Mr. Galen Weston reports
GEORGE WESTON LIMITED REPORTS A 6.4% INCREASE IN ADJUSTED EPS AND A 118.7% INCREASE IN BASIC EPS FOR THE SECOND QUARTER OF 2015
George Weston Ltd. (GWL) has released its consolidated unaudited results for
the 12 weeks ended June 20, 2015.
GWL's 2015 second quarter report to shareholders has been filed with
SEDAR and is available in the investor centre section
of the company's website.
"We are pleased with George Weston Ltd.'s performance in the second
quarter of 2015. We remain focused on delivering stable long-term
growth and profitability, and creating long-term value for
shareholders," said W. Galen Weston, executive chairman, George Weston.
SECOND QUARTER 2015 HIGHLIGHTS
(In millions, except where otherwise indicated)
12 weeks ended 12 weeks ended 24 weeks ended 24 weeks ended
Jun. 20, 2015 Jun. 14, 2014 Jun. 20, 2015 Jun. 14, 2014
Sales $ 10,851 $ 10,598 $ 21,260 $ 18,210
EBITDA 811 (42) 1,718 547
Adjusted EBITDA 913 859 1,763 1,407
Adjusted EBITDA margin 8.4% 8.1% 8.3% 7.7%
Operating income (loss) 423 (442) 942 (64)
Adjusted operating income 649 584 1,235 921
Adjusted operating margin 6.0% 5.5% 5.8% 5.1%
Net earnings (loss) attributable to
shareholders of the company 51 (208) 218 (88)
Adjusted net earnings attributable
to shareholders of the company 180 169 342 293
Basic net earnings (loss) per common
share 0.32 (1.71) 1.55 (0.85)
Adjusted basic net earnings per
common share 1.33 1.25 2.52 2.14
Pavi Binning, president, George Weston, commented that "In the
second quarter, Loblaw continued to execute against its strategic
framework, delivering solid results in both food and drug retail.
Weston Foods delivered sales growth and results in line with
expectations which reflected the impact of increased capital and
incremental investments in targeted areas."
Consolidated results of operations
GWL's second quarter 2015 adjusted basic net earnings per common share increased to $1.33 from $1.25 in the same period in 2014. The increase
of eight cents was primarily due to an improvement in operating performance
at Loblaw Companies Ltd., partially offset by a decline
in operating performance at Weston Foods.
Basic net earnings per common share increased by $2.03 to 32 cents compared with the same period in 2014, and included the favourable year-over-year
impact of the following significant prior year inventory items:
- A charge incurred in the second quarter of 2014 of $622-million ($1.63
per common share) related to the fair value increment on the acquired
inventory sold associated with the acquisition of Shoppers Drug Mart
Corp.;
-
A charge incurred in the second quarter of 2014 of $190-million (49 cents per common share) related to inventory measurement and other conversion
differences associated with the implementation of a perpetual inventory
system at Loblaw.
Reportable operating segments
Weston Foods segment results
Sales
Weston Foods sales in the second quarter of 2015 were $464-million, an
increase of $33-million, or 7.7 per cent compared with the same period in 2014.
Foreign currency translation positively impacted sales by approximately
5.7 per cent. Excluding the impact of foreign currency translation, sales
increased by 2.0 per cent primarily due to the combined positive impact of
pricing and changes in sales mix, as volumes remained relatively flat.
Volumes in the second quarter of 2015 were negatively impacted by the
timing of Easter.
Earnings before interest, taxes, depreciation and amortization
Weston Foods EBITDA in the second quarter of 2015 was $57-million, a decrease of $4-million
compared with the same period in 2014, primarily due to a decline in
underlying operating performance, partially offset by the favourable
year-over-year impacts of restructuring and other charges, and the fair
value adjustment of commodity derivatives.
Adjusted EBITDA in the second quarter of 2015 was $58-million, a decrease of $9-million
compared with the same period in 2014. The decline in adjusted EBITDA was primarily due to new plant costs, investments in capabilities, and
innovation and higher input costs, partially offset by higher pricing.
Operating income
Weston Foods operating income in the second quarter of 2015 was
$38-million, a decrease of $7-million compared with the same period in
2014. Adjusted operating income in the second quarter of 2015 was $39-million, a decrease of
$12-million compared with the same period in 2014.
In addition to the factors described above impacting EBITDA and adjusted EBITDA, the decline in both operating income and adjusted operating income was also driven by an increase in depreciation and amortization of
$3-million in the second quarter of 2015 due to investments in capital.
Loblaw segment results
Sales
Loblaw sales in the second quarter of 2015 were $10,535-million, an
increase of $228-million compared with the same period in 2014, primarily
driven by retail sales. Retail sales increased by $221-million, or 2.2 per cent,
compared with the same period in 2014 and included food retail (Loblaw)
sales of $7,629-million and drug retail (Shoppers Drug Mart) sales of
$2,689-million, representing increases of $141-million, or 1.9 per cent, and
$80-million, or 3.1 per cent, respectively. Food retail same-store sales growth
was 2.1 per cent (2014 -- 1.8 per cent) and the food retail average quarterly internal
food price index was higher than (2014 -- in line with) the average
quarterly national food price inflation of 3.9 per cent (2014 -- 2.5 per cent) as
measured by the Consumer Price Index for Food Purchased from Stores. Drug retail same-store sales growth was 3.8 per cent (2014 -- 2.5 per cent).
In the last 12 months, there was no change to retail net square
footage. Excluding the divestitures required pursuant to a consent
agreement with the Competition Bureau, net square footage increased by
300,000 square feet, or 0.4 per cent.
In 2014, Loblaw restructured its fee arrangements with the franchisees
of certain franchise banners. The revised arrangements are expected to
result in an annual reduction of retail sales and gross profit of
approximately $150-million, with a corresponding decrease in selling,
general and administrative expenses (SG&A). In the second quarter of
2015, this restructuring had a negative impact of $33-million to retail
sales and gross profit with an offsetting positive impact to SG&A.
Retail gross profit
Loblaw retail gross profit in the second quarter of 2015 was
$2,711-million, an increase of $871-million compared with the same period
in 2014. The increase in retail gross profit was driven by higher
sales, as described above, an increase in retail gross profit
percentage and included the favourable year-over-year net impact of the
following:
- The prior year charge of $622-million related to the recognition of the
fair value increment on the acquired Shoppers Drug Mart inventory sold;
- The prior year charge of $190-million related to inventory measurement
and other conversion differences associated with the implementation of
a perpetual inventory system at Loblaw;
- Partially offset by
a charge of $8-million related to apparel inventory in the second
quarter of 2015.
Excluding the favourable year-over-year net impact of the items noted
above, retail gross profit increased by $67-million to $2,719-million
compared with the same period in 2014, driven by higher sales and an
increase in retail gross profit percentage of 10 basis points to 26.4 per cent.
The increase in retail gross profit percentage included a 30-basis-point negative impact from the restructuring of certain franchise fee
arrangements, as described above. After excluding this negative impact,
Retail gross profit percentage was 26.7 per cent compared with 26.3 per cent in 2014. The
increase was primarily driven by the achievement of operational
synergies.
EBITDA
Loblaw EBITDA in the second quarter of 2015 was $780-million, an increase of
$854-million compared with the same period in 2014, primarily driven by
an improvement in underlying operating performance and the favourable
year-over-year impact of the prior year inventory items previously
described.
Loblaw adjusted EBITDA in the second quarter of 2015 was $855-million, an increase of
$63-million compared with the same period in 2014, driven by an increase
in retail gross profit (excluding the prior year inventory items
previously described), partially offset by an increase in retail SG&A,
which included the positive impact of the restructuring of certain
franchise fee arrangements. Excluding this positive impact, retail SG&A
increased by $35-million compared with the same period in 2014 and SG&A
percentage was flat. The increase in SG&A was due to higher store and
store support costs, primarily driven by higher sales volumes and the
impact of franchise consolidation. These costs were partially offset by
lower charges related to the transition of certain food retail stores
to more cost-effective and efficient operating terms under collective
agreements, efficiencies achieved in food retail supply chain,
administration and information technology, and positive changes
in the value of Loblaw's investments in its franchise business.
Operating income
Loblaw operating income in the second quarter of 2015 was
$411-million, an increase of $869-million compared with the same period
in 2014. Loblaw adjusted operating income in the second quarter of 2015 was $610-million, an increase of
$77-million compared with the same period in 2014.
In addition to the factors described above impacting EBITDA and adjusted EBITDA, the increase in both operating income and adjusted operating income in the second quarter of 2015 included a decrease in retail
depreciation and amortization of $14-million. The decrease in retail
depreciation and amortization was driven by the change in the estimated
useful life of certain IT systems, as disclosed in the first quarter of
2015, as well as lower IT and supply chain depreciation.
Net interest expense and other financing charges
In the second quarter of 2015, net interest expense and other financing
charges decreased by $19-million to $140-million compared with the same
period in 2014. The decrease was primarily due to the favourable
year-over-year impacts of the fair value adjustment of the trust unit
liability and the accelerated amortization of deferred financing
charges, partially offset by the unfavourable year-over-year impact of
the fair value adjustment of the forward sale agreement for 9.6 million
Loblaw common shares.
Adjusted net interest expense and other financing charges were $140-million, an increase of $4-million compared with the same period
in 2014. The increase was primarily driven by higher interest on long-term debt, as a result of debt issuances by Choice Properties to third
parties and GWL's issuance of a $200-million medium-term note, and the
timing of the distributions declared by Choice Properties Real Estate
Investment Trust on its trust units relative to
the company's reporting period. This increase was partially offset by a
reduction in interest on long-term debt as a result of repayments on
Loblaw's unsecured term loan facility, which was obtained in connection
with the acquisition of Shoppers Drug Mart.
Income taxes
In the second quarter of 2015, the government of Alberta announced an
increase to the provincial corporate income tax rate from 10 per cent to 12 per cent.
The increase was effective July 1, 2015, but was enacted on
June 19, 2015. As a result, the company recorded a charge of
$45-million related to the remeasurement of deferred tax liabilities.
Income tax expense for the second quarter of 2015 was $129-million and
the effective tax rate was 45.6 per cent. Income tax recovered for the second
quarter of 2014 was $145-million and the effective tax rate was 24.1 per cent.
The increase in the effective tax rate was primarily attributable to
the increase in deferred tax expense as a result of the increase in the
Alberta statutory corporate income tax rate, as described above.
Adjusted income tax expense for the second quarter of 2015 was $138-million and the adjusted income
tax rate was 27.1 per cent. Adjusted income tax expense for the second quarter of 2014 was $117-million and the adjusted income
tax rate was 26.1 per cent. The current tax impact of the increase in the Alberta
statutory corporate income tax rate on the adjusted income tax expense was partially offset by a decrease in certain non-deductible items.
Adjusted debt
During the second quarter of 2015, adjusted debt decreased by $309-million from the first quarter of 2015, primarily
driven by net repayments on Loblaw's unsecured term loan facilities,
partially offset by net borrowings on Choice Properties' senior
unsecured committed credit facility. The company's adjusted debt to rolling year adjusted EBITDA was 2.9 times in the second quarter of 2015 compared with 4.4 times in the same
period in 2014.
Loblaw has decreased its adjusted debt balance by $1,345-million since its acquisition of Shoppers Drug Mart,
leaving only $355-million of further reduction to achieve its debt
target.
Synergies
In the second quarter of 2015, Loblaw realized net synergies of
approximately $53-million (2014 -- $8-million), generated primarily from
improved cost of inventories sold and purchasing efficiencies in goods
not for resale.
Total net synergies achieved since the closing of the acquisition were
$198-million. Loblaw expects to achieve annualized synergies of
$300-million (net of related costs) in the third year following the
close of the acquisition of Shoppers Drug Mart.
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,
primarily driven by performance in the fourth quarter.
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 its 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 retail;
- Achieve net synergies as a result of the acquisition of Shoppers Drug
Mart slightly exceeding $200-million;
-
Continue to drive net efficiencies across the food retail business by
achieving reductions in supply chain, administrative functions and IT,
while still investing in key areas, like e-commerce;
- Grow adjusted operating income in its food retail business, excluding synergies, and experience a
decline in adjusted operating income in its drug retail business, excluding synergies, as a result of
investments in key projects and other factors;
- Grow consolidated adjusted net earnings available to common shareholders (including synergies) relative to 2014, however not at the same level
achieved in the first half of 2015;
-
Invest approximately $1,200-million in capital expenditures;
-
Achieve its deleveraging target in 2015.
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;
- Continued pressure in the company's drug retail business from the continuing impact
of health care reform.
Declaration of quarterly dividends
Subsequent to the end of the second quarter of 2015, 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:
- Common shares: 42.5 cents per share payable Oct. 1, 2015, to shareholders of record Sept. 15, 2015;
- Preferred shares, Series I: 36.25 cents per share payable Sept. 15, 2015, to shareholders of record Aug. 31, 2015;
- Preferred shares, Series III: 32.5 cents per share payable Oct. 1, 2015, to shareholders of record Sept. 15, 2015;
- Preferred shares, Series IV: 32.5 cents per share payable Oct. 1, 2015, to shareholders of record Sept. 15, 2015;
- Preferred shares, Series V: 29.6875 cents per share payable Oct. 1, 2015, to shareholders of record Sept. 15, 2015.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except where otherwise indicated)
12 weeks ended 12 weeks ended 24 weeks ended 24 weeks ended
Jun. 20, 2015 Jun. 14, 2014 Jun. 20, 2015 Jun. 14, 2014
Revenue $ 10,851 $ 10,598 $ 21,260 $ 18,210
Operating expenses
Cost of inventories sold 7,790 8,422 15,211 14,090
Selling, general and administrative
expenses 2,638 2,618 5,107 4,184
10,428 11,040 20,318 18,274
Operating income (loss) 423 (442) 942 (64)
Net interest expense and other
financing charges 140 159 317 327
Earnings (loss) before income taxes 283 (601) 625 (391)
Income taxes 129 (145) 225 (99)
Net earnings (loss) 154 (456) 400 (292)
Attributable to
Shareholders of the company 51 (208) 218 (88)
Non-controlling interests 103 (248) 182 (204)
Net earnings (loss) $ 154 $ (456) $ 400 $ (292)
Net earnings (loss) per common share
Basic $ 0.32 $ (1.71) $ 1.55 $ (0.85)
Diluted $ 0.31 $ (1.71) $ 1.53 $ (0.85)
We seek Safe Harbor.
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