DBRS Confirms George Weston Limited at BBB, R-2 (high) and Pfd-3, Stable Trends

DBRS has confirmed the Issuer Rating, Medium-Term Notes rating and Debentures rating of George Weston Limited (Weston or the Company) at BBB, its Preferred Shares rating at Pfd-3, all with Stable trends. DBRS has also converted the Company’s Commercial Paper rating into a Short-Term Issuer Rating, and confirmed the Short-Term Issuer Rating at R-2 (high), with a Stable trend. The basis for the conversion is that the Company has no commercial paper outstanding and no current plans to use commercial paper going forward. The confirmations reflect Weston’s stable balance-sheet debt levels despite pressure on the Weston Foods bakery business from higher commodity costs, and the confirmation of the ratings of Loblaw Companies Limited (Loblaw; see separate press release). Weston’s ratings continue to be based on its strong brands, efficient operations and its ownership interest in Loblaw. The ratings also reflect the Weston Foods segment’s exposure to volatile input costs and the mature nature of the bakery industry.

Weston Foods sales increased approximately 5.1% in H1 2014 to approximately $1.86 billion in the last 12 months (LTM) ended Q2 2014, primarily because of the positive impact of foreign currency translation and modest volume growth in frozen products, which more than offset a decline in fresh volumes. The decline in fresh volumes was attributable to a decline in market share for Weston Foods key food retail customers. Adjusted EBITDA margins declined notably because of higher commodity and other input costs (including the impact of foreign exchange) as well as new plant start-up costs. As a result, adjusted EBITDA generated by the Weston Foods segment declined to approximately $307 million for the LTM ended Q2 2014 versus $322 million in 2013 and $334 million in 2012. Weston’s financial profile remained relatively stable in 2013 and H1 2014 based on its inherent free cash flow-generating capacity and stable debt levels as well as its holdings in Loblaw and Choice Properties Real Estate Investment Trust.

Going forward, DBRS expects Weston’s earnings profile to remain relatively stable over the longer term as a result of its ownership interest in Loblaw and the relatively stable nature of the Weston Foods bakery business which has declined as a proportion of the consolidated entity. Weston Foods sales should increase modestly through the end of 2014 because of volume growth as price increases should remain difficult to implement in the current soft operating environment. Over the longer term, Weston Foods’ top line should benefit from its continued focus on innovation, investment in its brands and price increases. EBITDA margins are expected to remain pressured in the near term, but could benefit from easing pressure on commodity prices toward the end of 2014 and into 2015. As such, Weston Foods’ EBITDA is likely to remain challenged in the near term, but should begin to recover and grow at a modest pace over the medium term.

Weston’s financial profile is expected to remain relatively stable going forward based on the Company’s ownership interest in Loblaw, its cash on hand and its stable balance-sheet debt levels. DBRS believes that Weston will continue to use cash on hand and free cash flow generated to invest in growth and/or increase returns to shareholders over the longer term. Weston is likely to remain relatively conservative in the medium term particularly while Loblaw’s leverage remains high resulting from the acquisition of Shoppers Drug Mart Corporation. In the medium term, Weston’s ownership interest in Loblaw could return to above the 50% level as Loblaw is likely to use free cash flow to complete share repurchases once Loblaw completes its deleveraging plan. Over the longer-term DBRS notes that a positive rating action at Loblaw would not necessarily result in a corresponding rating action to Weston.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions) (December 2013), Rating Companies in the Consumer Products Industry (October 2014), Rating Companies in the Merchandising Industry (October 2014) and Rating Holding Companies and Their Subsidiaries (January 2014), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The full report providing additional analytical detail is available by clicking on the link under Related
Research at the right of the screen or by contacting us at info@dbrs.com.

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