Weston Foods: Reports Q4 and FY-2017 Results

Toronto / CA. (gwl) George Weston Limited (GWL) announced its consolidated unaudited results for the 12 weeks ended December 31, 2017. GWL’s 2017 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, 2017. The 2017 Annual Report has been filed with SEDAR and is available at sedar.com and in the Investor Centre section of the Company’s website. Galen G. Weston, Chairman and Chief Executive Officer, George Weston Limited, commented that «Loblaw delivered strong results in the fourth quarter driven by retail segment with positive same-store sales, while maintaining a stable trading environment. Weston Foods results for the quarter came in as expected for our artisan, biscuit and fresh businesses, and the frozen business has stabilized. In the fourth quarter, Weston Foods launched an ambitious three-year transformation program. We are confident that this transformation program will position us to become a premier North American bakery, and deliver strong financial performance in the long term».

2017 Fourth Quarter Highlights

CAD in millions except otherwise indicated (unaudited)		Quarters Ended					Years Ended
		2017-12-31		2016-12-31		Change	2017-12-31		2016-12-31		Change
Sales		CAD	11’409	CAD	11’519	(1.0)%	CAD	48’292	CAD	47’999	0.6%
Operating income		CAD	147	CAD	491	(70.1)%	CAD	2’540	CAD	2’255	12.6%
Adjusted Ebitda		CAD	1’072	CAD	1’027	4.4%	CAD	4’340	CAD	4’140	4.8%
Adjusted Ebitda margin		9.4%			8.9%			9.0%		8.6%
Net earnings attributable to shareholders
	of the Company	CAD	38	CAD	92	(58.7)%	CAD	759	CAD	550	38.0%
Net earnings available to common shareholders
	of the Company	CAD	28	CAD	82	(65.9)%	CAD	715	CAD	506	41.3%
Adjusted net earnings available to common
	shareholders of the Company	CAD	228	CAD	204	11.8%	CAD	904	CAD	838	7.9%
Diluted net earnings per common share (CAD)		CAD	0.22	CAD	0.64	(65.6)%	CAD	5.53	CAD	3.90	41.8%
Adjusted diluted net earnings per common share (CAD)		CAD	1.78	CAD	1.59	11.9%	CAD	7.00	CAD	6.49	7.9%

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Consolidated Results of Operations

Net earnings available to common shareholders of the Company in the fourth quarter of 2017 were CAD 28 million ( CAD 0.22 per common share), a decrease of CAD 54 million ( CAD 0.42 per common share) compared to the same period in 2016. The decrease included improvements in underlying operating performance of CAD 24 million ( CAD 0.19 per common share) which were more than offset by the unfavourable year-over-year net impact of adjusting items totalling CAD 78 million ( CAD 0.61 per common share), as described below.

• The improvements in underlying operating performance of CAD 24 million ( CAD 0.19 per common share) were primarily due to:
  • the underlying operating performance of Loblaw Companies Limited primarily due to the Retail segment;

• • the unfavourable underlying operating performance of Weston Foods.
• The unfavourable year-over-year net impact of certain adjusting items totalling CAD 78 million ( CAD 0.61 per common share) was primarily due to:
  • an increase in restructuring and other charges of CAD 78 million ( CAD 0.61 per common share);
  • the unfavourable impact of Loblaw’s charges related to the announcement of the PC Optimum Program, including the revaluation of the existing points liability and the impairment of certain information technology (IT) assets, of CAD 75 million( CAD 0.58 per common share); and
  • the unfavourable impact of the Loblaw Card Program of CAD 39 million ( CAD 0.30 per common share);

partially offset by,

• • the favourable impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of CAD 39 million ( CAD 0.29 per common share);
  • the favourable year-over-year impact of asset impairments, net of recoveries, of CAD 25 million ( CAD 0.19 per common share);
  • the favourable year-over-year impact of the statutory corporate income tax rate change of CAD 19 million ( CAD 0.15 per common share); and
  • the favourable impact of the remeasurement of deferred tax balances of CAD 10 million ( CAD 0.08 per common share).
• 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.

Adjusted net earnings available to common shareholders of the Company in the fourth quarter of 2017 were CAD 228 million ( CAD 1.78 per common share), an increase of CAD 24 million ( CAD 0.19 per common share) compared to the same period in 2016, primarily due to the improvement in underlying operating performance, as described above.

Competition Bureau Investigation

On December 19, 2017, the Company and Loblaw announced actions taken to address their role in an industry-wide price-fixing arrangement involving certain packaged bread products. The arrangement involved the coordination of retail and wholesale prices of certain packaged bread products over a period extending from late 2001 to March 2015. Under the arrangement, the participants regularly increased prices on a coordinated basis.

Class action lawsuits have been commenced against the Company and Loblaw as well as a number of other major grocery retailers and another bread wholesaler. It is too early to predict the outcome of such legal proceedings. Neither the Company nor Loblaw believes that the ultimate resolution of such legal proceedings will have a material adverse impact on their financial condition or prospects. The Company and Loblaw’s cash balances far exceed any realistic damages scenario and therefore the Company and Loblaw do not anticipate any impacts on the Company and Loblaw’s dividend, dividend policy or Loblaw’s share buyback plan.

The Company and Loblaw have not recorded any amounts related to the potential civil liability associated with the class action lawsuits in the fourth quarter of 2017 on the basis that a reliable estimate of the liability cannot be determined at this time. The Company and Loblaw will continue to assess whether a provision for civil liability associated with the class action lawsuits can be reliably estimated and will record an amount in the period that a reliable estimate of liability can be determined or the matter is ultimately resolved.

As part of its response to this issue, Loblaw has announced the Loblaw Card Program pursuant to which Loblaw is offering a CAD 25 Loblaw Card to eligible customers. The Loblaw Card can be used to purchase items sold in Loblaw grocery stores across Canada. Loblaw has recorded a charge of CAD 107 million in relation to the Loblaw Card Program in the fourth quarter of 2017. The Company and Loblaw expect that Loblaw Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card Program should not be viewed as an estimate of damages.

As a result of their admission that they participated in the arrangement and their cooperation in the Competition Bureau’s investigation, the Company and Loblaw will not face criminal charges or penalties.

Reportable Operating Segments

The Company has two reportable operating segments, Loblaw and Weston Foods. The Company also holds cash, short term investments and an interest in Choice Properties Real Estate Investment Trust (Choice Properties) of 6.1 percent (2016 – 5.8 percent). Loblaw has three reportable operating segments: Retail, Financial Services and Choice Properties. Loblaw provides Canadians with grocery, pharmacy, health and beauty, apparel, general merchandise, credit card services, insurance brokerage services, gift cards and telecommunication services. Loblaw also holds an 82.4 percent (2016 – 82.7 percent) effective interest in Choice Properties, which owns, manages and develops well-located retail and other commercial real estate across Canada. The Weston Foods operating segment includes a leading fresh bakery business in Canada and frozen, artisan bakery and biscuit businesses throughout North America.

Weston Foods Segment Results

CAD in millions except otherwise indicated (unaudited)	Quarters Ended					Years Ended
	2017-12-31		2016-12-31		Change	2017-12-31		2016-12-31		Change
Sales	CAD	527	CAD	537	(1.9)%	CAD	2’243	CAD	2’268	(1.1)%
Operating income	CAD	8	CAD	38	(78.9)%	CAD	91	CAD	173	(47.4)%
Adjusted Ebitda	CAD	61	CAD	73	(16.4)%	CAD	256	CAD	296	(13.5)%
Adjusted Ebitda margin	11.6%		13.6%			11.4%		13.1%
Depreciation and amortization(i)	CAD	35	CAD	27	29.6%	CAD	117	CAD	111	5.4%

(i) Depreciation and amortization in the fourth quarter of 2017 includes CAD 10 million (2016 – CAD 3 million) and CAD 10 million (2016 – CAD 14 million) year-to-date of accelerated depreciation related to restructuring and other charges.

Sales: Weston Foods sales in the fourth quarter of 2017 were CAD 527 million, a decrease of CAD 10 million, or 1.9 percent, compared to the same period in 2016. Sales included the negative impact of foreign currency translation of approximately 2.8 percent. Excluding the unfavourable impact of foreign currency translation, sales increased 0.9 percent mainly driven by an increase in volumes and positive sales mix.

Operating Income: Weston Foods operating income in the fourth quarter of 2017 was CAD 8 million, a decrease of CAD 30 million compared to the same period in 2016. The decrease was primarily due to the decline in underlying operating performance of CAD 13 million and the unfavourable year-over-year net impact of adjusting items totalling CAD 17 million, as described below:

• an increase in restructuring and other charges of CAD 26 million;

partially offset by,

• the favourable impact of inventory loss, net of recoveries, of CAD 7 million; and
• the favourable impact of the fair value adjustment of derivatives of CAD 2 million.

Adjusted Ebitda: Weston Foods adjusted Ebitda in the fourth quarter of 2017 was CAD 61 million, a decrease of CAD 12 million compared to the same period in 2016. The decrease was driven by changes in sales mix, and higher input and distribution costs, partially offset by productivity improvements.

Weston Foods adjusted Ebitda margin in the fourth quarter of 2017 was 11.6 percent compared to 13.6 percent in the same period in 2016. The decline in adjusted Ebitda margin in the fourth quarter of 2017 was mainly due to the factors impacting adjusted Ebitda, as described above.

Depreciation and Amortization: Weston Foods depreciation and amortization in the fourth quarter of 2017 was CAD 35 million, an increase of CAD 8 million compared to the same period in 2016. Depreciation and amortization included CAD 10 million and CAD 3 million in the fourth quarters of 2017 and 2016, respectively, of accelerated depreciation related to the closures of unprofitable facilities in the U.S. and Canada. Excluding these amounts, depreciation and amortization in the fourth quarter of 2017 increased nominally.

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. In the fourth quarter of 2017, Weston Foods recorded restructuring and other charges of CAD 33 million (2016 – CAD 7 million). In the fourth quarter of 2017, the restructuring charges were primarily related to the previously announced closure of an unprofitable facility in the U.S., which is expected to be completed in the first quarter of 2018, and reorganization costs related to the transformation program. In the fourth quarter of 2017, these charges included severance and exit costs of CAD 14 million, accelerated depreciation of CAD 10 million, and impairment of a definite life intangible asset of CAD 9 million.

Loblaw Segment Results

CAD in millions except otherwise indicated (unaudited)	Quarters Ended					Years Ended
	2017-12-31		2016-12-31		Change	2017-12-31		2016-12-31		Change
Sales	CAD	11’030	CAD	11’130	(0.9)%	CAD	46’702	CAD	46’385	0.7%
Operating income	CAD	138	CAD	447	(69.1)%	CAD	2’486	CAD	2’084	19.3%
Adjusted Ebitda	CAD	1’011	CAD	954	6.0%	CAD	4’084	CAD	3’844	6.2%
Adjusted Ebitda margin	9.2%		8.6%			8.7%		8.3%
Depreciation and amortization(i)	CAD	372	CAD	365	1.9%	CAD	1’568	CAD	1’543	1.6%

(i) Depreciation and amortization includes CAD 121 million (2016 – CAD 124 million) in the fourth quarter of 2017 and CAD 524 million (2016 – CAD 535 million) year-to-date of amortization of intangible assets acquired with Shoppers Drug Mart Corporation.

For more information regarding «Loblaw Segment Results» please visit the Company’s website.

Outlook

Weston Foods’ three year strategic framework is focused on becoming a premier North American Bakery and delivering solid financial results. In 2018, Weston Foods will focus on key fundamental areas by growing the core business, selectively innovating in new segments and markets, and strengthening key processes in the organization.

In 2018, on a full-year comparative basis, Weston Foods expects

• Sales will be essentially flat to 2017. Growth in volume is expected to be offset by product rationalization and negative impacts of foreign exchange;
• Adjusted Ebitda will be essentially flat to 2017. Adjusted Ebitda will include improvements from the transformation program and productivity, but will be offset by headwinds from higher input and distribution costs in an inflationary environment, minimum wage increases and foreign exchange. In the first half of 2018, adjusted Ebitda is expected to decline primarily due to costs related to the transformation program and inflation. Adjusted Ebitda in the second half of 2018 is expected to improve driven by sales growth and realized benefits from the transformation program, partially offset by continued inflationary pressures;
• Investment in capital expenditures of approximately CAD 230 million related to growth, regulatory and maintenance; and
• Depreciation will increase.

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 a stable trading environment that targets positive same-store sales and stable gross margin, creating efficiencies to deliver operating leverage, investing for the future and returning capital to shareholders.

Headwinds from minimum wage increases and healthcare reform will negatively impact Loblaw’s financial performance in 2018. In addition to the previously announced incremental impact of minimum wage increases of approximately CAD 190 million, Loblaw now expects that the announced healthcare reform will have an additional impact of approximately CAD 250 million on operating income. This compares to the average impact of healthcare reform of approximately CAD 70 million to CAD 80 million per year over the past three years.

In 2018, on a full-year comparative basis, normalized for the disposition of Loblaw’s gas bar business, Loblaw expects to:

• deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive market;
• deliver essentially flat adjusted net earnings growth with positive adjusted earnings per share growth based on our share buyback program;
• invest approximately CAD 1.3 billion in capital expenditures, including CAD 1.0 billion in its Retail segment; and
• return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.

For 2018, the Company expects adjusted net earnings to be essentially flat due to the results of Loblaw and Weston Foods, as described above.