 09-03-28		12 Weeks Ended 08-03-22	Change
Sales	CAD	7’022	CAD	6’835	2,7%
Operating income	CAD	101	CAD	195	(48,2)%
Operating margin		1,4%		2,9%
Interest expense and other financing charges	CAD	37	CAD	24	54,2%
Net (loss) earnings from continuing operations	CAD	(27)	CAD	84	(132,1)%
Net earnings	CAD	863	CAD	131	558,8%
Basic net (loss) earnings per common share from continuing operations (CAD)	CAD	(0,28)	CAD	0,55	(150,9)%
Basic net earnings per common share	CAD	6,61	CAD	0,91	626,4%
EBITDA	CAD	245	CAD	338	(27,5)%
EBITDA margin		3,5%		4,9%
Net debt (excluding Exchangeable Debentures)(1)	CAD	491	CAD	4’697	(89,5)%

Net earnings for the first quarter of 2009 were 863 million CAD, compared to 131 million CAD in 2008. The increase was primarily attributable to the net gain of 921 million CAD on the sale of the U.S. fresh bakery business. Basic net earnings per common share of 6,61 CAD compared to 0,91 CAD for the same period in 2008.

Net loss from continuing operations for the first quarter of 2009 was 27 million CAD, compared to net earnings from continuing operations of 84 million CAD in 2008, and basic net loss per common share from continuing operations of 0,28 CAD compared to basic net earnings per common share from continuing operations of 0,55 CAD for the same period in 2008.

Sales in the first quarter of 2009 were 7,0 billion CAD compared to 6,8 billion CAD for the same period in 2008, an increase of 2,7 percent. The impact of foreign currency translation on the Weston Foods operating segment positively impacted consolidated sales growth by approximately 0,6 percent for the first quarter of 2009.

Operating income for the first quarter of 2009 was 101 million CAD compared to 195 million CAD in the same period in 2008, a decrease of 48,2 percent. Consolidated operating margin of 1,4 percent for the first quarter decreased compared to 2,9 percent for the same period in 2008. Year-over-year changes in the following items together with additional factors outlined in the MD+A influenced the Company´s operating income in the first quarter of 2009 compared to the same period in 2008:

• a charge of 34 million CAD (2008-nil) related to the reversal of the cumulative foreign currency translation loss associated with Dunedin Holdings S.a.r.l., a subsidiary of GWL, and certain of its affiliates. The effect on basic net earnings per common share from continuing operations was a charge of 0,26 CAD (2008-nil);
• a charge of 62 million CAD (2008-nil) related to foreign exchange losses associated with the Company´s (excluding Loblaw´s) USD denominated cash and short term investments held in integrated foreign subsidiaries. The effect on basic net earnings per common share from continuing operations was a charge of 0,41 CAD (2008-nil);
• a charge of 73 million CAD (2008-nil) related to the non-cash goodwill impairment in Weston Foods´ biscuits, cookies, cones and wafers business. The effect on basic net earnings per common share from continuing operations was a charge of 0,38 CAD (2008-nil);
• a charge of 23 million CAD (2008 – 38 million CAD) related to the effect of stock-based compensation net of equity derivatives of both GWL and Loblaw. The effect on basic net earnings per common share from continuing operations was a charge of 0,12 CAD (2008 – 0,21 CAD);
• income of nine million CAD (2008 – eleven million CAD) related to the commodity derivatives fair value adjustment at Weston Foods. The effect on basic net earnings per common share from continuing operations was income of 0,05 CAD (2008 – 0,06 CAD); and
• nil (2008 – income of twelve million CAD) related to the income of Weston Foods´ dairy and bottling operations. The effect on basic net earnings per common share from continuing operations was nil (2008 – income of 0,06 CAD).

After the sale of the U.S. fresh bakery business on January 21, 2009, Dunedin and certain of its affiliates became «integrated» foreign subsidiaries for accounting purposes. On the date of the sale, the cumulative foreign currency translation loss of 34 million CAD associated with Dunedin and certain of its affiliates, which was previously reflected in accumulated other comprehensive loss, was reversed into operating income. Subsequent to January 21, 2009, gains and losses arising from the translation of the USD denominated assets of these integrated foreign subsidiaries will be included in net earnings. As a result, operating income for the first quarter of 2009 included 62 million CAD of foreign exchange losses associated with the Company´s (excluding Loblaw´s) USD denominated cash and short term investments held in integrated foreign subsidiaries.

Excluding the impact of the specific items noted above, operating income in the first quarter of 2009 was strong compared to the same period in 2008. The Weston Foods operating segment experienced increases in costs related to certain ingredients, primarily flour and oils, and other input items as compared to the first quarter of 2008. However, a combination of the pricing actions implemented in 2008 and cost reduction initiatives resulted in positive operating income growth in the first quarter. First quarter results at Loblaw benefited from its focus on cost reduction including initiatives to reduce shrink, buying synergies and more disciplined vendor management, as well as sales mix, successful promotional campaigns and inflation. The positive impact of these factors was partially offset by incremental investment in information technology and supply chain.

Interest expense and other financing charges for the first quarter of 2009 increased 54,2 percent to 37 million CAD from 24 million CAD in 2008, primarily due to decreased non-cash income related to the accounting for GWL´s forward sale agreement of 9,6 million CAD Loblaw common shares of 40 million CAD (2008 – 51 million CAD), which resulted in a basic net earnings per common share non-cash income of 0,23 CAD (2008 – 0,29 CAD).

The effective income tax rate increased to 84,4 percent in the first quarter of 2009 compared to 36,8 percent in the first quarter of 2008. The increase was mainly the result of the non-deductible reversal of the cumulative foreign currency translation loss associated with Dunedin and certain of its affiliates, and the foreign exchange gains and losses associated with the Company´s (excluding Loblaw´s) USD denominated cash and short term investments. The effective income tax rate before the impact of these charges decreased to 36,5 percent in the first quarter of 2009 from 36,8 percent in the first quarter of 2008.

Info: George Weston Limited – Quarterly Report to Shareholders (press release).