DBRS Confirms George Weston Limited at BBB, Stable

DBRS Limited (DBRS) confirmed the Issuer Rating and Notes & Debentures rating of George Weston Limited (GWL or the Company) at BBB as well as its Short-Term Issuer Rating at R-2 (high) and its Preferred Shares rating at Pfd-3. All trends are Stable. DBRS notes that it has concurrently confirmed the ratings of Loblaw Companies Limited (Loblaw) and maintained the Positive trend (see separate press release).

The confirmation of GWL’s ratings reflects (1) DBRS’s view of the Weston Foods bakery business (Weston Foods) as being consistent with the BBB rating category and (2) GWL’s position as the holding company of Loblaw (approximately 48.5% ownership; confirmed at BBB by DBRS). Despite the Positive trend on Loblaw, the trend on GWL’s ratings remains Stable because, as the holding company of Loblaw (absent the bakery business), GWL’s ratings would be one notch lower than Loblaw’s (consistent with “DBRS Criteria: Rating Holding Companies and Their Subsidiaries”). DBRS therefore notes that any rating upgrade on Loblaw to BBB (high) will not likely result in a corresponding rating action on GWL. As such, any future upgrade to the ratings of GWL arising from its position as holding company of Loblaw would be the result of Loblaw’s ratings increasing by two notches or more from its current BBB ratings.

On October 31, 2017, GWL and Loblaw confirmed their awareness of an industry-wide investigation by the Competition Bureau concerning a price-fixing scheme involving certain packaged bread products. GWL and Loblaw have indicated that they are cooperating fully with the investigation and expect to be able to provide further comment after the Competition Bureau’s court filings are unsealed. If the trend on the ratings of Loblaw are changed to Stable and the result of the Competition Bureau investigation has a material negative effect on GWL, including any penalties or impact on future profitability, a negative rating action on GWL could result.

Weston Foods’ operating performance was weaker than expected through the end of 2016 and in H1 2017, with sales declining 0.9% in H1 2017 to approximately $2.26 billion for the last 12 months (LTM) ended Q2 2017. Sales included a negative impact of approximately 0.2% from foreign exchange as negative foreign exchange movements of 2.5% in Q1 2017 were not fully offset by positive foreign exchange movements of 2.4% in Q2 2017. Excluding foreign currency movements and the timing of New Year’s Day, sales decreased by 0.6% because of a negative impact from pricing and changes in sales mix. The Company’s frozen business underperformed management expectations in H1 2017, primarily because of the loss of a line of business with a customer and slower-than-expected ramp-up filling the new capacity in the United States.

Adjusted EBITDA margins continued to be negatively affected by ongoing investments in the business, partially offset by productivity improvements. As such, adjusted EBITDA declined 5.7% in H1 2017 to approximately $289 million for the LTM ended Q2 2017 versus $296 million in 2016.

GWL’s financial profile remained relatively stable despite a challenging operating environment based on its inherent free cash-generating capacity, relatively stable balance sheet (as DBRS expects that a recently repaid maturity may ultimately be refinanced), debt levels and substantial holdings in Loblaw and Choice Properties REIT.

Going forward, DBRS expects Weston Food’s earnings profile to be relatively stable, as sales growth generated by incremental capacity (although sales from the frozen business are ramping up slower than previously anticipated) and productivity improvements are expected to be offset by a challenging environment in Weston Foods' Canadian fresh bakery business and incremental investments required to meet new, more stringent regulatory requirements with regards to food safety and labelling.

GWL’s financial profile should remain stable based on its relatively stable balance sheet debt, sizable cash balance and liquid holdings in Loblaw and Choice Properties REIT. Capital expenditures (capex) at Weston Foods moderated from elevated levels in 2017, and DBRS expects capex going forward to be in the $200 million to $250 million range over the near to medium term. Despite the decrease in capex, Weston Foods is likely to generate free cash flow deficits over the near term. Over the medium term, DBRS expects that the Company will use any free cash flow (including dividends and distributions received) as well as cash on hand and the possible refinancing of recently repaid debt to continue to invest in growth (organic or through acquisition) as well as to further increase returns to shareholders. DBRS notes that any rating upgrade on Loblaw to BBB (high) will not likely result in a corresponding rating action on the ratings of GWL.

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 principal methodologies are Rating Companies in the Consumer Products Industry, Rating Companies in the Merchandising Industry, DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries and Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

These ratings are no longer endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.