Branded products, cost structure boost Weston Foods

by Eric Schroeder
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TORONTO — A renewed focus on branded products combined with an improved cost structure helped drive a 100% gain in operating income at Weston Foods in the second quarter ended June 16.

Operating income of Weston Foods was C$112 million ($105.2 million) during the second quarter, up sharply from C$56 million in the same period last year. Weston Foods sales were C$1,004 million, up 1% from C$999 million.

Overall volume at Weston Foods decreased by approximately 2.2% for the second quarter of 2007 with approximately 1.1% of this volume decline attributable to the combined effect of the exit from the U.S. frozen food service bagel business early in the third quarter of 2006 and the discontinuance of contract manufacturing of biscuits for certain customers during 2006.

Restructuring and other charges during the quarter were C$7 million, which compared with income of C$10 million in the second quarter of fiscal 2006. Weston Foods also incurred charges of C$12 million related to commodity futures fair value adjustment and C$6 million related to net effect of stock-based compensation and the associated equity derivatives.

For the first half of fiscal 2007, operating income at Weston Foods totaled C$189 million ($177.5 million), up 58% from C$120 million in the first half of fiscal 2006. Net sales were C$2,065 million, up narrowly from C$2,027 million.

The company said fresh bakery sales rose approximately 4% in the second quarter, driven by price increases in key product categories combined with changes in sales mix.

"For the second quarter of 2007, branded volume increases included growth in the Arnold brand in the United States and Wonder and D’Italiano brands in Canada," Weston said. "Continued growth in whole grain products and the introduction of new and expanded products, such as Thomas’ 100 Calorie English Muffins and Thomas’ mini square bagels contributed positively to overall fresh bakery sales growth during the second quarter of 2007 due to price increases, partially offset by volume declines, particularly in private label products."

Weston said fresh-baked sweet goods sales, primarily sold under the Entenmann’s brand, decreased a little more than 1% due to higher promotional activity partially offset by volume growth, especially the introduction of new and expanded products, such as Entenmann’s 100 Calorie Little Bites.

Frozen bakery sales contributed about 1% to overall sales growth, as price increases combined with improvements in sales mix.

During the second quarter of 2007, Weston Foods completed the C$11 million sale of an ice cream cone baking facility in Los Angeles. As a result of the sale, Weston recognized a gain on the sale of fixed assets of C$9 million.

Weston also completed the sale of a frozen bagel plant in Nebraska City, Neb., for C$1 million and recognized a loss on the sale of fixed assets of C$1 million.

During 2005, Weston Foods approved a plan to restructure its U.S. biscuit operations. This plan includes the closing of two biscuit facilities located in Elizabeth, N.J., and Richmond, Va., by the end of 2006 with the majority of the production relocated to a new facility in Virginia and an existing Weston Foods facility already operating in South Dakota. The sale and lease-back of these two facilities was completed in 2005. All manufacturing activities have ceased in both facilities. During the first quarter of 2007, Weston Foods vacated the Elizabeth facility and recognized a gain on the sale of fixed assets of C$6 million. By the end of the second quarter of fiscal 2007, total cumulative charges related to this restructuring plan since 2005 totaled C$21 million in accelerated depreciation and C$39 million of employee termination benefits and other exit related costs.

Weston said it has approved a plan to transfer the manufacturing of two lines of private label English muffins in the United States to third-party producers or other Weston Foods manufacturing lines. The move is expected to result in C$2 million of accelerated depreciation in the third quarter of fiscal 2007. Also in the third quarter, Weston said it will consolidate, relocate and restructure certain sales and administrative functions in the United States, a move that will result in a charge of approximately C$4 million.

Net income of George Weston in the second quarter ended June 16 was C$129 million ($121.2 million), equal to C$0.90 (85c) per share on the common stock, down from C$184 million, or C$1.32 per share, in the same period a year ago. Sales were C$7,739 million, up 3%.

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