DBRS Confirms George Weston Limited at BBB, Stable

DBRS Limited (DBRS) has today 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, on March 11, 2016, DBRS confirmed the ratings of Loblaw Companies Limited (Loblaw) and changed the trend to Positive from Stable (see separate press release).

The confirmation of GWL’s ratings reflects: (1) DBRS’s view of the Weston Foods bakery business (Weston Foods) as consistent with the BBB rating category and (2) GWL’s position as the holding company of Loblaw (approximately 46% 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 (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.

Weston Foods has faced a challenging operating environment whereby intense competition has limited the ability to fully pass on input cost while the Company has been increasing its strategic investments to increase capacity, efficiency and innovation. Weston Foods sales increased approximately 13.3% (8.1% from foreign exchange) in F2015 to approximately $2.1 billion versus a comparable 52-week period in the previous year based on price increases, changes in mix and volume growth. Adjusted EBITDA margins were, however, negatively affected by continuing investments and higher input costs which were not fully passed on. As such, adjusted EBITDA declined approximately 6.6% to $285 million versus a comparable 52-week period in F2014.

GWL’s financial profile remained relatively stable despite a challenging operating environment based on its inherent free cash-generating capacity, stable balance-sheet debt levels and substantial holdings in Loblaw and Choice Properties REIT.

Going forward, DBRS expects Weston Foods’ operating performance to improve as the Company begins to benefit from sales generated by its new capacity investments in H2 2016 as well as improving volume trends in most categories and planned price increases. Adjusted EBITDA margins should improve with the additional sales generated and reduced costs associated with the strategic plan as new lines begin production as well as planned price increases to offset the foreign exchange impact on rising input costs.

GWL’s financial profile should remain stable based on its relatively stable balance-sheet debt, sizable cash balance and cash-generating capacity. Capital expenditures (capex) at Weston Foods are expected to remain elevated in the $300 million range in 2016 and to moderate somewhat going forward as the Company continues to invest new capacity, primarily in the United States, as well as replacement of end-of-life assets with more efficient alternatives. As a result, Weston Foods is likely to generate free cash flow deficits in the next one to two years. GWL is no longer committed to maintaining at least $1.0 billion of cash on hand as Loblaw completed its debt repayment plans in F2015. Over the near to medium term, DBRS expects that the Company will use any free cash flow (including dividends and distributions received) as well as cash on hand to continue to invest in growth (organic through Weston Foods capex 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.

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

The applicable methodologies are Rating Companies in the Consumer Products Industry, Rating Companies in the Merchandising Industry, Rating Holding Companies and Their Subsidiaries and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.