DBRS Morningstar Confirms Ratings on George Weston Limited at BBB, Stable

DBRS Limited (DBRS Morningstar) 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. The confirmation is concurrent with DBRS Morningstar’s confirmation of Loblaw Companies Limited’s (Loblaw) ratings and trend change to Positive from Stable (see DBRS Morningstar press release dated October 8, 2019). On August 23, 2019, DBRS Morningstar also confirmed the ratings on Choice Properties REIT (CHP) at BBB with a Stable trend.

To evaluate GWL’s ratings, DBRS Morningstar uses the “DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries” in conjunction with the applicable methodologies for each respective subsidiary – “Rating Companies in the Merchandising Industry” for Loblaw, “Rating Entities in the Real Estate Industry” for CHP and “Rating Companies in the Consumer Products Industry” for the Weston Foods bakery business (Weston Foods).

The confirmation of GWL’s ratings reflects (1) DBRS Morningstar’s view that the business risk profile of Weston Foods is consistent with the BBB rating category; (2) the Company’s position as the holding company of CHP (approximately 63.0% ownership); and (3) GWL’s position as the holding company of Loblaw (approximately 51.3% ownership).

DBRS Morningstar calculates the weighted-average (WA) subsidiary rating of BBB (low) based on each subsidiary’s contribution to consolidated cash flow, adjusted for GWL’s ownership interest in each respective entity, and based on structural subordination on the levered cash flows received from Loblaw and CHP. As such, despite the Positive trend on Loblaw, the trend on GWL’s ratings remains Stable and any rating upgrade on Loblaw to BBB (high) will not likely result in a corresponding rating action on GWL.

Weston Foods’ operating performance continued to remain pressured, but showed signs of stabilization through H1 2019. Sales, excluding foreign exchange, decreased by 1.7% year over year to $995 million in H1 2019 because of product rationalization and the loss of key customers in 2018, partially offset by the positive impact from pricing, growth in key categories and changes in sales mix. Adjusted EBITDA margins continued to be negatively affected by higher input and distribution costs, partially offset by productivity improvements and the benefit of the Company’s Transformation Program. As such, adjusted EBITDA declined by 3.3% to approximately $89 million in H1 2019, excluding the impact of International Financial Reporting Standards 16, compared with the same period in 2018.

DBRS Morningstar assesses GWL’s financial and liquidity strength based on key credit metrics calculated using the Company’s debt and preferred shares, related preferred dividends and interest expense (unconsolidated) as well as its adjusted EBITDA and cash flows. DBRS Morningstar-adjusted EBITDA and cash flows for GWL comprise the dividends received from Loblaw, the distributions received from CHP and the adjusted EBITDA to cash flow from Weston Foods operations. DBRS Morningstar also considers GWL’s cash on hand and net debt. The Company’s current Issuer Rating of BBB reflects the WA subsidiary rating of BBB (low), supported by the strength of GWL’s credit metrics and liquidity (i.e., pro forma lease-adjusted debt-to-EBITDAR of 0.93 times (x) and lease-adjusted EBITDA coverage of 11.97x for the last 12 months ended Q2 2019).

Going forward, DBRS Morningstar expects Weston Foods’ earnings profile to continue to stabilize. Revenues are anticipated to remain relatively flat at above $2.1 billion over the medium term as the impact of product rationalization is balanced by improvements in price and mix. EBITDA margins are forecast to improve because of efficiency improvements and the Company’s Transformation Program. As such, DBRS Morningstar believes that EBITDA will return to growth in 2020.

GWL’s financial profile should remain stable based on its relatively stable balance-sheet debt, sizable cash balance and liquid holdings in Loblaw and CHP. Annual capex at Weston Foods is expected to moderate to the $200 million range over the medium term from approximately $250 million previously, balanced between maintenance and growth. Over the near term, including dividends from Loblaw and CHP, DBRS Morningstar expects GWL to generate modest amounts of free cash flow (FCF) after dividends and before changes in working capital. Over the medium term, DBRS Morningstar expects the Company to use any FCF along with cash on hand to continue to invest in growth – organic or through acquisition – and to further increase returns to shareholders.

GWL’s liquidity remains adequate for its current exceptional Short-Term Issuer Rating of R-2 (high) based on its sizable cash on hand and short-term investments as well as its liquid ownership interests in Loblaw and CHP, cash-generating capacity and manageable debt levels.

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

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

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 under Related Documents or by contacting us at info@dbrs.com.

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

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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