George Weston Limited Reports 2016 Fourth Quarter and Fiscal Year Ended December 31, 2016 Results(2)

TORONTO, March 2, 2017 /CNW/ - George Weston Limited (TSX: WN) ("GWL" or the "Company") today announced its consolidated unaudited results for the 12 weeks ended December 31, 2016.

GWL's 2016 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, 2016. The 2016 Annual Report has been filed with SEDAR and is available at sedar.com and in the Investor Centre section of the Company's website at weston.ca.

Galen Weston, Chairman and Chief Executive Officer, George Weston Limited, commented that "George Weston Limited's fourth quarter results reflect the successful execution of the strategic priorities by both of the Company's operating segments. Loblaw delivered strong results as it remained focused on its financial plan in a highly competitive environment with continued pressures of healthcare reform. Weston Foods delivered results in line with expectations driven by volume growth and productivity improvements as it continued to invest in the business."

 

CONSOLIDATED RESULTS OF OPERATIONS
Net earnings available to common shareholders of the Company decreased by $56 million ($0.44 per common share) to $82 million ($0.64 per common share) in the fourth quarter of 2016 compared to the same period in 2015. The decrease was primarily due to the unfavourable year-over-year net impact of certain adjusting items, as described below, partially offset by the increase in Loblaw Companies Limited ("Loblaw") earnings and the positive contribution from the increase in the Company's ownership interest in Loblaw, as a result of Loblaw's share repurchases. The increase in Loblaw earnings was primarily due to improvements in the underlying operating performance of its Retail segment, including the favourable impact of a decrease in depreciation and amortization.

The unfavourable year-over-year net impact of certain adjusting items totaling $77 million ($0.60 per common share) was primarily due to:

• foreign currency translation of $52 million ($0.40 per common share);
• asset impairments, net of recoveries, of $42 million ($0.32 per common share); and
• a fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of $39 million ($0.29 per common share);

partially offset by,

• the favourable impact of the impairment of Loblaw's drug retail ancillary assets held for sale in the fourth quarter of 2015 of $37 million ($0.28 per common share); and
• the favourable impact of Loblaw's accelerated transition of certain grocery stores to more cost effective and efficient Labour Agreements in the fourth quarter of 2015 of $18 million ($0.14 per common share).

Adjusted net earnings available to common shareholders of the Company⁽¹⁾ increased by $21 million ($0.16 per common share) to $204 million ($1.59 per common share) in the fourth quarter of 2016 compared to the same period in 2015, primarily due to the increase in Loblaw earnings and the positive contribution from the increase in the Company's ownership interest in Loblaw, as described above.

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%. Loblaw has three reportable operating segments including retail businesses, a bank and Choice Properties. Loblaw provides Canadians with grocery, pharmacy, health and beauty, apparel, general merchandise, retail banking, credit card services, insurance and wireless mobile products and services. Loblaw also holds an 83% effective interest in Choice Properties, which owns, manages and develops retail and commercial properties 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

 

Sales  Weston Foods sales in the fourth quarter of 2016 were $537 million, an increase of $10 million, or 1.9%, compared to the same period in 2015, primarily due to an increase in volumes. Foreign currency translation had a nominal negative impact on sales compared to the same period in 2015.

Operating income  Weston Foods operating income in the fourth quarter of 2016 was $38 million, a decrease of $4 million, or 9.5%, compared to the same period in 2015. The decrease was due to the unfavourable year-over-year net impact of certain adjusting items and an increase in depreciation and amortization, partially offset by an improvement in underlying operating performance, as described below. The unfavourable year-over-year net impact of certain adjusting items was primarily due to:

• charges associated with damaged inventory in the fourth quarter of 2016 of $5 million; and
• the fair value adjustment of derivatives of $4 million;

partially offset by,

• the favourable impact of settlement charges related to pension annuities and buy-outs in the fourth quarter of 2015 of $3 million.

Adjusted EBITDA ⁽¹⁾  Weston Foods adjusted EBITDA⁽¹⁾ in the fourth quarter of 2016 was $73 million, an increase of $6 million, or 9.0%, compared to the same period in 2015. The increase was driven by the positive impact of the increase in sales and productivity improvements, partially offset by continued investments in the business and higher input costs.

Adjusted EBITDA margin⁽¹⁾ in the fourth quarter of 2016 was 13.6% compared to 12.7% in the same period in 2015. The improvement in adjusted EBITDA margin⁽¹⁾ in the fourth quarter of 2016 was mainly due to the factors impacting adjusted EBITDA⁽¹⁾, as described above.

Depreciation and Amortization  Weston Foods depreciation and amortization was $27 million in the fourth quarter of 2016, an increase of $2 million compared to the same period in 2015. Depreciation and amortization in the fourth quarter of 2016 included $3 million (2015 – $6 million) of accelerated depreciation related to the planned closures of bread, pie and cake manufacturing facilities. Excluding these amounts, depreciation and amortization increased by $5 million due to investments in capital.

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. Weston Foods recorded restructuring and other charges in the fourth quarter of 2016 of $7 million (2015 – $8 million) and year-to-date of $17 million (2015 – $26 million), including $3 million (2015 – $6 million) and $14 million (2015 – $11 million) of accelerated depreciation. These charges primarily relate to restructuring plans to close manufacturing facilities in Canada and the U.S. with production transferring to other facilities.

Inventory loss  In the fourth quarter of 2016 and year-to-date, Weston Foods recorded $5 million (U.S. $4 million) and $11 million (U.S. $9 million), respectively, related to the write-off of damaged inventory and other associated costs in selling, general and administrative expenses ("SG&A") in the Company's consolidated statement of earnings. An insurance claim is in progress and proceeds are expected to be recorded as the claim progresses.

Loblaw Segment Results

 

Sales, operating income and adjusted EBITDA⁽¹⁾ in the fourth quarter of 2016 included the impacts related to the franchises consolidated in the quarter, as set out in "Loblaw Other Business Matters".

Sales  Loblaw sales in the fourth quarter of 2016 were $11,130 million, an increase of $265 million compared to the same period in 2015, primarily driven by Retail. Retail sales increased by $239 million, or 2.3%, compared to the same period in 2015 and included food retail sales of $7,789 million (2015 – $7,631 million) and drug retail sales of $3,056 million (2015 – $2,975 million).

Excluding the consolidation of franchises, Retail sales increased by $168 million primarily driven by the following factors:

• food retail same-store sales growth was 1.1%. The same-store sales growth includes the impact of retail promotional investments. Food retail same-store sales included the favourable impact of an extra selling day in the fourth quarter of 2016, due to the timing of New Year's Day, of approximately 1.0%. Loblaw's food retail average quarterly internal food price index declined and was slightly lower than the average quarterly national food price deflation of 2.3% 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;
• drug retail same-store sales growth was 3.4%, including same-store pharmacy sales growth of 2.5% and same-store front store sales growth of 4.1%. Drug retail same-store sales included the favourable impact of an extra selling day in the fourth quarter of 2016, due to the timing of New Year's Day, of approximately 0.6%; and
• in the last 12 months, Retail net square footage increased 0.3 million square feet, or 0.4%, primarily driven by new store openings, partially offset by Loblaw's store closure plan announced in 2015 and completed in 2016.

Operating income  Loblaw operating income in the fourth quarter of 2016 was $447 million, an increase of $133 million compared to the same period in 2015, primarily driven by the improvements in underlying operating performance of $86 million and the favourable year-over-year net impact of certain adjusting items totaling $47 million, as described below:

• the improvements in underlying operating performance were primarily driven by Retail including higher sales with stable gross margins, lower SG&A, lower depreciation and amortization and the favourable impact of the consolidation of franchises; and
• the favourable year-over-year net impact of certain Retail adjusting items totaling $47 million was primarily due to:
  • the impairment of drug retail ancillary assets held for sale in the fourth quarter of 2015 of $112 million;
  • the accelerated transition of certain Loblaw's grocery stores to more cost effective and efficient Labour Agreements of $55 million in the fourth quarter of 2015; and
  • a charge related to inventory measurement of $33 million associated with the conversion of Loblaw's franchised grocery stores to the new information technology ("IT") systems in the fourth quarter of 2015;

partially offset by,

Adjusted EBITDA ⁽¹⁾  Loblaw adjusted EBITDA⁽¹⁾ in the fourth quarter of 2016 was $954 million, an increase of $75 million compared to the same period in 2015, primarily driven by Retail. Retail adjusted EBITDA⁽¹⁾ was $889 million, an increase of $66 million driven by an increase in gross profit, partially offset by an increase in SG&A.

• Retail gross profit percentage of 27.2% increased by 40 basis points compared to the fourth quarter of 2015. Excluding the consolidation of franchises, Retail gross profit percentage was 26.4%, a decrease of 20 basis points compared to the fourth quarter of 2015. The decrease in gross profit was driven by food retail promotional investments, partially offset by improvements in drug retail margins, due to strong front store performance, and improvements in shrink, driven by improved inventory management.
• Retail SG&A as a percentage of sales was 19.0%, a decrease of 10 basis points compared to the fourth quarter of 2015. Excluding the consolidation of franchises, SG&A decreased $9 million and as a percentage of sales was 18.4%, an improvement of 40 basis points compared to the fourth quarter of 2015, driven by the following factors:
  • lower store support costs;
  • the positive impact of Loblaw's store closure plan announced in 2015 and completed in 2016; and
  • favourable year-over-year foreign exchange impacts;

partially offset by,

Loblaw adjusted EBITDA⁽¹⁾ in the fourth quarter of 2016 also included an increase in Financial Services adjusted EBITDA⁽¹⁾ of $5 million, primarily driven by growth in credit card receivables and higher Mobile Shop sales, and an increase in Choice Properties adjusted EBITDA⁽¹⁾ of $4 million, primarily due to the expansion of the portfolio through development of properties and an increase in base rent from existing properties.

Depreciation and Amortization  Loblaw's depreciation and amortization was $365 million in the fourth quarter of 2016, a decrease of $11 million compared to the same period in 2015. The decline in depreciation and amortization was primarily attributable to a change in the estimated useful life of certain equipment and fixtures in the second quarter of 2016.

Depreciation and amortization in the fourth quarter of 2016 included $124 million (2015 – $124 million) of amortization of intangible assets acquired with Shoppers Drug Mart.

Loblaw Other Business Matters

Impairment of Ancillary Healthcare Business   In the fourth quarter of 2016, a Shoppers Drug Mart ancillary healthcare business was triggered for impairment testing due to impacts of Ontario healthcare reform implemented in the long term care industry. Loblaw recorded a charge of $88 million related to the impairment of fixed assets of $15 million and a customer relationship intangible asset of $73 million.

Consolidation of Franchises  Loblaw has more than 500 franchise food retail stores in its network. As at year end 2016, 200 of these stores were consolidated for accounting purposes under a new, simplified franchise agreement ("Franchise Agreement") implemented in 2015.

Loblaw will convert franchises to the Franchise Agreement as existing agreements expire, at the end of which all franchises will be consolidated. The following table presents the number of franchises consolidated in the fourth quarter of 2016 and year-to-date, and the total impact of the consolidation of franchises included in the consolidated results of the Company:

 

Operating income included in the table above does not significantly impact net earnings available to common shareholders of the Company as this amount is largely attributable to Non-Controlling Interests.

Loblaw expects that the estimated impact in 2017 of new and current consolidated franchises will be revenue of approximately $680 million, adjusted EBITDA⁽¹⁾ of approximately $55 million, depreciation and amortization of approximately $45 million and net earnings attributable to Non-Controlling Interests of approximately $10 million.

OUTLOOK ⁽²⁾
Weston Foods expects sales growth generated by incremental capacity and productivity improvements to drive an increase in adjusted EBITDA⁽¹⁾ in 2017 when compared to 2016. However, this improvement will be partially offset by a challenging environment in our Canadian fresh bakery business and incremental investments required to meet new more stringent regulatory requirements in food safety and labelling. The increase in adjusted EBITDA⁽¹⁾ is expected to be greater in the second half of the year. Management expects to make capital investments of approximately $250 million in 2017 related to growth, regulatory and maintenance. Depreciation is projected to increase in 2017 when compared to 2016, and more than offset the improvement in adjusted EBITDA⁽¹⁾.

Loblaw remains focused on its strategic framework, delivering the best in food, best in health and beauty, operational excellence and growth. This framework is supported by a financial plan of maintaining a stable trading environment that targets positive same-store sales and stable gross margin, surfacing efficiencies to deliver operating leverage, and returning capital to shareholders. In 2017, on a full year comparative basis, despite the current deflationary environment, Loblaw expects to:

• deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive grocery market with continued negative pressure from healthcare reform;
• grow adjusted net earnings⁽¹⁾;
• invest approximately $1.3 billion in capital expenditures, including $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 2017, the Company expects growth in net earnings to be driven by an increase in net earnings at Loblaw, and the positive impact of the Company's increased ownership in Loblaw as a result of Loblaw's share repurchases.

DECLARATION OF QUARTERLY DIVIDENDS
Subsequent to the end of the fourth quarter of 2016, 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:

 

NON-GAAP FINANCIAL MEASURES
The Company uses the following non-GAAP financial measures: adjusted EBITDA and adjusted EBITDA margin, adjusted net earnings attributable to shareholders of the Company, adjusted net earnings available to common shareholders of the Company and adjusted diluted net earnings per common share. In addition to these items, the following measures are used by management in calculating adjusted diluted net earnings per common share: adjusted operating income, adjusted net interest expense and other financing charges, adjusted income taxes and adjusted income tax rate. The Company believes these non-GAAP financial measures provide useful information to both management and investors in measuring the financial performance of the Company for the reasons outlined below.

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 consolidated and segment underlying operating performance. The excluded items are not necessarily reflective of the Company's underlying operating performance and make comparisons of underlying financial performance between periods difficult. From time to time, the Company may exclude 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 they should not be construed as an alternative to other financial measures determined in accordance with GAAP.

For details on the nature of items excluded in the calculation of any of the non-GAAP financial measures detailed below, see Section 18, "Non-GAAP Financial Measures", of the Company's 2016 Annual Report.

Adjusted EBITDA  The Company believes adjusted EBITDA is useful in assessing and making decisions regarding the underlying operating performance of the Company's ongoing operations and in assessing the Company's ability to generate cash flows to fund its cash requirements, including its capital investment program.

The following table reconciles adjusted EBITDA to operating income, which is reconciled to GAAP net earnings attributable to shareholders of the Company reported for the periods ended as indicated.

 

 

Adjusted Net Interest Expense and Other Financing Charges  The Company believes adjusted net interest expense and other financing charges is useful in assessing the ongoing net financing costs of the Company.

The following table reconciles adjusted net interest expense and other financing charges to GAAP net interest expense and other financing charges reported for the periods ended as indicated.

 

Adjusted Income Taxes and Adjusted Income Tax Rate  The Company believes the adjusted income tax rate applicable to adjusted earnings before taxes is useful in assessing the underlying operating performance of its business.

The following table reconciles the effective income tax rate applicable to adjusted earnings before taxes to the GAAP effective income tax rate applicable to earnings before taxes as reported for the periods ended as indicated.

 

Adjusted Net Earnings Available to Common Shareholders and Adjusted Diluted Net Earnings per Common Share  The Company believes adjusted net earnings available to common shareholders and adjusted diluted net earnings per common share are useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business.

The following table reconciles net earnings attributable to shareholders of the Company to net earnings available to common shareholders of the Company and then to adjusted net earnings available to common shareholders of the Company reported for the periods ended as indicated.

 

The following table reconciles adjusted net earnings available to common shareholders of the Company and adjusted diluted net earnings per common share to GAAP net earnings available to common shareholders of the Company and diluted net earnings per common share as reported for the periods ended as indicated.

 

 

FORWARD-LOOKING STATEMENTS
This News Release contains forward-looking statements about the Company's objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows, performance, prospects and opportunities. Specific forward-looking statements in this News Release include, but are not limited to, statements with respect to the Company's anticipated future results, events and plans, synergies and other benefits associated with the acquisition of Shoppers Drug Mart and other strategic initiatives, anticipated insurance recoveries and planned capital investments. These specific forward-looking statements are contained throughout this News Release including, without limitation, in the "Outlook" section of this News Release. Forward-looking statements are typically identified by words such as "expect", "anticipate", "believe", "foresee", "could", "estimate", "goal", "intend", "plan", "seek", "strive", "will", "may", "maintain", "achieve", "grow", and "should" and similar expressions, as they relate to the Company and its management.

Forward-looking statements reflect the Company's current estimates, beliefs and assumptions, which are based on management's perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The Company's expectation of operating and financial performance in 2017 is based on certain assumptions including assumptions about sales and volume growth, anticipated cost savings, operating efficiencies, and continued growth from current initiatives. The Company's estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and as such, are subject to change. The Company can give no assurance that such estimates, beliefs and assumptions will prove to be correct.

Numerous risks and uncertainties could cause the Company's actual results to differ materially from those expressed, implied or projected in the forward-looking statements, including those described in Section 12, "Enterprise Risks and Risk Management", of the MD&A of the Company's 2016 Annual Report and the Company's Annual Information Form ("AIF") for the year ended December 31, 2016. Such risks and uncertainties include:

• changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
• failure to effectively manage Loblaw's loyalty programs;
• the inability of the Company's IT infrastructure to support the requirements of the Company's business, or the occurrence of any internal or external security breaches, denial of service attacks, viruses, worms and other known or unknown cybersecurity or data breaches;
• failure to realize benefits from investments in the Company's new IT systems;
• failure to effectively respond to consumer trends or heightened competition, whether from current competitors or new entrants to the marketplace;
• public health events including those related to food and drug safety;
• changes to any of the laws, rules, regulations or policies applicable to the Company's business;
• failure to merchandise effectively, to execute Loblaw's e-commerce initiative or to adapt its business model to the shifts in the retail landscape caused by digital advances;
• failure to realize the anticipated benefits, including revenue growth, anticipated cost savings or operating efficiencies, associated with the Company's investment in major initiatives that support its strategic priorities;
• changes in economic conditions, including economic recession or changes in the rate of inflation or deflation, employment rates and household debt, interest rates, currency exchange rates and derivative or commodity prices;
• failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements;
• adverse outcomes of legal and regulatory proceedings and related matters;
• reliance on the performance and retention of third party service providers, including those associated with the Company's supply chain and Loblaw's apparel business, including issues with vendors in both advanced and developing markets;
• the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
• the inability of the Company to effectively develop and execute its strategy; and
• the inability of the Company to anticipate, identify and react to consumer and retail trends.

This is not an exhaustive list of the factors that may affect the Company's forward-looking statements. Other risks and uncertainties not presently known to the Company or that the Company presently believes are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including without limitation, the section entitled "Operating and Financial Risks and Risk Management" in the Company's AIF for the year ended December 31, 2016. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company's expectations only as of the date of this News Release. Except as required by law, the Company does not undertake to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SELECTED FINANCIAL INFORMATION
The following includes selected quarterly financial information which is prepared by management in accordance with International Financial Reporting Standards ("IFRS") and is based on the Company's audited annual consolidated financial statements for the year ended December 31, 2016. This financial information does not contain all disclosures required by IFRS, and accordingly, this financial information should be read in conjunction with the Company's 2016 Annual Report available in the Investor Centre section of the Company's website at www.weston.ca.

Condensed Consolidated Statements of Earnings

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Cash Flows

 

Basic and Diluted Net Earnings per Common Share

 

Segment Information

The Company has two reportable operating segments: Weston Foods and Loblaw. The accounting policies of the reportable operating segments are the same as those described in the Company's 2016 audited annual consolidated financial statements. The Company measures each reportable operating segment's performance based on adjusted EBITDA⁽ⁱ⁾ and adjusted operating income⁽ⁱ⁾. Neither reportable operating segment is reliant on any single external customer.

 

 

2016 ANNUAL AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's annual audited consolidated financial statements and MD&A for the year ended December 31, 2016 are available in the Investor Centre section of the Company's website at www.weston.ca and have been filed with SEDAR and are available online at www.sedar.com.

INVESTOR RELATIONS
Shareholders, security analysts and investment professionals should direct their requests to Mr. Geoffrey H. Wilson, Senior Vice President, Investor Relations, Business Intelligence and Communications, at the Company's Executive Office or by e-mail at investor@weston.ca.

Additional financial information has been filed electronically with various securities regulators in Canada through SEDAR. This News Release includes selected information on Loblaw Companies Limited, a public company with shares trading on the Toronto Stock Exchange. For information regarding Loblaw, readers should also refer to the materials filed by Loblaw with SEDAR from time to time. These filings are also maintained at Loblaw's corporate website at www.loblaw.ca.

FOURTH QUARTER CONFERENCE CALL AND WEBCAST PRESENTATION
George Weston Limited will host a conference call as well as an audio webcast on Thursday, March 2, 2017 at 9:00 a.m. (EST). To access via tele-conference, please dial (647) 427-7450 or 1-888-231-8191. The playback will be available two hours after the event at (416) 849-0833 or 1-855-859-2056 passcode:  77505016#. To access via audio webcast, please visit the Investor Centre section of www.weston.ca. Pre-registration will be available.

ANNUAL MEETING
The George Weston Limited Annual Meeting of Shareholders will be held on Tuesday, May 9, 2017, at 11:00 a.m. (EST) at The Royal Conservatory, TELUS Centre for Performance and Learning, Koerner Hall, 273 Bloor Street West, Toronto, Ontario, Canada.

 

SOURCE George Weston Limited

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