Worst part of multiyear restructuring over, says George Weston Ltd. chairman

Eric Shackleton, THE CANADIAN PRESS

Investor's Business Daily

May 13, 2008

- For George Weston Ltd. (TSX:WN), the worst part of its multiyear restructuring plan at Loblaw (TSX:L) is over and consumers can now look forward to improved service, chairman W. Galen Weston told the company's 80th annual meeting Tuesday.

"Over the last 12 months, customers have generally not seen the best of what we can do for them as a result of our challenging restructuring," Weston said, referring to Canada's largest grocery retailer. "The worst of this is now behind of us."

Loblaw's first-quarter earnings, announced April 30, amounted to $62 million or 23 cents per share, up from $54 million or 20 cents in the first quarter last year as sales increased to $6.5 billion from $6.35 billion in the year-ago period.

Faced with record food price inflation, soaring costs of doing business and the emergence of new lower cost retail formats that threatened the growth and profitability of the retail division, Loblaw rolled out a highly complex and difficult muiltiyear turnaround plan.

Going forward, Weston told shareholders Tuesday, "the restructuring is designed to make the food retail division competitive for the long term" - repeating a message that he began delivering while still chairman of Loblaw, before handing the job to his son.

Although publicly traded, both Weston and Loblaw are controlled by the Weston family. Apart from the grocery business, Weston has a major bakery business.

Weston said Loblaw's senior management team, "while under real pressure to perform, is responding correctly and forcefully in ways that reveal the strengths and quality of the company as well as its opportunities and challenges."

Loblaw recently announced several executive changes in an effort to improve performance.

Allan Leighton, a long-time advisor to the family, became president of Loblaw last month, replacing Mark Foote, formerly head of retailing of Canadian Tire Corp. (TSX:CTC), who had been named to the post in September 2006 when Galen G. Weston, 32, succeeded his father as executive chairman and chief executive of Loblaw.

Loblaw chief financial officer Bill Wells also left last month to became chief executive of Biovail Corp. (TSX:BVF), Canada's largest publicly traded drug maker. Wells was replaced by Bob Vaux, who is also Weston's CFO.

Weston said Loblaw's five-point plan, which builds on the work already done over the first year of the turnaround, "will result not only in Loblaw becoming the best again."

But, he said "it will provide a new and stronger foundation for the company's long-term performance and profitability."

George Weston Ltd. recently reported a first-quarter profit of $131 million, up 26 per cent from a year-earlier $104 million on price increases and cost reductions. Its earnings amounted to 91 cents per share, compared with 70 cents per share in the first quarter of 2007.

Analysts polled by Thomson Financial had expected earnings of 69 cents per share.

Sales for the period ended March 22 ticked up 1.6 per cent to $7.34 billion from $7.2 billion in the year-earlier period, foreign currency translation negatively impacting growth by about 1.6 per cent.

The good news about the Weston Foods side of the company, said Galen Sr., is that "while reported sales declined 1.2 per cent in 2007 to $4.3 billion, our sales would actually have risen by more than two per cent adjusting for the impact of the stronger Canadian dollar."

Profitability rose again strongly in 2007, he said, with adjusted operating income increasing 17.5 per cent to $382 million.

But, despite all these improvements, "the big story these days is the unprecedented increase in commodity prices," said Galen Sr.

For instance, he said, the price of hard red spring wheat rose from under $5 a bushel in early 2007 to a recent peak of over $20.

It has since dropped back below $10, but this still means the company's costs have doubled on this important bakery ingredient, he said.

Many other commodities on which the company depends have also reached unheard of pricing levels, such as gasoline.

"We have over 8,000 trucks alone across the country distributing food stuffs. That gives you some idea of the extra costs that the gas is having within the context of our business."

"Whatever the best manufacturers and the lowest cost retailers can do," said Weston, "consumers will be faced with significant cost increases in food products."

Nevertheless, he said, the company's three-fold response to securing the company against economic shocks such as the ones seen in the past 18 months are working well.

George Weston, he said, is concentrating on three things: continuous product innovation, optimizing infrastructure and determined control of costs.

So far, he said, "this strategy has served us well."

On the TSX, George Weston shares were trading up 42 cents at $49.67, while Loblaw shares were up 13

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