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Press release from CNW Group

George Weston Limited Reports 2013 Fourth Quarter Results(2)

Thursday, February 27, 2014

George Weston Limited Reports 2013 Fourth Quarter Results(2)

07:45 EST Thursday, February 27, 2014

TORONTO, Feb. 27, 2014 /CNW/ - George Weston Limited (TSX: WN) ("GWL") today announced its consolidated unaudited results for the 12 weeks ended December 31, 2013 and the release of its 2013 Annual Report.

The 2013 Annual Report to Shareholders of George Weston Limited and its subsidiaries (together referred to as the "Company"), including the Company's audited annual consolidated financial statements and Management's Discussion and Analysis ("MD&A") for the fiscal year ended December 31, 2013, is available in the Investor Centre section of the Company's website at www.weston.ca and has been filed with the System for Electronic Document Analysis and Retrieval ("SEDAR") and will be available at www.sedar.com.

2013 Fourth Quarter Summary

  • Sales growth of 2.5% to $7,919 million.
  • Adjusted operating income(1) declined to $374 million from $382 million.
  • Adjusted basic net earnings per common share(1) increased to $1.11 from $1.00 in the fourth quarter of 2012.

"2013 was a transformational year for George Weston Limited. We made significant progress on our strategic initiatives and are well-positioned for the future. We continued to focus on long term value creation for shareholders through our support of the Shoppers Drug Mart acquisition, the launch of Choice Properties REIT and by raising our common share dividend in the second quarter", said W. Galen Weston, Executive Chairman, George Weston Limited.

CONSOLIDATED RESULTS OF OPERATIONS                                                    
(unaudited)                                                  
($ millions except where otherwise indicated)   12 Weeks Ended                   52 Weeks Ended        
                                                     
For the periods ended as indicated   Dec. 31, 2013       Dec. 31, 2012(3)       Change         Dec. 31, 2013       Dec. 31, 2012(3)     Change  
Sales   $ 7,919       $ 7,727       2.5%       $ 33,582       $ 32,742     2.6%  
Operating income   $ 394       $ 321       22.7%       $ 1,621       $ 1,393     16.4%  
Adjusted operating income(1)   $ 374       $ 382       (2.1)%       $ 1,584       $ 1,570     0.9%  
Adjusted operating margin(1)     4.7%         4.9%                   4.7%         4.8%        
Adjusted EBITDA(1)   $ 585       $ 583       0.3%       $ 2,471       $ 2,406     2.7%  
Adjusted EBITDA margin(1)     7.4%         7.5%                   7.4%         7.3%        
Net earnings from continuing
  operations attributable to
  shareholders of the Company
  $ 185       $ 63       193.7%       $ 616       $ 475     29.7%  
Net earnings from continuing
  operations
  $ 232       $ 112       107.1%       $ 849       $ 708     19.9%  
Discontinued operations                               $ 58                  
Basic net earnings per common
  share from continuing
  operations ($)
  $ 1.37       $ 0.41       234.1%       $ 4.48       $ 3.36     33.3%  
Adjusted basic net earnings per
  common share from continuing
  operations(1) ($)
  $ 1.11       $ 1.00       11.0%       $ 4.49       $ 4.39     2.3%  
                                                     

Pavi Binning, President, George Weston Limited, commented that "George Weston Limited's fourth quarter results continue to reflect the challenging environments in which both of its operating segments participate. In 2014, Loblaw and Weston Foods will continue to execute their respective strategies with a view to driving sales growth while focusing on cost and efficiencies".

George Weston Limited's fourth quarter 2013 adjusted basic net earnings per common share(1) were $1.11 compared to $1.00 in the same period in 2012, an increase of $0.11. The increase was due to a lower effective income tax rate(4) partially offset by declines in the operating performance of the Company's two operating segments, Weston Foods and Loblaw Companies Limited ("Loblaw"), compared to the same period in 2012. The lower effective income taxrate(4) was primarily due to an increase in income tax recoveries related to prior year income tax matters and the reversal of previously recognized current tax assets in the fourth quarter of 2012.

Basic net earnings per common share increased to $1.37 compared to $0.41, an increase of $0.96, and was positively impacted by the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares and a number of other items. For a complete list of items which impacted basic net earnings per common share but that are excluded from adjusted basic net earnings per common share(1), see the "Non-GAAP Financial Measures" section of this News Release.

In the fourth quarter of 2013, Loblaw announced the reduction of approximately 275 store-support positions and incurred a charge of $32 million associated with this restructuring.

OPERATING SEGMENTS

Weston Foods                                  
(unaudited)   12 Weeks Ended       52 Weeks Ended  
                                       
($ millions except where otherwise indicated)   Dec. 31, 2013       Dec. 31, 2012(3)       Dec. 31, 2013       Dec. 31, 2012(3)  
Sales   $ 413       $ 399       $ 1,812       $ 1,765  
Operating income   $ 40       $ 44       $ 238       $ 230  
Adjusted operating income(1)   $ 54       $ 57       $ 267       $ 275  
Adjusted operating margin(1)     13.1%         14.3%         14.7%         15.6%  
Adjusted EBITDA(1)   $ 69       $ 71       $ 330       $ 334  
Adjusted EBITDA margin(1)     16.7%         17.8%         18.2%         18.9%  
                                     
                                     

For the fourth quarter of 2013, Weston Foods sales increased by 3.5% to $413 million from $399 million and volumes increased by 0.1% 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 by 1.6% due to the combined positive impact of pricing and changes in sales mix of 1.4% and an increase in volume of 0.2%.

Weston Foods operating income was $40 million in the fourth quarter of 2013 compared to $44 million in the same period in 2012. Operating margin for the fourth quarter of 2013 was 9.7% compared to 11.0% in the same period in 2012.

Adjusted operating income(1) decreased by $3 million, or 5.3%, to $54 million in the fourth quarter of 2013 from $57 million in the same period in 2012. Adjusted operating margin(1) was 13.1% for the fourth quarter of 2013 compared to 14.3% in the same period in 2012.

Adjusted operating income(1) was positively impacted by higher sales volumes driven by investments in growth, marketing and innovation, including new manufacturing capacity and promotional activity, as well as higher pricing and the benefits realized from productivity improvements and other cost reduction initiatives. This improvement was more than offset by a decline in the performance of the frozen dough business, the cost impact of investments, including the impact of changes in sales mix, and higher commodity and other input costs. Excluding the frozen dough business, adjusted operating income(1) was stable during the quarter.

Loblaw                                  
(unaudited)   12 Weeks Ended       52 Weeks Ended  
                                       
($ millions except where otherwise indicated)   Dec. 31, 2013       Dec. 31, 2012(3)       Dec. 31, 2013       Dec. 31, 2012(3)  
Sales   $ 7,640       $ 7,465       $ 32,371       $ 31,604  
Operating income   $ 312       $ 259       $ 1,308       $ 1,187  
Adjusted operating income(1)   $ 320       $ 325       $ 1,317       $ 1,295  
Adjusted operating margin(1)     4.2%         4.4%         4.1%         4.1%  
Adjusted EBITDA(1)   $ 516       $ 512       $ 2,141       $ 2,072  
Adjusted EBITDA margin(1)     6.8%         6.9%         6.6%         6.6%  
                                       

Loblaw sales in the fourth quarter of 2013 increased by 2.3% to $7.6 billion from $7.5 billion in the same period in 2012. Same-store sales growth was 0.6% (2012 - flat), positively impacted by the timing of the Thanksgiving holiday, estimated to be between 0.6% and 0.8%, and negatively impacted by an ice storm in Eastern Canada and a strike in Western Canada which negatively impacted same-store sales growth by approximately 0.2% and 0.1%, respectively. The range of same-store sales growth for the quarter, after the impact of these items, was approximately 0.1% to 0.3%. Loblaw's average quarterly internal food price inflation during the fourth quarter of 2013 was lower than the average quarterly national food price inflation of 0.9% (2012 - 1.5%) as measured by "The Consumer Price Index for Food Purchased from Stores". In the last 12 months, corporate and franchise square footage increased 0.8% (2012 - 0.6%). Loblaw sales in the fourth quarter of 2013 were also positively impacted by an increase in Financial Services segment revenue.

Loblaw operating income increased by $53 million to $312 million in the fourth quarter of 2013 compared to $259 million in the same period in 2012. Loblaw operating income was positively impacted by the favourable year-over-year change in fixed asset and other related (recoveries) impairments and lower restructuring and other charges, partially offset by a number of other items. For a complete list of items which impacted operating income but that are excluded from adjusted operating income(1), see the "Non-GAAP Financial Measures" section of this News Release. In addition, operating income was negatively impacted by a decrease in underlying operating performanceof $5 million, or 1.5%, as described below.

Loblaw adjusted operating income(1) was $320 million in the fourth quarter of 2013 compared to $325 million in the same period in 2012, a decrease of $5 million. Adjusted operating margin(1) was 4.2% compared to 4.4% in the same period in 2012. The decreases in adjusted operating income(1) and adjusted operating margin(1) were primarily driven by a decline in Loblaw's Retail segment, partially offset by an improvement in Loblaw's Financial Services segment. The decrease in Loblaw's Retail segment was primarily driven by investments in, and changes to the value of Loblaw's franchise business, costs related to the growth in certain of Loblaw's emerging businesses and higher other operating costs, including depreciation and amortization, partially offset by higher gross profit and labour efficiencies. The increase in Loblaw's Financial Services segment was mainly attributable to higher revenues, partially offset by higher operating costs and continued investments in marketing and customer acquisitions.

NET INTEREST EXPENSE AND OTHER FINANCING CHARGES
Net interest expense and other financing charges in the fourth quarter of 2013 decreased to $106 million from $175 million in the same period in 2012. The decrease included the favourable year-over-year impact of the fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares of $111 million, partially offset by the unfavourable year-over-year impact of a number of Choice Properties Real Estate Investment Trust ("Choice Properties") and Shoppers Drug Mart Corporation ("Shoppers Drug Mart") related items recorded in the fourth quarter of 2013 as follows:

  • a fair value adjustment related to the Trust Unit liability, reflecting the change in the fair value of Choice Properties' Trust Units ("Units") held by unitholders other than the Company, of $23 million; and
  • net interest expense of $14 million relating to indebtedness incurred to finance the acquisition of Shoppers Drug Mart.

Excluding the above impacts, net interest expense and other financing charges in the fourth quarter of 2013 increased by $5 million, primarily driven by Unit distributions by Choice Properties.

INCOME TAXES
In the fourth quarter of 2013 income taxes increased to $56 million from $34 million, and the effective income tax rate decreased to 19.4% from 23.3% in the same period in 2012.

The decrease in the effective income tax rate when compared to 2012 was primarily due to an increase in income tax recoveries related to prior year matters, reversal of previously recognized current tax assets in the fourth quarter of 2012 and higher non-taxable foreign currency translation gains partially offset by an increase in non-deductible amounts (including fair value adjustments related to the Trust Unit liability). The Company (excluding Loblaw) expensed current tax assets of $8 million in the fourth quarter of 2012 due to amendments to the Income Tax Act relating to the taxation of Canadian corporations with foreign affiliates.

AGREEMENT TO ACQUIRE SHOPPERS DRUG MART CORPORATION
On July 14, 2013, Loblaw entered into an arrangement agreement to acquire all of the outstanding common shares of Shoppers Drug Mart. The transaction is subject to various regulatory approvals under the Competition Act (Canada) and by the Toronto Stock Exchange, and the fulfillment of certain other closing conditions customary in transactions of this nature. The process of review under the Competition Act (Canada) is proceeding as expected and the Company anticipates that the transaction will be completed during the first quarter of 2014. There can be no assurance that all conditions will be met or waived or that Loblaw will be able to successfully consummate the proposed transaction as currently contemplated or at all.

OUTLOOK (2)
This outlook reflects the underlying operating performance of the Company's operating segments as discussed below.

For full year 2014, Weston Foods expects modest sales growth driven primarily by volumes. Despite the anticipated growth in sales, adjusted operating income(1) is expected to decline due to continued investments in growth, including plant start-up costs, capabilities, marketing and innovation. In addition, results will be more challenged in the first half of the year by the performance of the frozen dough business and higher commodity and other input costs.

Loblaw will continue to focus on investing in its customer proposition in 2014 in its retail business - value, assortment and service - while focusing on balancing these investments with incremental efficiencies. In the first half of 2014 the environment is expected to remain extremely competitive driven by continued greater than historical square footage expansion, which is expected to moderate in the second half of the year.

DECLARATION OF QUARTERLY DIVIDENDS
Subsequent to the end of the fourth quarter of 2013, the Company's Board of Directors declared a quarterly dividend on George Weston Limited Common Shares, Preferred Shares, Series I, Preferred Shares, Series III, Preferred Shares, Series IV and Preferred Shares, Series V payable as follows:

    Common Shares       $0.415 per share payable April 1, 2014, to shareholders of record March 15, 2014;  
               
    Preferred Shares, Series I       $0.3625 per share payable March 15, 2014, to shareholders of record February 28, 2014;  
               
    Preferred Shares, Series III       $0.3250 per share payable April 1, 2014, to shareholders of record March 15, 2014;  
               
    Preferred Shares, Series IV       $0.3250 per share payable April 1, 2014, to shareholders of record March 15, 2014; and  
               
    Preferred Shares, Series V       $0.296875 per share payable April 1, 2014, to shareholders of record March 15, 2014.  

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 and events and future plans. These specific forward-looking statements are contained throughout this News Release including, without limitation, 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" 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 2014 is based on certain assumptions including assumptions about sales and volume growth, anticipated cost savings and operating efficiencies, and competitive square footage growth. 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 16, "Enterprise Risks and Risk Management" of the MD&A included in the Company's 2013 Annual Report. Such risks and uncertainties include:

  • failure by Loblaw to complete the acquisition of Shoppers Drug Mart or to realize the anticipated strategic benefits or operational, competitive and cost synergies;
  • failure to realize benefits from investments in the Company's information technology ("IT") systems, including the Company's systems implementation, or unanticipated results from these initiatives;
  • failure to realize anticipated results, including revenue growth, anticipated cost savings or operating efficiencies from the Company's major initiatives, including those from restructuring;
  • the inability of the Company's IT infrastructure to support the requirements of the Company's business;
  • public health events;
  • risks associated with product defects, food safety and product handling;
  • failure to achieve desired results in labour negotiations, including the terms of future collective bargaining agreements which could lead to work stoppages;
  • heightened competition, whether from current competitors or new entrants to the marketplace;
  • changes in economic conditions including the rate of inflation or deflation, changes in interest and foreign currency exchange rates and changes in derivative and commodity prices;
  • changes in the Company's income, capital, commodity, property and other tax and regulatory liabilities including changes in tax laws, regulations or future assessments;
  • changes to the regulation of generic prescription drug prices and the reduction of reimbursements under public drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
  • the inability of the Company to manage inventory to minimize the impact of obsolete or excess inventory and to control shrink;
  • changes in the Company's estimate of inventory cost as a result of its IT system upgrade;
  • failure to respond to changes in consumer and retail customer trends;
  • reliance on the performance and retention of third-party service providers including those associated with the Company's supply chain and apparel business;
  • supply and quality control issues with vendors in both advanced and developing markets;
  • the impact of potential environmental liabilities;
  • any requirement of the Company to make contributions to its registered funded defined benefit pension plans or the multi-employer pension plans ("MEPPs") in which it participates in excess of those currently contemplated;
  • the risk that the Company would experience a financial loss if its counterparties fail to meet their obligations in accordance with the terms and conditions of their contracts with the Company;
  • the inability of Loblaw to collect on its credit card receivables; and
  • failure of Choice Properties to execute its plan and realize its forecasted results.

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. 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.

NON-GAAP FINANCIAL MEASURES
The Company uses the following non-GAAP financial measures: adjusted operating income and adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin, and adjusted basic net earnings per common share. 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, as 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. Beginning in the third quarter of 2013, Loblaw began reporting its results of operations on an adjusted basis. The Company excludes the impact of items excluded by Loblaw management when reporting its consolidated and segment results.

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.

Adjusted Operating Income and Adjusted EBITDA
The Company believes adjusted operating income is useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business. The Company believes adjusted EBITDA is also useful in assessing 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 tables reconcile adjusted operating income and adjusted EBITDA to GAAP net earnings attributable to shareholders of the Company reported for the periods ended as indicated.

  12 Weeks Ended  
                                                     
      Dec. 31, 2013           Dec. 31, 2012(i)  
(unaudited)
($ millions)
Weston
Foods
  Loblaw   Other (ii)   Consolidated       Weston
Foods 
  Loblaw   Other(ii)    Consolidated  
Net earnings attributable to shareholders of the
  Company
                  $ 185                         $ 63    
Add impact of the following:                                                    
Non-controlling interests                     47                           49    
Income taxes                     56                           34    
Net interest expense and other financing charges                     106                           175    
Operating income $ 40   $ 312   $ 42   $ 394       $ 44   $ 259   $ 18   $ 321    
Add (deduct) impact of the following:                                                    
Restructuring and other charges(iii)   3     32           35         3     63           66    
Fair value adjustment of commodity  
  derivatives at Weston Foods
  4                 4         10                 10    
Share-based compensation net of
  equity derivatives
  2     8           10         (4)     2           (2)  
Fixed asset and other related (recoveries)
  impairments
        (42)           (42)               12           12    
Shoppers Drug Mart acquisition costs         7           7                              
Choice Properties general and
  administrative costs
        3           3                              
MEPP withdrawal liability incurred
  by Weston Foods
  5                   5           17                 17    
Gain on disposal of assets                                     (11)           (11)  
Defined benefit plan amendments                               (8)                 (8)  
Weston Foods insurance proceeds                               (5)                 (5)  
Foreign currency translation gain               (42)     (42)                     (18)     (18)  
Adjusted operating income $ 54   $ 320   $     $ 374       $ 57   $ 325   $     $ 382    
Depreciation and amortization   15     196           211         14     187           201    
Adjusted EBITDA $ 69   $ 516   $     $ 585       $ 71   $ 512   $     $ 583    
                                                       

(i)      Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's consolidated financial statements included in the 2013 Annual Report.
(ii)      Operating income in the fourth quarter of 2013 included a gain of $42 million (2012 - $18 million) related to the effect of foreign currency translation on a portion of the United States ("U.S.") dollar denominated cash and short term investments held by foreign operations.
(iii)      Restructuring and other charges included $1 million (2012 - $1 million) of accelerated depreciation incurred by Weston Foods.

  52 Weeks Ended  
                                                     
      Dec. 31, 2013         Dec. 31, 2012(i)  
(unaudited)
($ millions)
Weston
Foods
  Loblaw   Other (ii)     Consolidated       Weston
Foods 
  Loblaw   Other(ii)    Consolidated   
Net earnings from continuing operations
  attributable to shareholders of the Company
                  $ 616                         $ 475    
Add impact of the following:                                                    
Non-controlling interests                     233                           233    
Income taxes                     275                           244    
Net interest expense and other financing charges                     497                           441    
Operating income (loss) $ 238   $ 1,308   $ 75   $ 1,621       $ 230   $ 1,187   $ (24)   $ 1,393    
Add (deduct) impact of the following:                                                    
Restructuring and other charges(iii)   6     35           41         12     72           84    
Fair value adjustment of commodity
  derivatives at Weston Foods
  10                   10         (6)                 (6)  
Share-based compensation net
  of equity derivatives
  8     32           40         1     28           29    
Fixed asset and other related (recoveries)
  impairments
        (32)           (32)               19           19  
Shoppers Drug Mart acquisition costs         16           16                              
Choice Properties general and
  administrative costs
        6           6                              
Choice Properties start-up costs         3           3                              
Defined benefit plan amendments         (51)           (51)         (8)                 (8)  
MEPP withdrawal liability incurred by
  Weston Foods
  5                 5         51                 51    
Gain on disposal of assets                                     (11)           (11)  
Weston Foods insurance proceeds                               (5)                 (5)  
Foreign currency translation (gain) loss               (75)     (75)                     24     24    
Adjusted operating income $ 267   $ 1,317   $     $ 1,584       $ 275   $ 1,295   $     $ 1,570    
Depreciation and amortization   63     824           887         59     777           836    
Adjusted EBITDA $ 330   $ 2,141   $     $ 2,471       $ 334   $ 2,072   $     $ 2,406    
                                                     

(i)      Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's consolidated financial statements included in the 2013 Annual Report.
(ii)      Year-to-date operating income included a gain of $75 million (2012 - loss of $24 million) related to the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and short term investments held by foreign operations.
(iii)      Restructuring and other charges included $4 million (2012 - $4 million) of accelerated depreciation incurred by Weston Foods.

The year-over-year change in the following items influenced operating income in the fourth quarter of 2013:

Restructuring and other charges   The Company continuously evaluates strategic and cost reduction initiatives related to its store infrastructure, manufacturing assets, distribution networks and administrative infrastructure with the objective of ensuring a low cost operating structure. Restructuring activities related to these initiatives are ongoing. The details of restructuring and other charges are included in the "Results of Reportable Operating Segments" and "Fourth Quarter Results of Reportable Operating Segments" sections of the MD&A included in the Company's 2013 Annual Report.

Fair value adjustment of commodity derivatives at Weston Foods   Weston Foods is exposed to commodity price fluctuations primarily as a result of purchases of certain raw materials, fuels and utilities. In accordance with the Company's commodity risk management policy, Weston Foods enters into commodity derivatives to reduce the impact of price fluctuations in forecasted raw material purchases over a specified period of time. These commodity derivatives are not acquired for trading or speculative purposes. Pursuant to Weston Foods' derivative instruments accounting policy, certain changes in fair value, which include realized and unrealized gains and losses related to future purchases of raw materials, are recorded in operating income. In the fourth quarter of 2013, Weston Foods recorded a charge of $4 million (2012 - $10 million) related to the fair value adjustment of exchange traded commodity derivatives. Despite the impact of accounting for these commodity derivatives on the Company's reported results, the derivatives have the economic impact of largely mitigating the associated risks arising from price fluctuations in the underlying commodities during the period that the commodity derivatives are held.

Share-based compensation net of equity derivatives Until the first quarter of 2013, GWL and Glenhuron Bank Limited ("Glenhuron") held equity derivatives to partially hedge the impact of increases in the value of GWL and Loblaw common shares on share-based compensation cost. The amount of net share-based compensation cost recorded in operating income has historically been mainly dependent upon changes in the value of GWL and Loblaw common shares and the number and vesting of Restricted Share Units ("RSUs") and Performance Share Units ("PSUs") relative to the number of common shares underlying the equity derivatives. In the first quarter of 2013, GWL and Glenhuron settled their remaining equity derivative contracts and the RSU and PSU plans were amended to require settlement in common shares rather than in cash. As a result of the settlements and plan amendments, the components of share-based compensation and their exposure to changes in the value of GWL and Loblaw common shares have changed. In order to assess consolidated and segment operating performance on a consistent basis, management continues to exclude the impact of share-based compensation from operating income. In the fourth quarter of 2013, a charge of $10 million (2012 - income of $2 million) was recorded related to share-based compensation net of equity derivatives.

Fixed asset and other related (recoveries) impairments  At each balance sheet date, the Company assesses and, when required, records impairments and recoveries of previous impairments related to the carrying value of its fixed assets, investment properties and intangible assets. In the fourth quarter of 2013, Loblaw recorded net recoveries of $42 million (2012 - a charge of $12 million).

Shoppers Drug Mart acquisition costs  In connection with the agreement to acquire all of the outstanding common shares of Shoppers Drug Mart, in the fourth quarter of 2013, Loblaw incurred $7 million of acquisition costs.

Choice Properties general and administrative costs  In the fourth quarter of 2013, Loblaw recorded incremental general and administrative costs relating to Choice Properties of $3 million.

Multi-employer pension plan withdrawal liability incurred by Weston Foods   During 2012, Weston Foods withdrew from one of the U.S. MEPPs in which it participated and as a result, paid a withdrawal liability of $34 million. During the fourth quarter of 2012, another participating employer withdrew from the plan and a mass withdrawal was triggered. As a result of the mass withdrawal, the Company is subject to an incremental withdrawal liability and an additional provision of $5 million was recorded in operating income during the fourth quarter of 2013. The total liability recorded as at year end 2013 relating to the Company's mass withdrawal liability is $22 million, $17 million of which was recorded in the fourth quarter of 2012.

Gain on disposal of assets  In the fourth quarter of 2012, Loblaw recognized a gain of $11 million related to the sale of a property.

Defined benefit plan amendments  During the fourth quarter of 2012, Weston Foods negotiated the elimination of certain post-retirement benefits. As a result, a net gain of $8 million was recorded in operating income.

Weston Foods insurance proceeds   In the fourth quarter of 2012, Weston Foods recorded insurance proceeds of $5 million related to the loss of a Quebec facility in 2010.

Foreign currency translation gains and losses   The Company's consolidated financial statements are expressed in Canadian dollars. A portion of the Company's (excluding Loblaw's) net assets are denominated in U.S. dollars and as a result, the Company is exposed to foreign currency translation gains and losses. The impact of foreign currency translation on a portion of the U.S. dollar denominated net assets, primarily cash and short term investments held by foreign operations, is recorded in operating income. In the fourth quarter of 2013, a foreign currency translation gain of $42 million (2012 - $18 million) was recorded in operating income as a result of the appreciation (2012 - appreciation) of the U.S. dollar relative to the Canadian dollar.

Adjusted Basic Net Earnings per Common Share from Continuing Operations

The Company believes adjusted basic net earnings per common share from continuing operations is useful in assessing the Company's underlying operating performance and in making decisions regarding the ongoing operations of its business.

The following table reconciles adjusted basic net earnings per common share from continuing operations to GAAP basic net earnings per common share from continuing operations reported for the periods ended as indicated.

    12 Weeks Ended     52 Weeks Ended  
(unaudited)                                         
($)   Dec. 31, 2013     Dec. 31, 2012(i)       Dec. 31, 2013   Dec. 31, 2012(i)  
Basic net earnings per common share from continuing operations   $ 1.37       $ 0.41         $ 4.48       $ 3.36    
(Deduct) Add impact of the following(ii):                                        
Fair value adjustment of the forward sale agreement
  for 9.6 million Loblaw common shares
    (0.21)         0.44           (0.01)         0.20    
Restructuring and other charges     0.14         0.24           0.17         0.33    
Fair value adjustment of commodity derivatives at Weston Foods     0.03         0.06           0.06         (0.03)  
Share-based compensation net of equity derivatives     0.05         (0.03)           0.20         0.14    
Fixed asset and other related (recoveries) impairments     (0.14)         0.05           (0.11)         0.07    
Shoppers Drug Mart acquisition costs and net financing charges     0.08                     0.13            
Choice Properties general and administrative costs     0.02                     0.03            
Choice Properties start-up and IPO transaction costs                           0.17            
Defined benefit plan amendments               (0.04)           (0.18)         (0.04)  
MEPP withdrawal liability incurred by Weston Foods     0.02         0.08           0.02         0.24    
Gain on disposal of assets               (0.04)                     (0.04)  
Weston Foods insurance proceeds               (0.03)                     (0.03)  
Early debt settlement costs                           0.06            
Fair value adjustment of Trust Unit liability     0.08                     0.06            
Foreign currency translation (gain) loss     (0.33)         (0.14)           (0.59)         0.19    
Adjusted basic net earnings per common share from
  continuing operations
  $ 1.11       $ 1.00         $ 4.49       $ 4.39    
                                         
(i)     Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's consolidated financial statements included in the 2013 Annual Report.
(ii)     Net of interest, income taxes and non-controlling interests, as applicable.

In addition to the items described in the "Adjusted Operating Income and Adjusted EBITDA" section above, the year-over-year change in the following items also influenced basic net earnings per common share in the fourth quarter of 2013:

Fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares   The fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares is non-cash and is included in net interest expense and other financing charges. The adjustment is determined by changes in the value of the underlying Loblaw common shares. In the fourth quarter of 2013, income of $34 million on a pre-tax basis (2012 - a charge of $77 million) was recorded in net interest expense and other financing charges as a result of the decrease (2012 - increase) in the market price of Loblaw common shares.

Shoppers Drug Mart net financing charges  In addition to the acquisition costs noted above, during the fourth quarter of 2013, net charges of $14 million on a pre-tax basis were incurred in connection with the committed financing related to the acquisition.

Choice Properties initial public offering ("IPO") transaction costs In addition to the start-up costs noted above, transaction costs of $1 million, on a pre-tax basis were incurred in the fourth quarter of 2013 related directly to the IPO. These transaction costs were recorded in net interest expense and other financing charges.

Fair value adjustment of Trust Unit liability  The Company is exposed to market price fluctuations as a result of the Choice Properties Units held by the public. These Units are presented as a liability on the Company's consolidated balance sheet as they are redeemable for cash at the option of the holder, subject to certain restrictions. This liability is recorded at fair value at each reporting period based on the market price of Units. In the fourth quarter of 2013, the Company recorded a loss of $23 million related to the fair value adjustment of the Trust Unit liability.

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, 2013. 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 audited annual consolidated financial statements and MD&A for the year ended December 31, 2013 which is contained in the Company's 2013 Annual Report available in the Investor Centre section of the Company's website at www.weston.ca.

Consolidated Statements of Earnings

  12 Weeks Ended 52 Weeks Ended  
                                         
(millions of Canadian dollars except where otherwise indicated)   Dec. 31, 2013   Dec. 31, 2012(3)   Dec. 31, 2013   Dec. 31, 2012(3)    
Revenue   $ 7,919       $ 7,727       $ 33,582       $ 32,742    
Operating Expenses                        
  Cost of inventories sold   5,941       5,870       25,286       24,700    
  Selling, general and administrative expenses   1,584       1,536       6,675       6,649    
    7,525       7,406       31,961       31,349    
Operating Income   394       321       1,621       1,393    
Net Interest Expense and Other Financing Charges   106       175       497       441    
Earnings Before Income Taxes   288       146       1,124       952    
Income Taxes   56       34       275       244    
Net Earnings from Continuing Operations   232       112       849       708    
Attributable to:                        
  Shareholders of the Company   185       63       616       475    
  Non-Controlling Interests   47       49       233       233    
Net Earnings from Continuing Operations   232       112       849       708    
Discontinued Operations               58        
Net Earnings   $ 232       $ 112       $ 907       $ 708    
Net Earnings per Common Share ($) - Basic                        
  Continuing Operations   $ 1.37       $ 0.41       $ 4.48       $ 3.36    
  Discontinued Operations               $ 0.46          
  Net Earnings   $ 1.37       $ 0.41       $ 4.94       $ 3.36    
Net Earnings per Common Share ($) - Diluted                        
  Continuing Operations   $ 1.37       $ 0.32       $ 4.45       $ 3.29    
  Discontinued Operations               $ 0.46          
  Net Earnings   $ 1.37       $ 0.32       $ 4.91       $ 3.29    
                         

Consolidated Balance Sheets

As at December 31                  
(millions of Canadian dollars) 2013   2012(3)  
ASSETS            
Current Assets            
  Cash and cash equivalents   $ 2,869       $ 1,589    
  Short term investments   1,490       2,138    
  Accounts receivable   736       559    
  Credit card receivables   2,538       2,305    
  Inventories   2,231       2,132    
  Income taxes recoverable         37    
  Prepaid expenses and other assets   84       83    
  Assets held for sale   22       30    
Total Current Assets   9,970       8,873    
Fixed Assets   9,655       9,452    
Investment Properties   99       100    
Goodwill and Intangible Assets   1,580       1,571    
Deferred Income Taxes   299       316    
Security Deposits   1,791       348    
Franchise Loans Receivable   375       363    
Other Assets   853       781    
Total Assets   $ 24,622       $ 21,804    
LIABILITIES            
Current Liabilities            
  Trade payables and other liabilities   $ 3,989       $ 3,937    
  Provisions   120       123    
  Income taxes payable   2          
  Short term debt   1,060       1,319    
  Long term debt due within one year   1,208       672    
Total Current Liabilities   6,379       6,051    
Provisions   81       94    
Long Term Debt   7,736       6,261    
Trust Unit Liability   478          
Deferred Income Taxes   187       160    
Other Liabilities   618       943    
Capital Securities   224       223    
Total Liabilities   15,703       13,732    
EQUITY            
Share Capital   972       953    
Contributed Surplus   65       28    
Retained Earnings   5,272       4,736    
Accumulated Other Comprehensive Income (Loss)   16       (24)    
Total Equity Attributable to Shareholders of the Company   6,325       5,693    
Non-Controlling Interests   2,594       2,379    
Total Equity   8,919       8,072    
Total Liabilities and Equity   $ 24,622       $ 21,804    
             

Consolidated Statements of Cash Flows

  12 Weeks Ended   52 Weeks Ended
                                         
(millions of Canadian dollars) Dec. 31, 2013   Dec. 31, 2012(3)   Dec. 31, 2013   Dec. 31, 2012(3)
Operating Activities                        
Net earnings from continuing operations   $ 232       $ 112       $ 849       $ 708    
Income taxes   56       34       275       244    
Net interest expense and other financing charges   106       175       497       441    
Depreciation and amortization   212       202       891       840    
Foreign currency translation (gain) loss   (42)       (18)       (75)       24    
Gain on defined benefit plan amendments               (51)          
Income taxes paid   (75)       (52)       (271)       (261)    
Interest received   7       22       59       65    
Settlement of derivatives   76             59          
Change in credit card receivables   (108)       (232)       (233)       (204)    
Change in non-cash working capital   380       469       (250)       43    
Fixed asset and other related (recoveries)
  impairments
  (42)       12       (32)       19    
Gain on disposal of assets   2       (11)       (1)       (14)    
Other   9       (33)       21       (53)    
Cash Flows from Operating Activities
  of Continuing Operations
  813       680       1,738       1,852    
Investing Activities                        
Fixed asset purchases   (341)       (398)       (976)       (1,110)    
Change in short term investments   765       300       730       181    
Business acquisition               (9)          
Proceeds from fixed asset sales   3       29       26       64    
Change in franchise investments
  and other receivables
  (22)       (21)       5       (22)    
Change in security deposits   201       (5)       (1,435)       14    
Intangible asset additions         1       (12)       (43)    
Other   (1)             (4)          
Cash Flows from (used in) Investing Activities
  of Continuing Operations
  605       (94)       (1,675)       (916)    
Financing Activities                        
Change in bank indebtedness                     (3)    
Change in short term debt   (289)       10       (259)       39    
Long term debt  - Issued, net of financing charges   473       62       2,749       111    
  - Retired   (469)       (18)       (871)       (115)    
Trust Units  - Issued, net of financing charges   (1)             416          
Share capital  - Issued         2       17       2    
  - Purchased and held in trust               (15)          
  - Retired         (1)       (42)       (1)    
Subsidiary share capital  - Issued   8       15       75       22    
  - Purchased and held                        
          in trust               (46)          
  - Retired         (10)       (73)       (16)    
Interest paid   (117)       (125)       (466)       (456)    
Dividends  - To common shareholders               (203)       (185)    
  - To preferred shareholders   (3)       (3)       (44)       (44)    
  - To minority shareholders               (96)       (65)    
Cash Flows (used in) from Financing Activities
  of Continuing Operations
  (398)       (68)       1,142       (711)    
Effect of foreign currency exchange rate changes
  on cash and cash equivalents
  12       4       27       (8)    
Cash Flows from Continuing Operations   1,032       522       1,232       217    
Cash Flows from Discontinued Operations               48          
Change in Cash and Cash Equivalents   1,032       522       1,280       217    
Cash and Cash Equivalents, Beginning of Period   1,837       1,067       1,589       1,372    
Cash and Cash Equivalents, End of Period   $ 2,869       $ 1,589       $ 2,869       $ 1,589    
                         

Basic and Diluted Net Earnings per Common Share from Continuing Operations

    12 Weeks Ended     52 Weeks Ended  
                                         
($ millions except where otherwise indicated) Dec. 31, 2013       Dec. 31, 2012(ii)       Dec. 31, 2013       Dec. 31, 2012(ii)  
Net earnings from continuing operations
  attributable to shareholders of the Company
  $ 185       $ 63       $ 616       $ 475    
Prescribed dividends on preferred shares
  in share capital
  (10)         (10)         (44)         (44)  
Net earnings from continuing operations
  available to common shareholders
  $ 175       $ 53       $ 572       $ 431    
Impact of GWL equity swaps         (6)             (2)  
Reduction in net earnings due to dilution
  at Loblaw
              (6)         (3)         (5)  
Net earnings from continuing operations
  available to common shareholders for
  diluted earnings per share
  $ 175       $ 41       $ 569       $ 424    
Weighted average common shares
  outstanding (in millions)
  127.7         128.2         127.6         128.2    
Dilutive effect of share-based
  compensation(i) (in millions)
    0.3                      0.2             
Dilutive effect of GWL equity swaps(i) (in millions)           0.5                0.6    
Diluted weighted average common shares
  outstanding (in millions)
  128.0         128.7         127.8         128.8    
Basic net earnings per common share
  from continuing operations ($)
  $ 1.37       $ 0.41       $ 4.48       $ 3.36    
Diluted net earnings per common share
  from continuing operations ($)
  $ 1.37       $ 0.32       $ 4.45       $ 3.29    
                         

(i)  In the fourth quarter of 2013 and year-to-date, 513,585 (2012 - 1,184,840) and 516,557 (2012 - 1,184,840) potentially dilutive instruments, respectively, were excluded from the computation of diluted net earnings per common share from continuing operations as they were anti-dilutive.
(ii)  Certain 2012 figures have been restated due to the implementation of IAS 19, "Employee Benefits". See note 2 of the Company's consolidated financial statements included in the 2013 Annual Report.

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 2013 Annual Report. 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.

    12 Weeks Ended     52 Weeks Ended  
                                           
($ millions) Dec. 31, 2013   Dec. 31, 2012(vii)   Dec. 31, 2013   Dec. 31, 2012(vii)  
Revenue                        
  Weston Foods   $ 413       $ 399       $ 1,812       $ 1,765    
  Loblaw   7,640       7,465       32,371       31,604    
  Intersegment   (134)       (137)       (601)       (627)    
Consolidated   $ 7,919       $ 7,727       $ 33,582       $ 32,742    
Adjusted EBITDA (i)                        
  Weston Foods   $ 69       $ 71       $ 330       $ 334    
  Loblaw   516       512       2,141       2,072    
Total   $ 585       $ 583       $ 2,471       $ 2,406    
Depreciation and Amortization (ii)                                        
  Weston Foods   $ 15       $ 14       $ 63       $ 59    
  Loblaw   196       187       824       777    
Total   $ 211       $ 201       $ 887       $ 836    
Adjusted Operating Income (i)                                        
  Weston Foods   $ 54       $ 57       $ 267       $ 275    
  Loblaw   320       325       1,317       1,295    
  Impact of certain items(iii)   (22)       (79)       (38)         (153)    
  Other(iv)   42       18         75         (24)    
Consolidated operating income   $ 394       $ 321       $ 1,621       $ 1,393    
Net Interest Expense and Other
  Financing Charges
                       
  Weston Foods   $ (21)       $ 91       $ 54       $ 90    
  Loblaw   141       84       458       351    
  Other(v)   (3)             (6)              
  Intersegment(vi)   (11)             (9)              
Consolidated net interest expense and
  other financing charges
  $ 106       $ 175       $ 497       $ 441    
                         
(i)   Excludes certain items and is used internally by management when analyzing segment underlying operating performance.
(ii)   Excludes accelerated depreciation in the fourth quarter of 2013 and year-to-date of $1 million (2012 - $1 million) and $4 million (2012 - $4 million), respectively, incurred by Weston Foods, included in restructuring and other charges.
(iii)  The impact of certain items excluded by management includes restructuring and other charges, the fair value adjustment of commodity derivatives at Weston Foods, share-based compensation net of equity derivatives, fixed asset and other related impairments at Loblaw net of recoveries, certain costs relating to Choice Properties and the Shoppers Drug Mart acquisition, the MEPP withdrawal liability incurred by Weston Foods, defined benefit plan amendments, gain on disposal of assets at Loblaw, and Weston Foods insurance proceeds.
(iv)  Operating income in the fourth quarter of 2013 and year-to-date included a gain of $42 million (2012 - $18 million) and $75 million (2012 - loss of $24 million), respectively, related to the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and short term investments held by foreign operations.
(v)  Represents the Unit distributions from Choice Properties to GWL.
(vi)  Represents the elimination of the fair value adjustment of the Trust Unit liability related to GWL's direct investment in Choice Properties.
(vii)  Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's consolidated financial statements included in the 2013 Annual Report.

2013 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, 2013 are available in the Investor Centre section of the Company's website at www.weston.ca and have been filed with SEDAR and will be available 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 the Canadian securities regulatory authorities in Canada through SEDAR. This News Release includes selected information on Loblaw Companies Limited, a 63.0%-owned public reporting subsidiary company with shares trading on the Toronto Stock Exchange. For information regarding Loblaw, readers should also refer to the materials filed by Loblaw with the Canadian securities regulatory authorities from time to time. These filings are also maintained at Loblaw's corporate website at www.loblaw.ca.

CONFERENCE CALL AND WEBCAST PRESENTATION
George Weston Limited will host a conference call as well as an audio webcast on Thursday, February 27, 2014 at 11:00 a.m. (EST). To access via tele-conference, please dial (647) 427-7450. The playback will be available two hours after the event at (416) 849-0833, passcode: 31040207#. To access via audio webcast, please visit the Investor Centre section of www.weston.ca. Pre-registration will be available.

   
Footnote Legend
   
(1) See non-GAAP financial measures.
(2) This News Release contains forward-looking information. See Forward-Looking Statements of this News Release for a discussion of material factors that could cause actual results to differ materially from the forecasts and projections herein and of the material factors, estimates, beliefs and assumptions that were applied in presenting the conclusions, forecasts and projections presented herein. This News Release must be read in conjunction with George Weston Limited's filings with securities regulators made from time to time, all of which can be found at www.weston.ca and www.sedar.com.
(3) Certain 2012 figures have been restated due to the implementation of revised IAS 19, "Employee Benefits". See note 2 of the Company's consolidated financial statements included in the 2013 Annual Report.
(4) Effective income tax rate excludes the tax impact of items excluded from adjusted basic net earnings per common share from continuing operations(1).
   

 

 

SOURCE George Weston Limited

For further information:

Geoffrey H. Wilson,
Senior Vice President, Investor Relations,
Business Intelligence and Communications
(416) 922-2500

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