DBRS Confirms George Weston Limited at BBB, Trend Stable

DBRS has today confirmed the ratings of the Notes & Debentures of George Weston Limited (Weston or the Company) at BBB, the Preferred Shares at Pfd-3 and the Commercial Paper at R-2 (high), all with Stable trends. Weston’s business risk profile remains well placed in the BBB rating category based on the Company’s strong brands and above-average operating efficiency. The Stable trend reflects DBRS’s expectation that Weston will continue to achieve growth in EBITDA from further brand development, operational efficiency gains and new investments. Weston has been successful at maintaining its market position while passing on price increases, at least partially offsetting the effects of a rising input cost environment. The significant increase in the Company’s pro forma adjusted EBITDA in 2010 (approximately $280 million versus approximately $225 million in 2009) was primarily the result of improved operational efficiencies as well as acquisitions (e.g., Ace Bakery Ltd. and Keystone Bakery Holdings, LLC). Weston used approximately $300 million of its cash on hand to finance the acquisition of the aforementioned EBITDA generating businesses. In addition, the Company used $1 billion of cash to fund a special dividend to shareholders in January 2011.

Although high prices will likely persist, the nature of the products Weston sells makes consumption quite inelastic. This stability, combined with a high level of remaining cash and short-term investments, provides Weston with the flexibility to pursue new, value-creating opportunities and/or contemplate additional returns to shareholders. That said, the Company remains patient and measured with regard to the deployment of its cash, equivalents and short-term investments. At the end of Q2 2011, Weston had cash, equivalents and short-term investments of nearly $2 billion, while gross debt was approximately $750 million (not including Series A and Series B debentures, which are secured by a pledge of 9.6 million Loblaw common shares) and the preferred shares balance (at year-end 2010) was approximately $817 million. DBRS believes that Weston has the ability to remain in the BBB rating category with an appropriate financial profile (i.e., ultimate gross debt-to-EBITDA of up to 2.5 times (x) or net debt-to-EBITDA of up to 2.0x.

DBRS’s ratings continue to reflect the Company’s business risk profile, while taking into consideration its financial capacity and strategic intentions. DBRS will continue to monitor Weston’s decisions with regard to the deployment of its remaining cash

As for the short-term rating, DBRS believes Weston’s liquidity profile remains commensurate with the R-2 (high) rating category, based on its long-term rating, positive free cash flow generating capacity, high level of cash and marketable investments, and manageable debt and maturity schedule.

The credit risk profile of Loblaw Companies Limited (Loblaw, 62.8% owned by Weston; see separate press release) remains stable, with a long-term rating of BBB and short-term rating of R-2 (middle). The ratings for Weston at BBB and R-2 (high) reflect its operating businesses and financial risk profile, both on a stand-alone basis, as well as consolidated with its ownership interest in Loblaw. As such, if there is any change in Loblaw’s ratings, it will not necessarily affect the ratings of Weston.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating the Consumer Products Industry, which can be found on our website under Methodologies.