Toronto / CA. (gwl) George Weston Limited announced its consolidated unaudited results for the twelve weeks ended June 15, 2013. Summary: Adjusted basic net earnings per common share increased 4,8 percent to 1,10 CAD from 1,05 CAD in the second quarter of 2012. Adjusted operating income increased 7,7 percent to 392 million CAD. Sales increased 2,2 percent to 7’792 million CAD. The Company uses non-GAAP financial measures.
«George Weston Limited´s second quarter delivered operating results in line with expectations. GWL´s investment in Choice Properties REIT, which recently completed its initial public offering, and GWL´s financial support for Loblaw´s acquisition of Shoppers Drug Mart underscore our strong belief in their ability to create value for George Weston Limited´s shareholders. We are well positioned in Loblaw, Weston Foods, and Choice Properties REIT to continue delivering shareholder value», said W. Galen Weston, Executive Chairman, George Weston Limited.
Consolidated Results of Operations
Pavi Binning, President, George Weston Limited, commented that «We are pleased with the second quarter´s operating results. Loblaw delivered good sales and operating performance and made progress in executing its strategy. Weston Foods achieved improved sales volume growth over last year, while operating results improved modestly as we continued to invest in growth, marketing and innovation».
The Company´s second quarter 2013 adjusted basic net earnings per common share were 1,10 CAD compared to 1,05 CAD in the same period in 2012, an increase of 0,05 CAD. The increase was primarily attributable to the improvement in the operating performance of Loblaw Companies Limited, partially offset by a higher effective income tax rate.
The Company´s basic net earnings per common share were 0,69 CAD compared to 0,98 CAD in the same period in 2012. The decrease included the year-over-year unfavourable impact of certain items, including the impact of the forward sale agreement for 9,6 million Loblaw common shares and certain foreign currency translation, partially offset by the favourable impact of the multi-employer pension plan (MEPP) withdrawal liability incurred by Weston Foods in the second quarter of 2012.
Subsequent to the end of the second quarter of 2013, Choice Properties Real Estate Investment Trust (Choice Properties) completed a 460 million CAD Initial Public Offering (IPO), a public offering of 600 million CAD aggregate principal amount of senior unsecured debentures (the Debentures), and issued 200 million CAD of trust units (the Units) to GWL as described in the «Choice Properties Real Estate Investment Trust» section of this News Release.
Loblaw recently entered into a definitive agreement to acquire all of the outstanding common shares of Shoppers Drug Mart Corporation (Shoppers Drug Mart) for 33,18 CAD in cash plus 0,5965 of a Loblaw common share per each Shoppers Drug Mart common share, on a fully pro-rated basis. Based on Loblaw´s closing common share price on July 12, 2013, this would represent a purchase price of approximately 12,4 billion CAD. Concurrently, GWL agreed to subscribe for 500 million CAD of additional Loblaw common shares, as described in the «Agreement to Acquire Shoppers Drug Mart Corporation» section of this News Release.
Weston Foods
Weston Foods sales in the second quarter of 2013 increased by 3,3 percent to 413 million CAD from 400 million CAD and volumes increased by 0,7 percent compared to the same period in 2012. Excluding the impact of the loss of certain frozen products that Weston Foods distributed on behalf of certain customers in 2012 and foreign currency translation, sales increased 4,5 percent due to the combined positive impact of pricing and changes in sales mix of 3,0 percent and an increase in volume of 1,5 percent.
Weston Foods operating income in the second quarter of 2013 was 64 million CAD compared to twelve million CAD in the same period in 2012, an increase of 52 million CAD. The increase was primarily due to the favourable year-over-year impact of the MEPP withdrawal liability of 35 million CAD recorded in the second quarter of 2012 and the fair value adjustment of commodity derivatives.
Weston Foods adjusted operating income in the second quarter of 2013 was 66 million CAD compared to 65 million CAD in the same period in 2012. Weston Foods adjusted operating margin for the second quarter of 2013 decreased to 16,0 percent from 16,3 percent in the same period in 2012. Adjusted operating income was positively impacted by higher pricing in key product categories, higher sales volumes, and the benefits realized from productivity improvements and other cost reduction initiatives. These benefits were partially offset by higher commodity and other input costs and increased investments in growth, marketing and innovation compared to the same period in 2012.
Loblaw
Investments made to advance Loblaw´s customer proposition again translated into improved same-store sales performance in an intense competitive environment. Better mix and good expense management enabled Loblaw to deliver improved operating performance during the quarter.
Loblaw sales in the second quarter of 2013 increased by 2,0 percent to 7’520 million CAD from 7’375 million CAD in the same period in 2012. Loblaw´s Retail segment sales increased by 1,9 percent and same-store sales growth was 1,1 percent (2012 – 0,2 percent). Loblaw´s average quarterly internal food price index was flat (2012 – modest inflation) during the second quarter of 2013, which was lower than the average quarterly national food price inflation of 1,5 percent (2012 – 2,5 percent) as measured by «The Consumer Price Index for Food Purchased from Stores». In the last twelve months, corporate and franchise store square footage increased 0,8 percent. Loblaw sales in the second quarter of 2013 were also positively impacted by an increase in revenue from its Financial Services segment, which includes President´s Choice Bank, a subsidiary of Loblaw.
Loblaw operating income in the second quarter of 2013 was 320 million CAD compared to 288 million CAD in the same period in 2012, an increase of 32 million CAD. Loblaw adjusted operating income increased by 27 million CAD to 326 million CAD in the second quarter of 2013 compared to 299 million CAD in the same period in 2012. Adjusted operating margin was 4,3 percent compared to 4,1 percent in the same period in 2012.
The increase in adjusted operating income was primarily attributable to increased gross profit from Loblaw´s Retail segment and the impact of foreign exchange, partially offset by increased operating costs, including depreciation and amortization. An improvement in Loblaw´s Financial Services segment also contributed to the increase and was mainly attributable to higher revenue, operational efficiencies and lower costs related to the renegotiation of vendor contracts, partially offset by investments in the Mobile Shop business.
Net Interest Expense And Other Financing Charges
In the second quarter of 2013, net interest expense and other financing charges increased by 73 million CAD to 150 million CAD compared to the same period in 2012. Net interest expense and other financing charges are impacted by the fair value adjustment of the forward sale agreement for 9,6 million Loblaw common shares. This fair value adjustment had an unfavourable year-over-year impact of 74 million CAD in the second quarter of 2013.
Excluding this impact, net interest expense and other financing charges decreased by one million CAD in the second quarter of 2013 compared to the same period in 2012.
Income Taxes
In the second quarter of 2013, income tax expense increased to 64 million CAD from 53 million CAD in the same period in 2012. The effective income tax rate increased to 28,1 percent in the second quarter of 2013 from 21,5 percent in the same period in 2012, primarily due to an increase in non-deductible amounts, including non-deductible foreign currency translation losses (2012 – non-taxable foreign currency translation gains) and a decrease in income tax recoveries related to prior year tax matters.
Choice Properties Real Estate Investment Trust
Subsequent to the end of the second quarter of 2013, in connection with its acquisition of approximately seven billion CAD of properties and related assets from Loblaw, Choice Properties completed a 460 million CAD IPO of Units, which included the exercise of a 60 million CAD over-allotment option. In addition, Choice Properties issued 200 million CAD of Units to GWL at a price of 10,00 CAD per Unit.
As a result of its 200 million CAD direct investment, GWL holds 20’000’000 Units and a 5,6 percent effective interest in Choice Properties. After the exercise of the over-allotment option, Loblaw held approximately 81,7 percent effective interest in Choice Properties through ownership of 21’500’000 Units and 272’497’871 Class B Limited Partnership units, which are economically equivalent to and exchangeable for Units.
At closing, Loblaw recorded transaction costs of approximately 40 million CAD in net interest expense and other financing charges related to the completion of the IPO.
Concurrent with the offering of Units, Choice Properties completed a public offering of the Debentures. The Debentures were comprised of 400 million CAD Series A Debentures with a 5-year term and a coupon of 3,554 percent per annum, and 200 million CAD Series B Debentures with a 10-year term and a coupon of 4,903 percent per annum. A portion of the debt offering proceeds were used to replenish the cash used to repay the United States (U.S.) 150 million CAD private placement (USPP) note that matured during the second quarter of 2013 and to early-settle the remaining U.S. 150 million USD USPP note during the third quarter of 2013, including the associated early-settlement costs of approximately 18 million CAD, which will be recorded in net interest expense and other financing charges.
Agreement To Acquire Shoppers Drug Mart Corporation
Subsequent to the end of the second quarter of 2013, Loblaw entered into a definitive agreement to acquire all of the outstanding common shares of Shoppers Drug Mart Corporation for 33,18 CAD in cash plus 0,5965 of a Loblaw common share per each Shoppers Drug Mart common share, on a fully pro-rated basis. Based on Loblaw´s closing common share price on July 12, 2013, this would represent a purchase price of approximately 12,4 billion CAD. The Company anticipates that the transaction will be completed within six to seven months. Completion is subject to various approvals, including Shoppers Drug Mart shareholder and court approvals, compliance with the Competition Act (Canada) and other regulatory approvals as well as certain other closing conditions customary in transactions of this nature.
As part of Loblaw´s financing, GWL has agreed to subscribe for approximately 500 million CAD of additional Loblaw common shares at a price of 47,55 CAD per common share. The proceeds from this subscription will be used to finance a portion of the cash consideration payable to shareholders of Shoppers Drug Mart.
In connection with this agreement, Loblaw entered into committed bank facilities. These committed facilities consist of a 3,5 billion CAD term loan and a 1,6 billion CAD bridge loan that will only be utilized upon completion of the acquisition. As a result of the agreement and related commitments, Dominion Bond Rating Service (DBRS) placed the credit ratings of GWL, Loblaw and Choice Properties under review with developing implications and Standard + Poor´s (S+P) placed GWL, Loblaw and Choice Properties on credit watch with negative implications associated with its Loblaw review. The Company expects DBRS and S+P to complete their reviews in the upcoming weeks.
Outlook
The outlook reflects the underlying operating performance of the Company´s operating segments as discussed below.
For full year 2013, Weston Foods sales growth is expected to be moderate due to a combination of pricing and modest volume growth. Adjusted operating margins are expected to remain in line with 2012 as Weston Foods invests in growth, marketing and innovation.
Loblaw continued to make progress in executing its strategy in the second quarter. The resulting improvement in year-to-date financial performance compared to the first half of 2012, in addition to updated expectations for the remainder of the year, has led management to expect mid-single digit growth in adjusted operating income in 2013. This revised outlook compares to the prior expectation for modest, or low-single digit growth and excludes the impact of the 61 million CAD restructuring charge recorded in the fourth quarter of 2012, the 51 million CAD gain recorded in the first quarter of 2013 associated with amendments to certain defined benefit plans, and the costs associated with the creation and recently completed IPO of Choice Properties and the recently announced Shoppers Drug Mart agreement.
Loblaw´s information technology (IT) infrastructure implementation and related costs, as well as investments in price, assortment and labour, are expected to be offset by operating efficiencies.
The Canadian retail environment remains competitive and Loblaw continues to expect sales growth in 2013 to be moderated by ongoing competitor square footage expansions, a new competitor´s entry into the market and generic drug deflation.
