George Weston Limited Reports 2013 Fourth Quarter Results(2)

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.

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 tax rate⁽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

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 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 performance of $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:

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.

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.

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

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Basic and Diluted Net Earnings per Common Share from Continuing Operations

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.

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.

SOURCE George Weston Limited