11 October 2024
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Market + Management

Weston Foods: Sales up 12.2 percent in Q1/2015

Toronto / CA. (gwl) George Weston Limited (GWL) announced its consolidated unaudited results for the twelve weeks ended March 28, 2015. The Company´s first quarter 2015 results include the results of Shoppers Drug Mart Corporation as well as the associated acquisition-related accounting adjustments.

«George Weston Limited continues to focus on creating long term shareholder value and now, for the third consecutive year, we announced a dividend increase. We continue to execute against the strategic initiatives set by each of the Company´s operating segments to deliver stable, long term growth and profitability», said W. Galen Weston, Executive Chairman, George Weston Limited.

2015 First Quarter Highlights

  • Sales of 10’409 million CAD, an increase of 2’797 million CAD or 36.7 percent.
  • Adjusted Ebitda of 850 million CAD, an increase of 302 million CAD or 55.1 percent.
  • Adjusted operating income of 586 million CAD, an increase of 249 million CAD or 73.9 percent.
  • Adjusted basic net earnings per common share of 1.19 CAD, an increase of 0.30 CAD or 33.7 percent.
  • Free cash flow of 81 million CAD.
  • Quarterly common share dividend increase of approximately 1.2 percent from 0.42 CAD per common share to 0.425 CAD per common share.

Pavi Binning, President, George Weston Limited, commented that «We are pleased with George Weston Limited´s first quarter results as the performance of both of the Company´s operating segments was in-line with expectations. Loblaw delivered solid operating and financial performance in highly competitive grocery and pharmacy industries. Weston Foods delivered volume growth and higher sales across all business units, while operating income reflected the impact of increased capital expenditures and incremental investments in capabilities and innovation».

GWL´s first quarter 2015 adjusted basic net earnings per common share increased to 1.19 CAD from 0.89 CAD in the same period in 2014. The improvement of 0.30 CAD was primarily due to an increase in Loblaw Companies Limited earnings offset by the reduction in the Company´s ownership as a result of the shares issued by Loblaw to acquire Shoppers Drug Mart. Loblaw earnings were positively impacted in the first quarter of 2015 by Shoppers Drug Mart results, partially offset by higher interest expense driven by the financing associated with the acquisition of Shoppers Drug Mart.

Basic net earnings per common share increased by 0.37 CAD to 1.23 CAD compared to the same period in 2014, and were impacted by the following significant items:

  • the favourable year-over-year impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of 52 million CAD (0.31 CAD per common share); and
  • the favourable year-over-year impact of foreign currency translation of 23 million CAD (0.11 CAD per common share); partially offset by
  • the amortization of the acquired Shoppers Drug Mart intangible assets of 124 million CAD (0.32 CAD per common share).

Weston Foods

Sales: Weston Foods sales in the first quarter of 2015 were 504 million CAD, an increase of 55 million CAD, or 12.2 percent compared to the same period in 2014. Foreign currency translation positively impacted sales by approximately 7.2 percent. Excluding the impact of foreign currency translation, sales increased 5.0 percent primarily due to an increase in volumes across all business units and the combined positive impact of pricing and changes in sales mix. The increase in volumes was positively impacted by the timing of Easter.

Ebitda: Weston Foods Ebitda in the first quarter of 2015 was 59 million CAD, a decrease of 18 million CAD compared to the same period in 2014, primarily due to the year-over-year unfavourable impact of the fair value adjustment of commodity derivatives.

Adjusted Ebitda in the first quarter of 2015 was 63 million CAD, a decrease of 5 million CAD compared to the same period in 2014. Despite an increase in volumes, adjusted Ebitda declined primarily due to higher input costs, new plant costs, and investments in capabilities and innovation.

Operating Income: Weston Foods operating income in the first quarter of 2015 was 41 million CAD, a decrease of 20 million CAD compared to the same period in 2014 and was negatively impacted by a number of items as described above in Ebitda. For a complete list of items that impacted operating income but that are excluded from adjusted operating income.

Adjusted operating income in the first quarter of 2015 was 45 million CAD, a decrease of 7 million CAD compared to the same period in 2014. The decrease was driven by the decline in adjusted Ebitda as described above and an increase in depreciation and amortization of 2 million CAD in the first quarter of 2015 due to investments in capital.

Loblaw

Sales: Loblaw sales in the first quarter of 2015 were 10’048 million CAD, an increase of 2’756 million CAD compared to the same period in 2014, primarily driven by the Retail segment. Retail sales increased by 2’735 million CAD, including 2’596 million CAD in sales contributed by Shoppers Drug Mart. Food retail same-store sales growth was 2.0 percent and the food retail average quarterly internal food price index was higher than the average quarterly national food price inflation of 4.6 percent as measured by the Consumer Price Index for Food Purchased from Stores. Shoppers Drug Mart same-store sales growth was 3.1 percent, including same-store pharmacy sales growth of 3.5 percent and same-store front store sales growth of 2.7 percent. Total Retail same-store sales growth was 2.3 percent for the first quarter of 2015.

In the last twelve months, grocery and drug store net square footage increased by 0.1 million square feet, or 0.1 percent. Excluding the divestitures required pursuant to a Consent Agreement with the Competition Bureau, net square footage increased by 0.3 million square feet, or 0.5 percent.

Gross Profit: Loblaw Retail gross profit in the first quarter of 2015 was 2’624 CAD, an increase of 1’021 million CAD compared to the same period in 2014. The increase included 1’024 million CAD of gross profit contributed by Shoppers Drug Mart. Excluding Shoppers Drug Mart, food retail gross profit percentage was 22.1 percent compared to 22.6 percent in the same period in 2014. Retail gross profit percentage was negatively impacted by the restructuring of certain franchise fee arrangements as described below. Excluding this impact, gross profit percentage was flat, as reductions in transportation costs and synergies related to the acquisition of Shoppers Drug Mart were offset by higher shrink.

In 2014, Loblaw restructured its fee arrangements with the franchisees of certain franchise banners. These revised arrangements are expected to result in an annual reduction of Retail sales and gross profit of approximately 150 million CAD with a corresponding decrease in selling, general and administrative expenses (SG+A). In the first quarter of 2015, this restructuring had a negative impact of 33 million CAD to gross profit with an offsetting positive impact to SG+A.

Ebitda: Loblaw Ebitda in the first quarter of 2015 was 782 million CAD, an increase of 313 million CAD compared to the same period in 2014, primarily driven by the contribution from Shoppers Drug Mart and included the impact of a number of items that are excluded from adjusted Ebitda.

Loblaw adjusted Ebitda in the first quarter of 2015 was 787 million CAD, an increase of 307 million CAD compared to the same period in 2014, driven by the increase in Retail gross profit of 1’021 million CAD described above, partially offset by an increase in SG+A of 722 million CAD. The increase in SG+A was primarily driven by the acquisition of Shoppers Drug Mart. Food retail SG+A was positively impacted by the restructuring of certain franchise fee arrangements. Excluding this positive impact, food retail expenses were relatively flat, as lower charges related to the transition of certain grocery stores to more cost effective and efficient operating terms under collective agreements and efficiencies achieved in supply chain and administration were offset by higher foreign exchange losses and higher investments in Loblaw´s franchise business. Adjusted Ebitda was positively impacted by net synergies of 44 million CAD.

Operating Income: Loblaw operating income in the first quarter of 2015 was 412 million CAD, an increase of 138 million CAD compared to the same period in 2014, and included the negative impact of the amortization of intangible assets acquired with Shoppers Drug Mart as well as a number of other items that are excluded from adjusted operating income.

Loblaw adjusted operating income in the first quarter of 2015 was 541 million CAD, an increase of 256 million CAD compared to the same period in 2014, and was positively impacted by the increase in adjusted Ebitda as described above, partially offset by an increase in depreciation and amortization of 51 million CAD.

Net interest expense and other financing charges

In the first quarter of 2015, net interest expense and other financing charges increased by 9 million CAD to 177 million CAD compared to the same period in 2014 and included the favourable year-over-year impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares, as well as a number of other items.

Adjusted net interest expense and other financing charges were 138 million CAD, an increase of 42 million CAD compared to the same period in 2014, driven by higher interest on long term debt, primarily as a result of debt incurred by Loblaw to finance the acquisition of Shoppers Drug Mart and debt issuances by Choice Properties Real Estate Investment Trust to third parties.

Income taxes

Income tax expense for the first quarter of 2015 was 96 million CAD and the effective tax rate was 28.1 percent. Income tax expense for the first quarter of 2014 was 46 million CAD and the effective tax rate was 21.9 percent. The increase in the effective tax rate was primarily attributable to income tax expense of 9 million CAD recorded in the first quarter of 2015 related to unrealized foreign currency translation gains and a decrease in certain non-taxable amounts. Adjusted income tax expense for the first quarter of 2015 was 122 million CAD and the adjusted income tax rate was 27.2 percent. Adjusted income tax expense for the first quarter of 2014 was 61 million CAD and the adjusted income tax rate was 25.3 percent. The increase in the adjusted income tax rate was primarily attributable to a decrease in certain non-taxable amounts.

Adjusted debt

During the first quarter of 2015, adjusted debt increased by 42 million CAD, primarily driven by normal seasonal working capital requirements.

On closing of the acquisition of Shoppers Drug Mart, adjusted debt was 12.1 billion CAD. Loblaw has made progress and remains on track to meeting its debt reduction target. The Company has decreased adjusted debt by approximately 676 million CAD since the closing of the acquisition, resulting in an adjusted debt balance of 11.4 billion CAD as at the end of the first quarter of 2015.

Free cash flow

The Company´s year-over-year free cash flow increased by 357 million CAD to 81 million CAD in the first quarter of 2015. The increase was primarily due to higher cash flows from operating activities, including the contribution from Shoppers Drug Mart, partially offset by higher investments in capital.

Acquisition of Shoppers Drug Mart Corporation

In the first quarter of 2015, Loblaw realized net synergies of approximately 44 million CAD generated primarily from improved cost of inventories sold and from purchasing efficiencies in goods not for resale. Since the closing of the acquisition, total net synergies achieved as at the end of the first quarter of 2015 were 145 million CAD. Loblaw continues to expect to achieve annualized synergies of 300 million CAD in the third full year following the close of the acquisition of Shoppers Drug Mart (net of related costs).

Pursuant to the Consent Agreement, the final three Shoppers Drug Mart stores were sold, resulting in a divestitures loss of 2 million CAD in the first quarter of 2015. Loblaw has recorded a net cumulative loss of 14 million CAD from the required store divestitures.

As a result of the acquisition of Shoppers Drug Mart, GWL´s ownership interest in Loblaw decreased from approximately 63 percent to approximately 46 percent. The Company remains the controlling shareholder of and continues to consolidate Loblaw.

Outlook

The outlook reflects the underlying operating performance of the Company´s operating segments as discussed below.

For full year 2015, Weston Foods expects a decline in adjusted operating income due to the costs associated with capital investments, incremental investments in innovation and capabilities and higher input costs. This decline will be partially offset by the positive impact of pricing, volume growth and productivity improvements. On an equivalent 52-week basis, management continues to expect the decline in adjusted operating income to be greater in the first half of the year than in the second half.

Loblaw´s strategic framework is focused on 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 deleveraging the balance sheet.

Consistent with Loblaw´s previous outlook, on a full year comparative basis, reflecting 2014 financial results for Loblaw and Shoppers Drug Mart, in 2015 Loblaw expects to:

  • maintain positive same-store sales and stable gross margin (excluding synergies) in its Retail segment;
  • achieve net synergies as a result of the acquisition of Shoppers Drug Mart approaching 200 million CAD;
  • continue to drive net efficiencies across the food retail business by achieving reductions in supply chain, administrative functions and information technology (IT), while still investing in key areas, like eCommerce;
  • grow adjusted operating income in its food retail business, excluding synergies;
  • experience a decline in adjusted operating income in its retail pharmacy business, excluding synergies, as a result of investments in key projects and other factors;
  • grow consolidated adjusted net earnings (including synergies) relative to 2014, however not at the same level achieved in the first quarter of 2015;
  • invest approximately 1.2 billion CAD in capital expenditure programs; and
  • remain on track with its deleveraging target, expecting to meet its target in the first quarter of 2016.

Loblaw´s expectations for 2015 also include the following:

  • competitive intensity expected to remain high, but relatively stable as industry square footage growth in supermarket-type merchandise moderates; and
  • continued pressure in its retail pharmacy business from the ongoing impact of healthcare reform.

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