DBRS Confirms Ratings of George Weston Limited

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Medium-Term Notes and Debentures rating of George Weston Limited (Weston or the Company) at BBB, its Short-Term Issuer Rating at R-2 (high) and its Preferred Shares rating at Pfd-3, all with Stable trends. The confirmations reflect the confirmation of the ratings of Loblaw Companies Limited (Loblaw; see separate press release) as well as Weston’s stable balance-sheet debt levels despite pressure on the Weston Foods bakery business from higher commodity costs.

DBRS expects Weston’s earnings profile should remain relatively stable over the longer-term based on its ownership interest in Loblaw and the relatively stable nature of Weston Foods bakery business, which has declined as a proportion of the consolidated entity after the Shoppers Drug Mart Corporation (Shoppers) acquisition by Loblaw. Weston Foods sales should increase in the low- to mid-single digit range over the medium term based primarily on volume growth in addition to price increases. Adjusted EBITDA margins will remain pressured in the near term as price increases are not expected to fully offset rising input costs. In addition, margins will be further pressured by planned investments in in marketing, innovation and plant start-up costs (related to two new facilities) in 2015 and 2016. As such, DBRS believes Weston Foods’ adjusted EBITDA should decline modestly (or remain relatively flat on a comparable 52-week basis) in 2015 but should begin to grow modestly over the medium-term as the Company benefits from the new investments and expected price increases.

Weston’s financial profile is expected to remain relatively stable going forward based on the Company’s ownership in Loblaw, its cash-on-hand, and its stable balance-sheet debt levels. Weston announced a strategic plan in 2015, which includes expansionary capex of approximately $300 million in 2015 and approximately $170 million in 2016 to increase capacity (including two new facilities in the United States) and innovation in key growth areas. As a result of the increase in capex, Weston Foods is expected to incur a free cash flow deficit through the end of 2016. DBRS believes the Company will use a portion of its cash-on-hand to fund such investments, while maintaining at least $1 billion of cash-on-hand and short-term investments through the end of Loblaw’s deleveraging plans expected to be completed at the end of 2015. Over the longer-term DBRS expects the Company will continue to use cash-on-hand and free cash-flow generated to invest in growth (organic and/or acquisitions) and/or to increase returns to shareholders. Weston’s ownership interest in Loblaw could return above the 50% level in the medium term as Loblaw is expected to use free cash flow to complete share repurchases once it completes its deleveraging plan. DBRS notes that a positive rating action at Loblaw would not necessarily result in a corresponding rating action at 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, Rating Companies in the Consumer Products Industry, Rating Companies in the Merchandising Industry and Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.

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