DBRS Confirms George Weston Limited at BBB, R-2 (high), Trend Stable

DBRS has today confirmed the ratings of the Notes & Debentures of George Weston Limited (Weston or the Company) and the Issuer Rating at BBB, the Preferred Shares at Pfd-3 and the Commercial Paper at R-2 (high), all with Stable trends. The confirmation of the ratings is based on the stable operating performance of Weston Bakery, the stable ratings of Loblaw Companies Limited (Loblaw; see separate press release), in which Weston holds a 63% stake, and the Company’s significant cash resources, which are expected to be used toward growth opportunities. The ratings continue to be supported by the Company’s strong brands and above-average operating efficiency, while reflecting the volatile input cost environment and the mature nature of the bakery industry.

Weston Foods’ sales for the last twelve months (LTM) ended June 16, 2012, were relatively flat versus fiscal 2011 (F2011), based on higher prices and a modest decline in sales volumes. Margins remained flat as higher input/commodity costs during the year were offset by the increased pricing and benefits from cost reduction and productivity improvement initiatives. As such, DBRS estimates Weston Foods’ adjusted EBITDA for the LTM ended June 16, 2012, at $327 million, relatively flat versus F2011.

The Company has remained patient and measured with regard to the use of its cash, cash equivalents and short-term investments. At the end of Q2 2012, Weston had approximately $800 million of balance-sheet debt (not including Series A and Series B debentures, which are secured by a pledge of 9.6 million Loblaw common shares) and the preferred share balance at year-end 2011 was approximately $817 million.

Going forward, DBRS expects the operating performance of Weston’s bakery business should remain stable, while the outlook for Loblaw also remains relatively stable, despite significant challenges from intensifying competition and a difficult consumer environment. The relatively inelastic nature of the Company’s product offering, combined with high levels of cash, cash equivalents and short-term investments, will continue to provide Weston with the flexibility to pursue new, value-creating opportunities.

DBRS believes that Weston has the ability to maintain its current BBB rating and a financial profile commensurate with the current rating category (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 will continue to monitor Weston’s decisions on the deployment of its remaining cash, cash equivalents and short-term investments, and will assess the potential impact on the Company’s credit risk profile at such time.

As for the short-term rating, 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 remains relatively 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.