2018 Annual Report
George Weston Limited
Footnote Legend
(1)
(2)
(3)
(4)
(5)
See Section 18, “Non-GAAP Financial Measures”, of the Company’s 2018 Management’s Discussion and Analysis.
For financial definitions and ratios refer to the Glossary beginning on page 174.
To be read in conjunction with “Forward-Looking Statements” beginning on page 4.
Certain current and comparative figures have been restated to present Continuing Operations at Loblaw as a result of Loblaw’s spin-out of Choice
Properties. See note 5 in the Company’s 2018 annual consolidated financial statements.
Certain figures have been restated as a result of IFRS 15, “Revenue from Contracts with Customers” and a change in accounting policy. See note 2
in the Company’s 2018 annual consolidated financial statements.
Financial Highlights 1 / Report to Shareholders 2 / Management’s Discussion and Analysis 3 / Financial Results 79 /
Three Year Summary 172 / Glossary 174 / Corporate Directory 176 / Shareholder and Corporate Information 177
Financial Highlights(2)
As at or for the years ended December 31
($ millions except where otherwise indicated)
Consolidated Operating Results
Sales
Operating income
Adjusted EBITDA(i)
Depreciation and amortization(ii)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(i)
Income taxes
Adjusted income taxes(i)
Net earnings
Net earnings attributable to shareholders of the Company(iii)
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(i)
Consolidated Financial Position and Cash Flows
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Capital investments
Free cash flow(i)
Total debt
Total equity attributable to shareholders of the Company
Total equity
Consolidated Per Common Share ($)
Diluted net earnings per common share
Adjusted diluted net earnings per common share(i)
Consolidated Financial Measures and Ratios
Adjusted EBITDA margin(i) (%)
Rolling year adjusted return on average equity attributable to common shareholders
of the Company(i) (%)
Rolling year adjusted return on capital(i) (%)
Reportable Operating Segments
Weston Foods
Sales
Operating income
Adjusted EBITDA(i)
Adjusted EBITDA margin(i) (%)
Depreciation and amortization(ii)
Loblaw(4)
Sales
Operating income
Adjusted EBITDA(i)
Adjusted EBITDA margin(i) (%)
Depreciation and amortization(ii)
Choice Properties
Revenue
Net income
Funds from operations(i)
$
$
$
$
$
$
$
$
2018
48,568
2,585
4,528
1,746
948
762
639
680
998
574
530
908
1,889
2,719
1,593
134
16,445
8,040
14,204
$
3.99
6.85
9.3%
12.7%
12.0%
2,122
73
219
10.3%
130
46,693
1,915
3,520
7.5%
1,497
1,148
650
604
$
$
$
2017(5)
48,289
2,561
4,337
1,685
523
555
449
712
1,589
766
722
903
3,233
3,425
1,474
1,395
13,066
7,934
14,795
5.58
6.99
9.0%
12.9%
13.0%
2,243
91
256
11.4%
117
46,587
2,041
3,513
7.5%
1,454
830
405
443
(i)
See “Non-GAAP Financial Measures” section of the Company’s 2018 Annual Management’s Discussion and Analysis beginning
on page 68.
(ii) Depreciation and amortization includes $521 million (2017 – $524 million) of amortization of intangible assets, acquired with
Shoppers Drug Mart, recorded by Loblaw and $9 million (2017 – $10 million) of accelerated depreciation and amortization recorded
by Weston Foods, related to restructuring and other charges.
(iii) Includes net earnings available to common shareholders of the Company and preferred dividends.
George Weston Limited 2018 Annual Report 1
Report to Shareholders(3)
Fellow shareholders,
In 2018, we saw the pace of change continue across our businesses. It brought opportunities to pursue new growth,
headwinds to be overcome, and defining moments for our organization. Throughout it all, we took several steps to bring
stability and focus to our group, positioning George Weston Limited for the future.
Weston Foods completed the first year of its ambitious transformation plan, leaning into the new organizational structure
that was put in place at the end of 2017 and benefiting from many of the cost efficiencies that were surfaced as a result. We
stabilized the Frozen business and continued to see momentum in key growth areas such as Artisan and Donuts. This was
offset by sales flowing back more slowly than expected following a widespread optimization of our assortment. In response,
management took action, pausing additional SKU reductions and postponing the implementation of a new ERP system. By
making this difficult decision, we brought focus to restoring our sales growth trajectory and further embedding operational
consistency. Early signs suggest we are on the right path and we remain committed to seeing Weston Foods secure its place
as North America’s premier bakery.
At Loblaw, our strategic framework took hold as our operating divisions delivered stable trading performance despite
significant regulatory headwinds. This came as a result of more effective data-driven promotions, greater process and
efficiencies, and a passion for the customer across all levels of the organization. At the same time, the business continued to
benefit from focused investments in the future. We brought together our loyalty programs, allowing 18 million PC Optimum
members to join a loyalty loop that rewards customers personally while encouraging them to return to our stores and
services more frequently. PC Financial launched a reimagined digital payments experience that is seeing cardholder
engagement outpace our expectations. We continued to cement the technology foundation for our connected healthcare
platform following the acquisition of QHR. And, with 670 PC Express locations, as well as 16 urban areas that offer delivery
by Instacart, our everyday digital retail offering is now within 10 minutes of 75% of Canadians and 85% of those living in the
Greater Toronto Area. Although grocery leads that omnichannel offering, apparel, beauty, and pharmacy have also become
meaningful businesses and in 2018 our e-commerce sales surpassed half a billion dollars. The pace at which we’re able to
bring these new platforms to our customers is the result of more than a decade’s investment in our underlying systems and
infrastructure. With that firm footing in place, Loblaw is set to lead the market by serving changing consumer needs and
continuing to build upon the same bricks and mortar network that Canadians have come to trust and rely upon.
Finally, Choice Properties saw two defining transactions take place in 2018. First, the combination with Canadian Real Estate
Investment Trust (CREIT) reinforced its position as Canada’s preeminent REIT. With the addition of CREIT’s strong portfolio of
retail, office, and industrial properties, as well as the depth of their management team’s expertise, Choice Properties is now
unmatched in the Canadian landscape. The spin out of Loblaw’s interest in Choice Properties to George Weston that
followed cements real estate as a key pillar of our strategy. George Weston will benefit from Choice Properties’ stable cash
flow and NOI growth while preserving the strategic relationship with Loblaw and providing a committed long-term owner.
Looking ahead, Choice Properties is set to pursue a thoughtful development agenda that will tap into some of the country’s
most prized real estate, delivering value to our shareholders.
As we turn from 2018 to 2019, we find George Weston in a position of strength. Weston Foods is steadily improving sales
and operational execution. Loblaw is well placed to meet the evolving everyday needs of Canadians. And, Choice Properties
is now a core part of our organization, comprising a solid third pillar of our strategy that is set to grow over the long term.
From here, we see an exciting future for our company as we make further headway in our transformation. As we do so, we
wish to thank our employees and shareholders for their support.
[signed]
Galen G. Weston
Chairman and Chief Executive Officer
Toronto, Canada
February 25, 2019
2 George Weston Limited 2018 Annual Report
[signed]
Richard Dufresne
President and Chief Financial Officer
Management’s Discussion and Analysis
1.
2.
3.
4.
5.
Forward-Looking Statements
Overview
Strategic Framework
Key Financial Performance Indicators
Overall Financial Performance
5.1
5.2
5.3
Consolidated Results of Operations
Selected Annual Information
Consolidated Other Business Matters
6.
Results of Reportable Operating Segments
6.1 Weston Foods Operating Results
Loblaw Operating Results
6.2
Choice Properties Operating Results
6.3
7.
Liquidity and Capital Resources
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
Cash Flows
Liquidity
Components of Total Debt
Financial Condition
Credit Ratings
Share Capital
Off-Balance Sheet Arrangements
Contractual Obligations
8.
Quarterly Results of Operations
8.1
8.2
Quarterly Financial Information (Unaudited)
Fourth Quarter Results (Unaudited)
9.
Fourth Quarter Results of Reportable Operating Segments
9.1 Weston Foods Fourth Quarter Operating Results (Unaudited)
Loblaw Fourth Quarter Operating Results (Unaudited)
9.2
Choice Properties Fourth Quarter Operating Results (Unaudited)
9.3
10. Disclosure Controls and Procedures
11.
12.
13.
14.
Internal Control Over Financial Reporting
Enterprise Risks and Risk Management
12.1 Operating Risks and Risk Management
12.2 Financial Risks and Risk Management
Related Party Transactions
Critical Accounting Estimates and Judgments
15. Accounting Standards Implemented
16.
Future Accounting Standards
17. Outlook
18. Non-GAAP Financial Measures
19. Additional Information
4
6
6
7
8
8
15
18
18
19
20
23
26
26
27
28
31
31
32
34
35
36
36
38
45
45
46
48
49
49
49
50
57
59
60
62
65
67
68
78
George Weston Limited 2018 Annual Report 3
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) for George Weston Limited (“GWL” or the
“Company”) should be read in conjunction with the audited annual consolidated financial statements and the
accompanying notes on pages 79 to 171 of this Annual Report. The Company’s audited annual consolidated
financial statements and the accompanying notes for the year ended December 31, 2018 have been prepared in
accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International
Accounting Standards Board (“IASB”). The audited annual consolidated financial statements include the accounts
of the Company and other entities that the Company controls and are reported in Canadian dollars, except
where otherwise noted.
Under GAAP, certain expenses and income must be recognized that are not necessarily reflective of the
Company’s underlying operating performance. Non-GAAP financial measures exclude the impact of certain items
and are used internally when analyzing consolidated and segment underlying operating performance. These
non-GAAP financial measures are also helpful in assessing underlying operating performance on a consistent
basis. See Section 18, “Non-GAAP Financial Measures”, of this MD&A for more information on the Company’s
non-GAAP financial measures.
On November 1, 2018, the Company and Loblaw Companies Limited (“Loblaw”) completed a reorganization
under which Loblaw spun out its approximate 61.6% effective interest in Choice Properties Real Estate
Investment Trust (“Choice Properties”) to the Company (the “reorganization”), as described in Section 5.3
“Consolidated Other Business Matters” and Note 5 “Loblaw's Spin-out of Choice Properties Real Estate
Investment Trust” of this Annual Report. In connection with the reorganization, the Company issued
approximately 26.6 million common shares to Loblaw shareholders other than the Company and its subsidiaries
(“Loblaw minority shareholders”). Following the reorganization, the Company owned an approximate 65.4%
effective interest in Choice Properties directly (which includes the approximate 3.8% interest in Choice
Properties directly owned by GWL prior to the reorganization) and Choice Properties became a reportable
operating segment of the Company.
A glossary of terms and ratios used throughout this Annual Report can be found beginning on page 174.
The information in this MD&A is current to February 25, 2019, unless otherwise noted.
FORWARD-LOOKING STATEMENTS
1.
This Annual Report, including this MD&A, for the Company contains forward-looking statements about the
Company’s objectives, plans, goals, aspirations, strategies, financial condition, results of operations, cash flows,
performance, prospects, opportunities and legal and regulatory matters. Specific forward-looking statements in
this Annual Report include, but are not limited to, statements with respect to the Company’s anticipated future
results, events and plans, strategic initiatives, regulatory changes including further healthcare reform, future
liquidity, planned capital investments, and status and impact of information technology (“IT”) systems
implementation. These specific forward-looking statements are contained throughout this Annual Report
including, without limitation, in Section 3, “Strategic Framework”, Section 7, “Liquidity and Capital Resources”,
Section 17, “Outlook”, and Section 18, “Non-GAAP Financial Measures” of this MD&A. Forward-looking
statements are typically identified by words such as “expect”, “anticipate”, “believe”, “foresee”, “could”,
“estimate”, “goal”, “intend”, “plan”, “seek”, “strive”, “will”, “may”, “maintain”, “achieve”, “grow”, “should” and
similar expressions, as they relate to the Company and its management.
4 George Weston Limited 2018 Annual Report
Forward-looking statements reflect the Company’s current estimates, beliefs and assumptions, which are based
on management’s perception of historical trends, current conditions and expected future developments, as well
as other factors it believes are appropriate in the circumstances. The Company’s expectation of operating and
financial performance in 2019 is based on certain assumptions including assumptions about sales and volume
growth, anticipated cost savings, operating efficiencies, anticipated benefits from strategic initiatives and
restructuring, healthcare reform impacts, future liquidity, planned capital investments, and the status and impact
of information technology (“IT”) systems implementations. The Company’s estimates, beliefs and assumptions
are inherently subject to significant business, economic, competitive and other uncertainties and contingencies
regarding future events and as such, are subject to change. The Company can give no assurance that such
estimates, beliefs and assumptions will prove to be correct.
Numerous risks and uncertainties could cause the Company’s actual results to differ materially from those
expressed, implied or projected in the forward-looking statements, including those described in Section 12,
“Enterprise Risks and Risk Management”, of this MD&A and the Company’s Annual Information Form (“AIF”) for
the year ended December 31, 2018. Such risks and uncertainties include:
•
changes to the regulation of generic prescription drug prices, the reduction of reimbursements under public
drug benefit plans and the elimination or reduction of professional allowances paid by drug manufacturers;
the inability of the Company’s IT infrastructure to support the requirements of the Company’s business, or
the occurrence of any internal or external security breaches, denial of service attacks, viruses, worms and
other known or unknown cybersecurity or data breaches;
failure to realize benefits from investments in the Company’s new IT systems;
failure to realize the anticipated benefits associated with the Company’s strategic priorities and major
initiatives, including revenue growth, anticipated cost savings, operating efficiencies, or organizational
changes that may impact the relationships with franchisees and associates;
failure to effectively respond to consumer trends or heightened competition, whether from current
competitors or new entrants to the marketplace;
failure to maintain an effective supply chain could adversely affect the assortment and product availability at
store level, which may negatively impact customer experience;
failure to execute Loblaw’s e-commerce initiative or to adapt its business model to the shifts in the retail
landscape caused by digital advances;
•
•
•
•
•
•
• public health events including those related to food and drug safety;
• errors made through medication dispensing or errors related to patient services or consultations;
• adverse outcomes of legal and regulatory proceedings and related matters;
•
•
changes to any of the laws, rules, regulations or policies applicable to the Company’s business;
failure to achieve desired results in labour negotiations, including the terms of future collective bargaining
agreements;
changes in economic conditions, including economic recession or changes in the rate of inflation or
deflation, employment rates and household debt, political uncertainty, interest rates, currency exchange
rates or derivative and commodity prices;
the inability of the Company to effectively develop and execute its strategy; and
the inability of the Company to anticipate, identify and react to consumer and retail trends.
•
•
•
This is not an exhaustive list of the factors that may affect the Company’s forward-looking statements. Other
risks and uncertainties not presently known to the Company or that the Company presently believes are not
material could also cause actual results or events to differ materially from those expressed in its forward-looking
statements. Additional risks and uncertainties are discussed in the Company’s materials filed with the Canadian
securities regulatory authorities from time to time, including without limitation, the section entitled “Operating
and Financial Risks and Risk Management” in the Company’s AIF for the year ended December 31, 2018. Readers
are cautioned not to place undue reliance on these forward-looking statements, which reflect the Company’s
expectations only as of the date of this Annual Report. Except as required by law, the Company does not
undertake to update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
George Weston Limited 2018 Annual Report 5
Management’s Discussion and Analysis
OVERVIEW
2.
GWL is a Canadian public company, founded in 1882. The Company operates through its three reportable
operating segments, Weston Foods, Loblaw and Choice Properties. The Company also holds cash and short term
investments. The Weston Foods operating segment includes a leading North American bakery that offers
packaged bread and rolls in Canada as well as frozen and artisan bread and rolls, cakes, donuts, pies, biscuits and
alternatives throughout Canada and the U.S.
Loblaw has two reportable operating segments, Retail and Financial Services. Loblaw provides Canadians with
grocery, pharmacy, health and beauty, apparel, general merchandise, financial services and wireless mobile
products and services. Loblaw is one reportable operating segment of the Company.
Choice Properties owns, manages and develops a high quality portfolio of commercial retail, industrial, office
and residential properties across Canada.
STRATEGIC FRAMEWORK
3.
The Company employs various operating and financial strategies, driven by each of its reportable operating
segments.
Weston Foods is committed to offering superior products and services to its consumers and customers in an
increasingly competitive environment.
In 2017, Weston Foods introduced its new strategic framework with a corresponding multi-year transformation
program, centered on its ambition of becoming a premier North American bakery, all while delivering solid
financial results. Weston Foods aims to redefine bakery for its consumers and customers with superior taste and
experiences, enhance its level of service to customers, build on its leading brands and engage in strategic
innovation.
Critical to achieving these goals are engaging talent in its workforce, investing in a competitive integrated supply
chain, executing with excellence, and implementing new systems to support agile ways of working. A
transformation program is in place to support these critical elements, with the aim of realizing $100 million of
adjusted EBITDA(1) improvement.
This strategic framework and the transformation program will be pursued while respecting our core values and
working towards our greater purpose of elevating everyday moments.
Loblaw’s strategic framework is anchored by a powerful purpose: Live Life Well. Loblaw is committed to
delivering industry leading financial results through data-driven insights and process and efficiency excellence - a
model that fuels truly customer-centric investments in Everyday Digital Retail, Payments and Rewards, and a
future Connected Healthcare Network.
Loblaw strives to be the “best in food, health and beauty.” The approach to offering “best in food” is driven by
fresh food selection, a desire to offer sustainable and competitive pricing, customized assortments across
banners, and several of the country’s top control brands. Achieving “best in health and beauty” requires putting
pharmacy customers first, providing high quality health and wellness products and services, and delivering a
diverse and differentiated beauty offering.
All of these objectives require Loblaw’s customers to have the convenience to shop, when, where and how they
want - which is the fundamental strength of Loblaw’s omni-channel strategy.
Choice Properties’ strategy is to grow and manage its portfolio and cash flow by leveraging its sizable base of
assets, its relationship with Loblaw and its solid capital structure. Choice Properties is focused on driving growth
through the acquisition of assets that meet or exceed its investment criteria, the development and
redevelopment of properties to their highest and best use, and the active management of properties to
maximize their occupancy and operating income.
6 George Weston Limited 2018 Annual Report
Weston Foods, Loblaw and Choice Properties each have their own risk profiles and operating risk management
strategies. The success of these and other plans and strategies discussed in this MD&A may be affected by risks
and uncertainties, including those described in Section 12, “Enterprise Risks and Risk Management” of this
MD&A and in the Company’s AIF for the year ended December 31, 2018.
KEY FINANCIAL PERFORMANCE INDICATORS
4.
The Company has identified specific key financial performance indicators to measure the progress of short and
long term objectives. Certain key financial performance indicators are set out below:
($ millions except where otherwise indicated)
As at or for the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders of the Company(1)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1)
Cash and cash equivalents, short term investments and security deposits
Cash flows from operating activities
Free cash flow(1)
Total debt
Rolling year adjusted return on average equity attributable to common
($)
shareholders of the Company(1)
Rolling year adjusted return on capital(1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
48,568
2,585
4,528
9.3%
574
530
908
3.99
6.85
1,889
2,719
134
16,445
12.7%
12.0%
2017(5)
48,289
2,561
4,337
9.0%
766
722
903
5.58
6.99
3,233
3,425
1,395
13,066
12.9%
13.0%
George Weston Limited 2018 Annual Report 7
Management’s Discussion and Analysis
5.
OVERALL FINANCIAL PERFORMANCE
5.1
CONSOLIDATED RESULTS OF OPERATIONS
($ millions except where otherwise indicated)
For the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other
financing charges(1)
Income taxes
Adjusted income taxes(1)
Adjusted income tax rate(1)
Net earnings attributable to shareholders
of the Company
Net earnings available to common shareholders
of the Company
Adjusted net earnings available to common
shareholders of the Company(1)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1) ($)
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
48,568
2,585
4,528
9.3%
1,746
948
762
639
680
26.7%
574
530
908
3.99
6.85
$
$
$
$
$
$
$
$
$
$
$
$
$
2017(5)
48,289
2,561
4,337
9.0%
1,685
523
555
449
712
27.1%
766
722
903
5.58
6.99
$
$
$
$
$
$
$
$
$
$
$
$
$
$ Change
279
% Change
0.6 %
24
191
61
425
207
190
(32)
0.9 %
4.4 %
3.6 %
81.3 %
37.3 %
42.3 %
(4.5)%
(192)
(25.1)%
(192)
(26.6)%
5
(1.59)
(0.14)
0.6 %
(28.5)%
(2.0)%
(i) Depreciation and amortization includes $521 million (2017 – $524 million) of amortization of intangible assets, acquired with
Shoppers Drug Mart, recorded by Loblaw and $9 million (2017 – $10 million) of accelerated depreciation and amortization recorded
by Weston Foods, related to restructuring and other charges.
On November 1, 2018, the Company and Loblaw completed a reorganization under which Loblaw spun out its
approximate 61.6% effective interest in Choice Properties to the Company. In connection with the
reorganization, the Company issued approximately 26.6 million common shares to Loblaw minority shareholders.
The issuance of the common shares had a dilutive impact on both diluted net earnings per common share and
adjusted diluted earnings per common share(1) in 2018.
Following the reorganization, the Company owned an approximate 65.4% effective interest in Choice Properties
directly (which includes the approximate 3.8% interest in Choice Properties directly owned by GWL prior to the
reorganization) and Choice Properties became a reportable operating segment of the Company. See Section 5.3
“Consolidated Other Business Matters” of this MD&A for further details of the reorganization.
In the second quarter of 2018, Choice Properties completed the acquisition of Canadian Real Estate Investment
Trust (“CREIT”) as set out in Section 6.3 “Choice Properties Operating Results”. In 2018, the acquisition resulted
in increases in revenue of $274 million, adjusted EBITDA(1) of approximately $192 million, adjusted net interest
expense and other financing charges(1) of $187 million and adjusted net earnings available to common
shareholders of the Company(1) of $4 million.
8 George Weston Limited 2018 Annual Report
Net Earnings Available to Common Shareholders of the Company
Net earnings available to common shareholders of the Company in 2018 were $530 million, a decrease of
$192 million compared to the same period in 2017. The decrease in 2018 was due to the unfavourable year-over-
year net impact of adjusting items totaling $197 million partially offset by an improvement in the underlying
operating performance of $5 million, as described below.
• The unfavourable year-over-year net impact of adjusting items totaling $197 million was primarily due to:
the prior year gain on disposition of Loblaw’s gas bar operations of $207 million; and
the charge related to Glenhuron Bank Limited (“Glenhuron”) at Loblaw of $184 million;
partially offset by,
the prior year impact of Loblaw’s charges related to the PC Optimum Program of $67 million;
the year-over-year favourable impact of restructuring and other charges of $67 million; and
the fair value adjustment to the Trust Unit Liability of $55 million.
• The improvement in underlying operating performance of $5 million was mainly due to the following:
the favourable underlying operating performance of Choice Properties, including the impact of the
acquisition of CREIT; and
the positive contribution from the increase in the Company’s ownership interest in Loblaw, as a
result of Loblaw’s share repurchases;
partially offset by,
an increase in adjusted net interest expenses and other financing charges(1), including the impact of
the acquisition of CREIT, as described below;
an increase in depreciation and amortization, as described below;
the unfavourable underlying operating performance of Weston Foods; and
the unfavourable underlying operating performance of Loblaw’s Retail segment, which as previously
announced, included the negative year-over-year impact of minimum wage increases, incremental
healthcare reform, and the 2017 disposition of Loblaw’s gas bar operations.
Adjusted net earnings available to common shareholders of the Company(1) in 2018 were $908 million, an
increase of $5 million, or 0.6%, compared to the same period in 2017 mainly due to the improvement in
underlying operating performance, as described above. Normalized for the disposition of Loblaw’s gas bar
operations, adjusted net earnings available to common shareholders of the Company(1) increased by
approximately $18 million or 2.0%.
Diluted net earnings per common share in 2018 were $3.99 per common share, a decrease of $1.59 per common
share compared to the same period in 2017. The decrease was mainly due to:
•
the unfavourable year-over-year impact of adjusting items totaling $1.45 per common share, primarily
due to the following:
the prior year gain on disposition of Loblaw’s gas bar operations of $1.61 per common share;
and
the charge related to Glenhuron at Loblaw of $1.39 per common share;
partially offset by,
the year-over-year favourable impact of restructuring and other charges of $0.54 per common
share;
the prior year impact of Loblaw’s charges related to the PC Optimum Program of $0.52 per
common share; and
the fair value adjustment to the Trust Unit Liability of $0.41 per common share; and
• a decline of $0.14 per common share, including the net earnings improvement in the underlying
operating performance described above, which was more than offset by the dilutive impact of the
Company’s issuance of approximately 26.6 million common shares in connection with the
reorganization.
George Weston Limited 2018 Annual Report 9
Management’s Discussion and Analysis
Adjusted diluted net earnings per common share(1) in 2018 were $6.85 per common share, a decline of $0.14 per
common share, or 2.0%, compared to the same period in 2017. Normalized for the dilutive impact of the
Company’s issuance of approximately 26.6 million common shares, adjusted diluted net earnings per common
share(1) increased by approximately $0.09 per common share, or 1.3%, which included the positive contribution
from the increase in the Company’s ownership interest in Loblaw of approximately $0.28 per common share.
Sales
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
2018
2,122
46,693
1,148
(1,395)
48,568
$
$
$
$
$
$
$
$
$
$
2017(4)(5)
2,243
46,587
830
(1,371)
48,289
$ Change
$
$
$
(121)
106
318
% Change
(5.4)%
0.2 %
38.3 %
$
279
0.6 %
The Company’s 2018 consolidated sales were $48,568 million, an increase of $279 million compared to the same
period in 2017. The increase in sales in 2018 was impacted by each of its reportable operating segments as
follows:
• Negatively by 0.3% due to sales decline of 5.4% at Weston Foods. Foreign currency translation negatively
impacted sales by approximately 0.2%. Excluding the impact of foreign currency translation, sales decreased
by 5.2%, primarily due to a decrease in volume, including the impact of product rationalization and the loss
of sales to key customers, and the negative impact of changes in sales mix.
• Positively by 0.2% due to sales growth of 0.2% at Loblaw. The improvement was primarily due to an increase
in Loblaw’s Financial Services segment, driven by higher year-over-year sales attributable to The Mobile Shop
as well as higher interest and interchange income, partially offset by a decrease in Loblaw’s Retail segment
sales. Excluding the consolidation of franchises, Loblaw’s Retail segment sales decreased by $369 million, or
0.8%. The decrease was primarily due to the impact of the 2017 disposition of Loblaw’s gas bar operations of
$843 million, partially offset by positive same-store sales growth. Food retail same-store sales growth was
1.1%, after excluding gas bar operations. Loblaw’s food retail average annual internal food price index was
modestly lower than the average annual national food price inflation of 0.8% as measured by “The
Consumer Price Index for Food Purchased from Stores” (“CPI”). CPI does not necessarily reflect the effect of
inflation on the specific mix of goods sold in Loblaw stores. Drug retail same-store sales growth of 2.4%.
• Positively by 0.7% due to revenue growth of 38.3% at Choice Properties. The improvement was mainly due
to the acquisition of CREIT of $280 million, an increase in base rent and operating cost recoveries from
existing properties, and additional revenue generated from other properties acquired in 2017 and 2018 and
from tenant openings in newly developed leasable space.
10 George Weston Limited 2018 Annual Report
Operating Income
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
2018
73
1,915
593
4
2,585
$
$
$
$
$
2017(4)(5)
91
2,041
756
(327)
2,561
$
$
$
$
$
$ Change
(18)
$
(126)
$
(163)
$
% Change
(19.8)%
(6.2)%
(21.6)%
$
24
0.9 %
The Company’s 2018 operating income was $2,585 million, an increase of $24 million compared to the same
period in 2017. The increase in operating income in 2018 included the improvement in underlying operating
performance of $126 million, partially offset by the unfavourable year-over-year net impact of adjusting items
totaling $102 million, as described below:
•
the improvement in underlying operating performance of $126 million was primarily due to:
the underlying operating performance of Choice Properties, driven by the acquisition of CREIT;
partially offset by,
the unfavourable underlying operating performance of Weston Foods, including an increase in
depreciation and amortization; and
the unfavourable underlying operating performance of Loblaw’s Retail segment, including an
increase in depreciation and amortization at Loblaw, partially offset by the improvement in
underlying operating performance of Loblaw’s Financial Services segment. As previously announced,
Loblaw’s results included the negative year-over-year impact of minimum wage increases,
incremental healthcare reform, and the 2017 disposition of Loblaw’s gas bar operations.
•
the unfavourable year-over-year net impact of adjusting items totaling $102 million was primarily due to:
the prior year gain on disposition of Loblaw’s gas bar operations of $501 million; and
the unfavourable impact of acquisition and other costs related to Choice Properties’ acquisition of
CREIT of $141 million;
partially offset by,
the impact of prior year charges at Loblaw related to the PC Optimum Program of $187 million;
the year-over-year favourable impact of restructuring and other charges of $180 million;
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of
$103 million; and
the year-over-year favourable impact of fixed asset and other related impairments, net of recoveries
of $50 million.
Adjusted EBITDA(1)
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
2018
219
3,520
824
(35)
4,528
$
$
$
$
$
2017(4)(5)
256
3,513
597
(29)
4,337
$
$
$
$
$
$ Change
(37)
$
7
$
227
$
% Change
(14.5)%
0.2 %
38.0 %
$
191
4.4 %
George Weston Limited 2018 Annual Report 11
Management’s Discussion and Analysis
The Company’s 2018 adjusted EBITDA(1) was $4,528 million, an increase of $191 million compared to the same
period in 2017. The increase in adjusted EBITDA(1) in 2018 was impacted by each of its reportable operating
segments as follows:
• Negatively by 0.9% due to a decrease of 14.5% in adjusted EBITDA(1) at Weston Foods driven by higher input
and distribution costs and the decline in sales, partially offset by productivity improvements and net benefits
realized from the transformation program.
• Positively by 0.2% due to an increase of 0.2% in adjusted EBITDA(1) at Loblaw, primarily due to improvements
in Loblaw’s Financial Services segment and Loblaw’s Retail segment. The Retail segment included the
favourable contribution from the consolidation of franchises and an increase in Retail gross profit, partially
offset by an increase in Retail selling, general & administrative expenses (“SG&A”) and the unfavourable
impact of the disposition of gas bar operations.
• Positively by 5.2% due to an increase of 38.0% in adjusted EBITDA(1) at Choice Properties primarily driven by
the acquisition of CREIT. The increase also included an increase in net operating income from existing
properties and additional net operating income generated from other property acquisitions, and tenant
openings in newly developed leasable space.
Depreciation and Amortization
($ millions except where otherwise indicated)
For the years ended December 31
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
2018
130
1,497
1
118
1,746
$
$
$
$
$
$
$
$
$
$
2017(4)
117
1,454
1
113
1,685
$ Change
13
$
43
$
—
$
% Change
11.1%
3.0%
—%
$
61
3.6%
Depreciation and amortization in 2018 was $1,746 million, an increase of $61 million compared to the same
period in 2017, and included $521 million (2017 – $524 million) of amortization of intangible assets related to
the acquisition of Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) recorded by Loblaw and $9 million
(2017 – $10 million) of accelerated depreciation and amortization recorded by Weston Foods, related to
restructuring and other charges. Excluding these amounts, depreciation and amortization increased by
$65 million primarily due to:
• an increase in depreciation from the consolidation of Loblaw franchises;
• higher depreciation due to an increase in Loblaw’s IT assets;
• higher depreciation due to investments in capital at Weston Foods; and
• an increase in depreciation on Choice Properties’ investment properties classified as fixed assets by the
Company and measured at cost.
12 George Weston Limited 2018 Annual Report
Net Interest Expense and Other Financing Charges
($ millions)
For the years ended December 31
Net interest expense and other financing
charges
Add: Loblaw’s charge related to Glenhuron
Bank Limited
Fair value adjustment of the forward sale
agreement for 9.6 million Loblaw
common shares
Fair value adjustment of the Trust Unit
liability
Loblaw’s Spin-out of Choice Properties
Adjusted net interest expense and other
financing charges(1)
2018
2017(4)
$ Change
% Change
$
948
$
523
$
425
81.3%
(176)
(50)
41
(1)
—
25
7
—
(176)
(75)
34
(1)
$
762
$
555
$
207
37.3%
Net interest expense and other financing charges in 2018 were $948 million, an increase of $425 million
compared to the same period in 2017. The increase in net interest expense and other financing charges in 2018
was primarily due to the year-over-year impact of an increase in adjusting items totaling $218 million, itemized in
the table above, and an increase in adjusted net interest expense and other financing charges(1) of $207 million
driven by:
• higher interest expense in Choice Properties segment as a result of the issuance of new senior unsecured
debentures, debt assumed on the acquisition of CREIT, higher distributions from newly issued Trust Units to
former CREIT unitholders as part of the acquisition consideration, partially offset by the repayment of Series
A senior unsecured debentures and interest income on the joint ventures assumed on the acquisition of
CREIT; and
• higher interest expense in Loblaw’s Financial Services segment, primarily due to an increase in interest rates
on borrowings related to credit card receivables and a net increase in Guaranteed Investment Certificates
(“GICs”).
George Weston Limited 2018 Annual Report 13
Management’s Discussion and Analysis
Income Taxes
($ millions except where otherwise indicated)
For the years ended December 31
Income taxes
Add: Tax impact of items excluded from
adjusted earnings before taxes(1)(i)
Loblaw’s charge related to Glenhuron
Bank Limited
Remeasurement of deferred tax balances
Statutory corporate income tax rate
change
Adjusted income taxes(1)
Effective income tax rate applicable to earnings
before taxes
Adjusted income tax rate applicable to adjusted
earnings before taxes(1)
$
$
2018
639
170
(191)
62
2017(4)(5)
$
449 $
$ Change
190
% Change
42.3 %
225
—
19
(55)
(191)
43
(19)
(32)
(4.5)%
—
680
$
19
712 $
39.0%
26.7%
22.0%
27.1%
(i)
See the adjusted EBITDA table and the adjusted net interest expense and other financing charges table included in Section 18,
“Non-GAAP Financial Measures”, of this MD&A for a complete list of items excluded from adjusted earnings before taxes(1).
The effective tax rate in 2018 was 39.0%, compared to 22.0% in the same period in 2017. The increase was
primarily attributable to a charge of $191 million and the impact of the non-deductible interest related to
Glenhuron, as described in "Section 5.3 Consolidated Other Business Matters”, and the impact of the non-
taxable portion of the gain on the disposition of Loblaw’s gas bar operations in 2017; partially offset by a
deferred tax recovery resulting from the remeasurement of certain deferred tax balances.
The adjusted income tax rate(1) in 2018 was 26.7%, compared to 27.1% in the same period in 2017. The decrease
was primarily attributable to income attributed to the non-controlling interest in Choice Properties which
increased as a result of the acquisition of CREIT.
In the fourth quarter of 2018, the Company recorded a deferred tax recovery of $62 million resulting primarily
from the change in the manner by which the Company expects to recover certain assets.
In the fourth quarter of 2017, the Company recorded a deferred tax recovery of $19 million resulting from a
change in the applicable provincial income tax rate used to measure certain deferred tax balances caused by a
change in the location of certain business activities.
In the fourth quarter of 2017, the U.S. government enacted a 14.0% decrease in the U.S. federal statutory
corporate income tax rate from 35.0% to 21.0%. As a result, Weston Foods recorded a recovery of $19 million in
2017 related to the remeasurement of its deferred tax liabilities.
14 George Weston Limited 2018 Annual Report
SELECTED ANNUAL INFORMATION
5.2
The selected information presented below has been derived from and should be read in conjunction with the
annual consolidated financial statements of the Company dated December 31, 2018 and 2017. The analysis of
the data contained in the table focuses on the trends and significant events or items affecting the results of
operations and financial condition of the Company over the latest three year period.
For the years ended December 31
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(1)
Income taxes
Adjusted income taxes(1)
Adjusted income tax rate(1)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the Company
Adjusted net earnings available to common shareholders
of the Company(1)
Net earnings per common share ($) - diluted
Adjusted diluted net earnings per common share(1) ($)
Dividends declared per share type ($):
Common shares
Preferred shares – Series I
Preferred shares – Series III
Preferred shares – Series IV
Preferred shares – Series V
2018
(52 weeks)
48,568
2,585
4,528
9.3%
1,746
948
762
639
680
26.7%
998
574
530
908
3.99
6.85
1.950
1.45
1.30
1.30
1.1875
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017(5)
(52 weeks)
48,289
2,561
4,337
9.0%
1,685
523
555
449
712
27.1%
1,589
766
722
903
5.58
6.99
1.805
1.45
1.30
1.30
1.1875
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
(52 weeks)
47,999
2,255
4,140
8.6%
1,654
700
568
465
678
27.5%
1,090
550
506
838
3.90
6.49
1.745
1.45
1.30
1.30
1.1875
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(i) Depreciation and amortization includes $521 million (2017 – $524 million; 2016 – $535 million) of amortization of intangible assets,
acquired with Shoppers Drug Mart, recorded by Loblaw and $9 million (2017 – $10 million; 2016 – $14 million) of accelerated
depreciation and amortization recorded by Weston Foods, related to restructuring and other charges.
Sales The Company’s reportable operating segments had the following sales trends over the last three years:
• Weston Foods sales were negatively impacted by volume declines in 2018 but positively impacted by volume
growth in 2017 and 2016. Foreign currency translation had an unfavourable impact on sales in 2018 and
2017 but a positive impact on sales in 2016.
•
Loblaw’s Retail segment has driven the growth in Loblaw sales over the last three years. Loblaw’s Retail
segment sales have continued to grow despite the pressure of an intensely competitive retail market and an
uncertain economic and regulatory environment over the last three years. In 2016, the food price inflation
trend reversed, with inflation declining each quarter and becoming deflationary in the fourth quarter. This
trend continued until the third quarter of 2017, when deflation in food prices returned to inflation. Through
2018, Loblaw experienced food prices inflation while drug retail was negatively impacted by incremental
healthcare reform. Loblaw’s Retail segment sales over the past three years were also impacted by the
consolidation of franchisees and the disposition of gas bar operations in the third quarter of 2017.
George Weston Limited 2018 Annual Report 15
Management’s Discussion and Analysis
• Choice Properties has continued to grow mainly through the addition of new properties as a result of the
CREIT acquisition, an increase in base rents and recovery of property operating costs from existing
properties.
Net earnings available to common shareholders of the Company and Diluted net earnings per common share
Net earnings available to common shareholders of the Company and diluted net earnings per common share for
the last three years were impacted by certain adjusting items as described in Section 18, “Non-GAAP Financial
Measures”, of this MD&A and by the underlying operating performance of each of the Company’s reportable
operating segments.
Over the last three years, the Company’s underlying operating performance was impacted by the following:
•
changes in underlying operating performance of the Loblaw’s Retail segment, including positive same-store
sales growth in both Food retail and Drug retail in 2018, 2017 and 2016; cost savings and operating
efficiencies from process and efficiency initiatives and benefits from strategic initiatives; and improvements
in the performance of Loblaw’s Financial Services segment including the continued investments in strategic
initiatives. Impacts also included, the negative year-over-year impact from the 2017 disposition of Loblaw
gas bar operations; and the negative impact from minimum wage increases and incremental healthcare
reform. The changes in underlying operating performance included increases in depreciation and
amortization in 2018 and 2017, and a decrease in depreciation and amortization in 2016;
• a decline in underlying operating performance at Weston Foods in 2018, driven by higher input and
distribution costs, and the decline in sales, partially offset by productivity improvements and net benefits
realized from the transformation program. A decline in underlying operating performance at Weston Foods
in 2017, including the impact of investments in the business, higher input and distribution costs and
operational issues. A decline in underlying operating performance at Weston Foods in 2016, including the
impact of incremental investments in the business, higher input costs, and new plant costs. The changes in
underlying operating performance included increases in depreciation and amortization in 2018, 2017 and
2016;
• higher adjusted net interest expense and other financing charges(1) in 2018 at Loblaw as a result of an
increase in interest rates on borrowings related to credit card receivables and a net increase in GICs, and at
Choice Properties due to the issuance of new debt and the debt acquired related to the acquisition of CREIT.
A decrease in adjusted net interest expense and other financing costs(1) in 2017 and 2016 was due to
repayment of MTNs at Loblaw and GWL; and
• an increase in GWL’s ownership interest in Loblaw in 2018, 2017 and 2016 as a result of share repurchases.
GWL’s ownership of Loblaw was approximately 50.4% as at the end of 2018 (2017 – approximately 48.6%
and 2016 - approximately 47.0%).
16 George Weston Limited 2018 Annual Report
the charge related to Glenhuron Bank Limited;
Over the last three years, the adjusting items included:
• amortization of intangible assets acquired with Shoppers Drug Mart;
•
• CREIT acquisition and other related costs;
•
•
•
•
•
•
•
•
•
•
•
•
• asset impairments, net of recoveries;
•
•
costs related to the spin-out of Choice Properties;
impact of healthcare reform on inventory balances;
the gain on the sale of air rights;
the change in the fair value adjustment of the Trust Unit liability;
the remeasurement of deferred tax balances;
the change in the fair value adjustment of the forward sale agreement for 9.6 million Loblaw shares;
year-over-year change in restructuring and other charges;
the change in the fair value adjustment of investment properties;
year-over-year foreign currency translation;
the change in the fair value adjustment of derivatives;
the gain on disposition of Loblaw’s gas bar operations;
the wind-down of PC Financial banking services;
the Loblaw Card Program;
the PC Optimum Program, including the revaluation of existing points liability and the impairment of certain
IT assets;
year-over-year change in pension annuities and buy-outs; and
year-over-year change in inventory loss, net of recoveries.
•
•
Total Assets and Long Term Financial Liabilities
($ millions)
Total assets
Total long term debt
Trust Unit liability
Total long term financial liabilities
Dec. 31, 2018
43,814
$
15,318
$
2,658
17,976
$
As at
Dec. 31, 2017(4)
$
$
38,540
12,092
634
12,726
$
Dec. 31, 2016
37,946
$
11,785
$
635
12,420
$
In 2018, total assets of $43,814 million increased by 13.7% as compared to 2017. The increase in total assets was
primarily driven by an increase in investment properties as a result of the CREIT acquisition. Total long term
financial liabilities increased by 41.3% compared to 2017 driven by long term debt assumed on the CREIT
acquisition and net drawings on Choice Properties’ credit facilities and the increase in the value of the Trust Unit
liability.
In 2017, total assets of $38,540 million increased by 1.6% as compared to 2016. The increase in total assets was
primarily driven by an increase in cash and cash equivalents and short term investments as a result of the sale of
Loblaw’s gas bar operation. Total long term financial liabilities increased by 2.5% compared to 2016 driven by the
drawings on Choice Properties credit facilities and the Eagle debt issuance, partially offset by the repayment of
Choice Properties Series 6 senior unsecured debentures.
The Trust Unit liability is recognized at fair value on the consolidated balance sheets and fluctuates due to
issuances and changes in the fair value of Choice Properties’ Trust Units. As at December 31, 2018, 231,346,144
Units were held by unitholders other than the Company (2017 – 47,444,450, 2016 – 47,071,606) and the
Company held an approximate 65.4% (2017 – 88.5%, 2016 – 88.5%) effective ownership interest in Choice
Properties.
George Weston Limited 2018 Annual Report 17
Management’s Discussion and Analysis
5.3
CONSOLIDATED OTHER BUSINESS MATTERS
Loblaw's Spin-out of Choice Properties Real Estate Investment Trust On November 1, 2018, the Company and
Loblaw completed a reorganization under which Loblaw distributed its approximate 61.6% effective interest in
Choice Properties to the Company on a tax-free basis to Loblaw and its Canadian shareholders. In connection
with the reorganization, Loblaw minority shareholders received 0.135 of a common share of the Company for
each common share of Loblaw held, which was equivalent to the market value of their pro rata interest in Choice
Properties as at the announcement date of the reorganization, and the Company received Loblaw’s approximate
61.6% effective interest in Choice Properties. Following the reorganization, Loblaw no longer had an interest in
Choice Properties and the Company owned an approximate 65.4% effective interest in Choice Properties directly
(which includes the approximate 3.8% interest in Choice Properties directly owned by the Company prior to the
completion of the reorganization).
As a result of the reorganization, Loblaw ceased to consolidate its equity interest in Choice Properties and Choice
Properties became a separate reportable operating segment of the Company. The Loblaw segment results
include transactions between Loblaw and Choice Properties in the current and comparative period, including,
but not limited to, rent payments made by Loblaw to Choice Properties. Following the reorganization, the Loblaw
segment results also include impairment and depreciation of certain assets associated with the retail locations
that are leased from Choice Properties. These transactions are eliminated and the impairment and depreciation
is reversed, as applicable, in Other and Intersegment Eliminations as they are consolidated by the Company.
In connection with the reorganization, the Company issued approximately 26.6 million common shares to Loblaw
minority shareholders. The Company continues to be controlled by Mr. W. Galen Weston who, directly and
indirectly through entities which he controls, owns approximately 53.1% of the outstanding common shares of
the Company.
The Company consolidated Loblaw and Choice Properties into its financial statements before and after the
reorganization, and as a result adjusted net earnings(1) remain relatively unchanged. The issuance of
approximately 26.6 million common shares in connection with the reorganization has a dilutive impact on both
the Company’s diluted net earnings per common share and adjusted diluted net earnings per common share(1).
The Company recorded $10 million and $20 million in transaction costs and other related costs in the fourth
quarter and year-to-date 2018, respectively.
Loblaw’s charge related to Glenhuron Bank Limited On September 7, 2018, the Tax Court of Canada (“Tax
Court”) released its decision relating to Glenhuron, a wholly-owned Barbadian subsidiary of Loblaw that was
wound up in 2013. The Tax Court ruled that certain income earned by Glenhuron should be taxed in Canada
based on a technical interpretation of the applicable legislation.
On October 4, 2018, Loblaw filed a Notice of Appeal with the Federal Court of Appeal. Although Loblaw believes
in the merits of its position, it recorded a charge during the third quarter of 2018 of $367 million, of which
$176 million was recorded in net interest and other financing charges and $191 million was recorded in income
taxes. Loblaw believes that this provision will be sufficient to cover its ultimate liability if the appeal is
unsuccessful.
In the third quarter of 2018, Loblaw made a cash payment of $235 million to fund the tax and interest owing in
light of the decision of the Tax Court.
6.
RESULTS OF REPORTABLE OPERATING SEGMENTS
The following discussion provides details of the 2018 results of operations of each of the Company’s reportable
operating segments.
18 George Weston Limited 2018 Annual Report
6.1 WESTON FOODS OPERATING RESULTS
($ millions except where otherwise indicated)
For the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
2018
2,122
73
219
10.3%
130
$
$
$
$
2017
2,243 $
91 $
256 $
$ Change
(121)
(18)
(37)
% Change
(5.4)%
(19.8)%
(14.5)%
11.4%
117 $
13
11.1 %
$
$
$
$
(i) Depreciation and amortization includes $9 million (2017 – $10 million) of accelerated depreciation and amortization related to
restructuring and other charges.
Sales Weston Foods sales in 2018 were $2,122 million, a decrease of $121 million, or 5.4%, compared to the
same period in 2017. Sales included the unfavourable impact of foreign currency translation of approximately
0.2%. Excluding the impact of foreign currency translation, sales decreased by 5.2%, primarily due to a decrease
in volume, including the impact of product rationalization and the loss of sales to key customers, and the
negative impact of changes in sales mix.
Operating income Weston Foods operating income in 2018 was $73 million, a decrease of $18 million compared
to the same period in 2017. The decrease was primarily due to the decline in underlying operating performance
of $51 million, partially offset by the favourable year-over-year net impact of adjusting items totaling $33 million
as described below:
•
•
partially offset by,
•
the favourable year-over-year impact of the fair value adjustment of derivatives of $26 million; and
the favourable year-over-year impact of restructuring and other charges of $10 million;
the unfavourable year-over-year impact of inventory losses, net of recoveries, of $5 million.
Adjusted EBITDA(1) Weston Foods adjusted EBITDA(1) in 2018 was $219 million, a decrease of $37 million
compared to the same period in 2017. Excluding the impact of a net gain related to the sale leaseback of
properties for $24 million, the decrease was driven by higher input and distribution costs and the decline in
sales, partially offset by productivity improvements and net benefits realized from the transformation program.
Weston Foods adjusted EBITDA margin(1) was 10.3% compared to 11.4% in the same period in 2017. The decline
in adjusted EBITDA margin(1) was mainly due to factors impacting adjusted EBITDA(1), as described above.
Depreciation and Amortization Weston Foods depreciation and amortization in 2018 was $130 million, an
increase of $13 million compared to the same period in 2017. Depreciation and amortization included $9 million
(2017 – $10 million) of accelerated depreciation and amortization. These charges primarily related to the
reorganization costs from the transformation program which included an announced closure of unprofitable
facilities in Canada and the U.S. Excluding these amounts, depreciation and amortization increased $14 million in
2018 due to investments in capital.
Weston Foods Other Business Matters
Restructuring and other charges Weston Foods continuously evaluates strategic and cost reduction initiatives
related to its manufacturing assets, distribution networks and administrative infrastructure with the objective of
ensuring a low cost operating structure. In the fourth quarter of 2018 and year-to-date, Weston Foods recorded
restructuring and other charges of $9 million (2017 – $33 million) and $38 million (2017 – $48 million),
respectively, which were primarily related to the reorganization costs from the transformation program, which
year-to-date included the previously announced closures of an unprofitable facility in Canada in the third quarter
of 2018, and in the U.S. that was completed in the first quarter of 2018. Restructuring and other related costs
recorded in the fourth quarter of 2018 and year-to-date included $8 million and $27 million, respectively, of
severance and exit costs, and a nominal amount in the fourth quarter of 2018 and $9 million year-to-date, of
accelerated depreciation and amortization.
George Weston Limited 2018 Annual Report 19
Management’s Discussion and Analysis
6.2
LOBLAW OPERATING RESULTS(4)
($ millions except where otherwise indicated)
For the years ended December 31
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
2018
46,693
1,915
3,520
7.5%
1,497
$
$
$
$
$
$
$
$
2017(5)
46,587 $
2,041 $
3,513 $
7.5%
1,454 $
$ Change
106
(126)
7
% Change
0.2 %
(6.2)%
0.2 %
43
3.0 %
(i) Depreciation and amortization includes $521 million (2017 – $524 million) of amortization of intangible assets acquired with
Shoppers Drug Mart.
Immediately following Loblaw’s spin-out of Choice Properties, Loblaw no longer retained its interest in Choice
Properties and has ceased to consolidate its equity interest in Choice Properties from its consolidated financial
statements. As a result, Loblaw’s current and comparative financial results are restated to present Continuing
Operations of Loblaw. For further details, see Section 5.3 “Consolidated Other Business Matters” of this MD&A.
As previously announced, Loblaw’s year-over-year financial performance was negatively impacted by minimum
wage increases and incremental healthcare reform. In addition, the disposition of Loblaw’s gas bar operations, in
the third quarter of 2017, had a negative year-over-year impact on financial performance.
Sales Loblaw sales in 2018 were $46,693 million, an increase of $106 million compared to the same period in
2017, primarily driven by Financial Services partially offset by a decrease in Retail sales. Financial Services
increased by $129 million or 13.5% driven by higher year-over-year sales attributable to The Mobile Shop as well
as higher interest and interchange income. Retail sales in 2018 decreased by $31 million, or 0.1%, compared to
the same period in 2017 and included food retail sales of $32,969 million (2017 – $33,288 million) and drug retail
sales of $12,867 million (2017 – $12,579 million).
the impact of the disposition of gas bar operations of $843 million;
Excluding the consolidation of franchises, Retail sales in 2018 decreased by $369 million, or 0.8%, primarily
driven by the following factors:
•
partially offset by,
•
food retail same-store sales growth of 1.1%, after excluding gas bar operations. Including gas bar operations,
food retail same-store sales growth was 1.1%. Loblaw’s food retail average annual internal food price index
was modestly lower than the average annual national food price inflation of 0.8% as measured by CPI. CPI
does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores; and
• drug retail same-store sales growth of 2.4%, including pharmacy same-store sales growth of 1.2% and front
store same-store sales growth of 3.5%. Pharmacy same-store sales growth included the impact of
incremental healthcare reform.
In 2018, 17 food and drug stores were opened and 22 food and drug stores were closed, resulting in a net
increase in Retail square footage of 0.1 million square feet, or 0.1%.
The redemption of Loblaw Cards resulted in the delivery of approximately $74 million of free products to
customers in 2018, which was provided for in the fourth quarter of 2017. The redemptions did not benefit sales
or Loblaw’s financial performance and Loblaw’s management does not believe it had a significant impact on food
retail same-store sales.
20 George Weston Limited 2018 Annual Report
Operating income Loblaw operating income in 2018 was $1,915 million, a decrease of $126 million compared to
the same period in 2017. The decrease was primarily driven by the decline in underlying operating performance
of $39 million and the unfavourable year-over-year net impact of adjusting items totaling $87 million, as
described below:
•
the decline in underlying operating performance of $39 million was primarily driven by Retail, partially offset
by Financial Services. Retail included the favourable contribution from the consolidation of franchises, and
the unfavourable impact of the disposition of gas bar operations; and
•
the unfavourable year-over-year net impact of adjusting items totaling $87 million was primarily due to:
the prior year gain on the disposition of gas bar operations of $501 million; and
the unfavourable year-over-year impact of asset impairments, net of recoveries, of $30 million;
partially offset by,
the prior year charges related to the PC Optimum Program of $187 million;
the favourable year-over-year impact of restructuring and other charges of $167 million; and
the favourable year-over-year impact of prior year charges related to the Loblaw Card Program of
$103 million.
Adjusted EBITDA(1) Loblaw adjusted EBITDA(1) in 2018 was $3,520 million, an increase of $7 million compared to
the same period in 2017. The increase was driven by improvements in both Financial Services and Retail. The
improvement in Financial Services was mainly driven by growth in the credit card portfolio. Retail adjusted
EBITDA(1) increased $3 million and included the favourable contribution from the consolidation of franchises of
$26 million as well as the unfavourable impact of the disposition of gas bar operations of approximately $45
million. The increase in Retail adjusted EBITDA(1) was driven by an increase in Retail gross profit, partially offset
by an increase in Retail SG&A.
• Retail gross profit percentage was 29.4%, an increase of 90 basis points compared to the same period in
2017. Excluding the consolidation of franchises, Retail gross profit percentage was 27.7%, an increase of
40 basis points compared to 2017, primarily driven by the favourable impact of the disposition of gas bar
operations of approximately 40 basis points. Margins were negatively impacted by healthcare reform and
positively impacted by food retail.
• Retail SG&A as a percentage of sales was 22.1%, an increase of 90 basis points compared to the same period
in 2017. Excluding the consolidation of franchises, Retail SG&A increased $91 million. Retail SG&A as a
percentage of sales, excluding the consolidation of franchises, was 20.4%, an increase of 30 basis points
compared to the same period in 2017, driven by the following factors:
the unfavourable impact from the 2017 disposition of gas bar operations of approximately 30 basis
points;
higher store costs driven by minimum wage increase; and
the unfavourable year-over-year impact of foreign exchange;
partially offset by,
lower store support costs driven by cost savings initiatives.
Loblaw adjusted EBITDA(1) in 2018 also included a net gain of $6 million (2017 – $7 million) related to the sale
leaseback of properties.
Depreciation and Amortization Loblaw depreciation and amortization in 2018 was $1,497 million, an increase
of $43 million compared to the same period in 2017. The increase in depreciation and amortization was
primarily driven by the consolidation of franchises, an increase in IT assets and the change in the estimated
useful life of certain building components as a result of the spin-out of Choice Properties. Included in
depreciation and amortization is the amortization of intangible assets acquired with Shoppers Drug Mart of
$521 million (2017 – $524 million).
George Weston Limited 2018 Annual Report 21
Management’s Discussion and Analysis
Loblaw Other Business Matters
Process and Efficiency Loblaw continues to execute on a multi-year plan, initiated in 2018, focused on improving
processes and generating efficiencies across its administrative, store, and distribution network
infrastructures. Many initiatives are underway to reduce the complexity and cost of business operations,
ensuring a low cost operating structure that allows for continued investments in Loblaw’s strategic growth
areas. Loblaw’s management anticipates investing capital as well as recording restructuring and other charges
related to these initiatives in 2019 and beyond.
Consolidation of Franchises Loblaw has more than 500 franchise food retail stores in its network. As at year end
2018, 400 of these stores were consolidated for accounting purposes under a new, simplified franchise
agreement (“Franchise Agreement”) implemented in 2015.
Loblaw will convert the remaining franchises to the Franchise Agreement as existing agreements expire, at the
end of which all franchises will be consolidated for accounting purposes. The following table presents the
number of franchises consolidated in the fourth quarter of 2018 and year-to-date, and the total impact of the
consolidation of franchises included in the consolidated results of the Company.
(unaudited)
($ millions except where otherwise indicated)
Number of Consolidated Franchise stores,
beginning of period
Add: Net Number of Consolidated Franchise
stores in the period
Number of Consolidated Franchise stores,
end of period
Sales
Operating income
Adjusted EBITDA(1)
Depreciation and amortization
Net earnings attributable to
non-controlling interests
Quarters Ended
Years Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2018
Dec. 31, 2017
$
379
21
400
264
20
35
15
19
$
273
37
310
186
16
27
11
14
$
310
90
400
1,048
33
92
59
34
$
200
110
310
710
23
66
43
24
Operating income included in the table above does not significantly impact net earnings available to common
shareholders of the Company as the related income is largely attributable to non-controlling interests.
Loblaw expects(3) that the estimated annual impact in 2019 of new and current consolidated franchises will be
revenue of approximately $1,300 million, adjusted EBITDA(1) of approximately $130 million, depreciation and
amortization of approximately $80 million and net earnings attributable to non-controlling interests of
approximately $40 million.
Wind-down of PC Financial banking services In the third quarter of 2017, President’s Choice Bank (“PC Bank”)
entered into an agreement to end its business relationship with a major Canadian chartered bank, which
represented the personal banking services offered under the PC Financial brand. As a result of this agreement,
PC Bank received a payment of approximately $44 million, net of certain costs incurred, $20 million of which was
recognized in the first half of 2018 and $24 million which was recognized in 2017.
PC Bank continues to operate the PC MasterCard® Program and customers will earn PC Optimum points. PC Bank
remains committed to providing payment products to its customers and continues to strengthen its credit card
services and loyalty programs.
22 George Weston Limited 2018 Annual Report
6.3
CHOICE PROPERTIES OPERATING RESULTS
($ millions except where otherwise indicated)
For the years ended December 31
Revenue
Net interest (income) expense and other
financing charges(i)
Net income
Funds from operations(1)(ii)
2018
1,148
(57)
650
604
$
$
$
$
$
$
$
$
2017
830
351
405
443
$
$
$
$
$ Change
318
% Change
38.3%
408
245
161
116.2%
60.5%
36.3%
(i) Net interest expense and other financing charges includes a fair value adjustment on Class B Limited Partnership units.
(ii) Funds from operations is calculated for management purposes and includes the accelerated amortization of debt premium of
$37 million.
Choice Properties’ current and comparative financial results are presented as a reportable operating segment of
the Company on a full year basis.
Revenue Revenue was $1,148 million in 2018, an increase of $318 million compared to 2017 and included
$742 million (2017 – $718 million) generated from tenants within Loblaw’s Retail segment. The increase in
revenue was primarily driven by:
• additional revenue generated from the investment properties included in the acquisition of CREIT of
$280 million;
• an increase in base rent and operating cost recoveries from existing properties;
• additional revenue generated from other properties acquired in 2017 and 2018; and
• additional revenue generated from tenant openings in newly developed leasable space.
Net Interest (Income) Expense and Other Financing Charges Net interest expense and other financing charges
in 2018 resulted in income of $57 million, compared to net interest expense of $351 million in 2017. The change
of $408 million was primarily driven by:
• a favourable change in the fair value adjustment on Class B LP units of $555 million;
partially offset by,
• higher interest expense resulting from the issuance of new debt related to the acquisition of CREIT; including
senior unsecured debentures, term loans and draws on the syndicated credit facility and interest expense on
the debt assumed on the acquisition of CREIT;
• an accelerated amortization of the debt premium on the Class C LP units, related to the conversion to Class B
Exchangeable units exercised by the Company concurrent with the acquisition of CREIT; and
• higher distributions on Class B Exchangeable Units.
Net income Net income was $650 million in 2018, an increase of $245 million compared to 2017, primarily
driven by:
• an increase in net operating income from investment properties acquired as part of the acquisition of CREIT;
• an increase in net operating income from existing properties;
• additional net operating income generated from other property acquisitions and tenant openings in newly
developed leasable space; and
the favourable change in net interest expense and other financing charges, described above;
•
partially offset by,
• an unfavourable change in the fair value adjustment to investment properties; and
• acquisition and other costs related to the acquisition of CREIT of $141 million.
Funds from Operations(1) Funds from Operations(1) were $604 million in 2018, an increase of $161 million
compared to 2017 primarily driven by additional property operating income attributable to the acquired
portfolio, partially offset by higher interest expense due to the acquisition of CREIT.
George Weston Limited 2018 Annual Report 23
Management’s Discussion and Analysis
Choice Properties’ Other Matters
Acquisition of Investment Properties During 2018, Choice Properties acquired eight investment properties for
an aggregate purchase price of $112 million, excluding acquisition costs. Of the eight investment properties
acquired during 2018, three investment properties were acquired from third-party vendors, for an aggregate
purchase price of $34 million, excluding acquisition costs, which was settled by an assumption of a $3 million
mortgage, with the remainder in cash. During 2018, Choice Properties acquired five investment properties from
Weston Foods and Loblaw, of which one property was acquired from Weston Foods and four properties from
Loblaw. This included one property from Weston Foods and three properties from Loblaw during the fourth
quarter of 2018, for an aggregate purchase price of $78 million, excluding acquisition costs, fully settled in cash.
Choice Properties’ Acquisition of CREIT On May 4, 2018, Choice Properties acquired all the assets and assumed
all the liabilities, including outstanding debt, of CREIT for total consideration of $3,708 million. The consideration
was comprised of $1,652 million of cash and the issuance of 182,836,481 new Trust Units.
In connection with the acquisition, Choice Properties arranged a new $1,500 million committed revolving credit
facility. Concurrent with the closing of the acquisition, Choice Properties repaid and cancelled its existing credit
facilities and those acquired from CREIT.
Also, concurrent with the closing of the acquisition, Loblaw, Choice Properties’ controlling unitholder, converted
all of its outstanding Class C LP Units with the face value of $925 million into Class B LP Units of Choice Properties
Limited Partnership. Choice Properties issued to Loblaw 70,881,226 Class B LP Units upon the conversion and the
shortfall in value of approximately $99 million was paid in cash. In connection with this conversion, the Company
recognized capital gains income tax expense of $8 million in contributed surplus.
The cash portion of the acquisition and other transactions in relation to CREIT was financed as follows:
• $1,300 million of proceeds from the issuance of senior unsecured debentures Series K and L; and
• $800 million was obtained through two unsecured term loan facilities, of which $175 million is due in four
years and $625 million is due in five years.
The purchase equation is based on management’s best estimate of fair value. The actual amount allocated to
certain identifiable net assets could vary as the purchase equation is finalized. Choice Properties has one year
from the acquisition date to finalize the fair value of the assets acquired and the liabilities assumed and does not
expect significant changes from the amounts presented below:
($ millions)
Net Assets Acquired:
Cash and cash equivalents
Accounts receivable and other assets
Mortgages, loans and notes receivable
Equity accounted joint ventures
Investment properties
Intangible assets
Goodwill
Trade payables and other liabilities
Long term debt
Deferred income tax liabilities
Total Net Assets Acquired
As at
May 4, 2018
$
$
32
50
196
683
4,730
30
367
(172)
(1,841)
(367)
3,708
The goodwill is generated on consolidation of Choice Properties and is attributable to deferred income tax
recorded on temporary differences arising between the fair value of the investment properties acquired and
their respective income tax bases for the Company’s effective ownership interest in Choice Properties. The
goodwill arising from this acquisition is not deductible for tax purposes. Management has allocated this goodwill
to Loblaw segment for impairment testing.
24 George Weston Limited 2018 Annual Report
As at December 31, 2018, on a year-to-date basis, Choice Properties incurred costs totaling $141 million related
to the acquisition of CREIT, which were recorded in SG&A.
The following table provides impact of the acquisition of CREIT on the Choice Properties segment in the fourth
quarter and year-to-date of 2018:
(unaudited)
($ millions unless where otherwise indicated) Quarter Ended
For the periods ended as indicated
Dec. 31, 2018
106
Revenue
60
Net income
$
Year Ended
Dec. 31, 2018
280
165
$
On a year-to-date pro forma basis, the impact of the CREIT acquisition on Choice Properties revenue and net
income in 2018 would have amounted to approximately $420 million and $250 million, respectively, excluding
the impact of acquisition transaction costs and other related expenses and any adjustment to the fair value of
the investment properties acquired. This pro forma information incorporates the effect of the purchase equation
as if the acquisition had been effective January 1, 2018.
The following table provides the impacts of the acquisition of CREIT on the consolidated results of the Company
in the fourth quarter and year-to-date of 2018:
(unaudited)
($ millions unless where otherwise indicated)
For the periods ended as indicated
Revenue
Adjusted EBITDA(1)
Adjusted net interest expense and other financing charges(1)
Adjusted net earnings available to common shareholders of
the Company(1)
Adjusted diluted net earnings per common share(1) ($)
$
Quarter Ended
Dec. 31, 2018
103
71
68
$
2
0.01
Year Ended
Dec. 31, 2018(i)
274
192
187
4
0.03
(i) Year-to-date adjusted net interest and other financing charges(1) includes $2 million recorded in the first quarter of 2018. Year-to-date
adjusted net earnings available to common shareholders of the Company(1) includes a nominal loss recorded in the first half of 2018.
George Weston Limited 2018 Annual Report 25
Management’s Discussion and Analysis
7.
LIQUIDITY AND CAPITAL RESOURCES
7.1
CASH FLOWS
($ millions)
For the years ended December 31
Cash and cash equivalents, beginning of period
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
Effect of foreign currency exchange rate changes on
cash and cash equivalents
Cash and cash equivalents, end of period
2018
2,034
2,719
(2,256)
(987)
11
1,521
$
$
$
$
$
$
2017
$
1,560
3,425
$
(1,075) $
(1,865) $
(11) $
$
2,034
Change
474
(706)
(1,181)
878
22
(513)
$
$
$
$
$
$
Cash Flows from Operating Activities The year-over-year decrease in cash inflows in 2018 was $706 million,
primarily driven by an unfavourable change in non-cash working capital, a reduction in provision balances,
partially offset by higher cash earnings and lower income taxes paid.
Cash Flows used in Investing Activities The year-over-year increase in cash outflows in 2018 was $1,181 million,
primarily driven by Choice Properties acquisition of CREIT and Loblaws’ proceeds from disposition of gas bar
operations received in 2017; partially offset by a decrease in short term investments.
The following table summarizes the Company’s capital investments by each of its reportable operating segments:
($ millions)
For the years ended December 31
Weston Foods
Loblaw
Choice Properties
Total capital investments
2018
212
1,070
311
1,593
$
$
2017
215
979
280
1,474
$
$
Cash Flows used in Financing Activities The year-over-year decrease in cash outflows in 2018 was $878 million,
primarily driven by higher net issuances of long term debt related to Choice Properties acquisition of CREIT and
an increase in Loblaw’s short term debt, partially offset by an increase in interest paid, mainly driven by interest
related to Glenhuron.
The Company’s significant long term debt transactions are set out in Section 7.3, “Components of Total Debt”.
Free Cash Flow(1)
($ millions)
For the years ended December 31
Cash flows from operating activities
Less:
Interest paid
Fixed asset and investment properties purchases
Intangible asset additions
Free cash flow(1)
2018
2,719
992
1,250
343
134
$
$
2017
3,425
556
1,177
297
1,395
$
$
Change
(706)
436
73
46
(1,261)
$
$
The year-over-year decrease in free cash flow(1) in 2018 was $1,261 million, primarily due to lower cash flows
from operating activities and an increase in interest paid, as described above.
26 George Weston Limited 2018 Annual Report
LIQUIDITY
7.2
The Company (excluding Loblaw and Choice Properties) expects that cash and cash equivalents, short term
investments and future operating cash flows will enable it to finance its capital investment program and fund its
ongoing business requirements, including working capital, pension plan funding requirements and financial
obligations, over the next 12 months. The Company (excluding Loblaw and Choice Properties) does not foresee
any impediments in obtaining financing to satisfy its long term obligations.
Loblaw expects that cash and cash equivalents, short term investments, future operating cash flows and the
amounts available to be drawn against committed credit facilities will enable it to finance its capital investment
program and fund its ongoing business requirements, over the next 12 months including working capital,
pension plan funding requirements and financial obligations. Financial Services expects to obtain long term
financing for the growth of its credit card portfolio through the issuance of Eagle notes and Guaranteed
Investment Certificates (“GICs”). Choice Properties expects to obtain long term financing for the acquisition of
properties primarily through the issuance of unsecured debentures and equity.
For details on the Company’s cash flows, see Section 7.1 “Cash Flows” of this MD&A.
Total Debt The following table presents total debt, as monitored by management:
($ millions)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Fair value of financial derivatives
related to the above debt
As at
Dec. 31, 2018
Dec. 31, 2017
Weston
Foods
Loblaw
Choice
Properties
$
— $
56 $
— $
664
—
915
—
915
847
6,379
48
—
496
6,681
—
Total
56
1,579
1,343
13,975
48
Weston
Foods
Loblaw
Choice
Properties
$
— $
110 $
— $
618
—
915
—
640
985
6,781
41
—
650
2,761
—
Total
110
1,258
1,635
10,457
41
(556)
—
—
(556)
(435)
—
—
(435)
Total debt
$ 1,023 $ 8,245 $ 7,177 $ 16,445
$
1,098 $
8,557 $
3,411 $ 13,066
Management targets credit metrics consistent with those of an investment grade profile. The Company
(excluding Loblaw and Choice Properties) holds cash and cash equivalents and short term investments and as a
result monitors its leverage on a net debt basis. The Company (excluding Loblaw and Choice Properties) has total
debt of $1,023 million (2017 – $1,098 million) and cash and cash equivalents and short term investments of
$612 million (2017 – $803 million), resulting in a $411 million net debt position (2017 – $295 million net
debt position).
Loblaw’s management is focused on managing its capital structure on a segmented basis to ensure that each of
its operating segments is employing a capital structure that is appropriate for the industry in which it operates.
•
Loblaw targets maintaining Retail segment credit metrics consistent with those of investment grade retailers.
Loblaw monitors the Retail segment’s debt to retail adjusted EBITDA(1) ratio as a measure of the leverage
being employed. The Retail segment debt to adjusted EBITDA(1) ratio increased compared to 2017 primarily
as a result of an increase in Retail segment debt.
• PC Bank capital management objectives are to maintain a consistently strong capital position while
considering the economic risks generated by its credit card receivables portfolio and to meet all regulatory
requirements as defined by the Office of the Superintendent of Financial Institutions (“OSFI”).
Choice Properties targets maintaining credit metrics consistent with those of investment grade Real Estate
Investment Trusts (“REIT”). Choice Properties monitors metrics relevant to the REIT industry including targeting
an appropriate debt to total assets ratio.
George Weston Limited 2018 Annual Report 27
Management’s Discussion and Analysis
Covenants and Regulatory Requirements The Company, Loblaw and Choice Properties are required to comply
with certain financial covenants for various debt instruments. As at year end 2018 and throughout the year, the
Company, Loblaw and Choice Properties were in compliance with their respective covenants. As at year end
2018 and throughout the year, PC Bank and Choice Properties met all applicable regulatory requirements.
Short Form Base Shelf Prospectus In 2017, Loblaw filed a Short Form Base Shelf Prospectus, which allows for
the potential issuance of up to $2 billion of unsecured debentures and/or preferred shares subject to the
availability of funding in the capital markets.
In 2017, Eagle filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up to
$1 billion of notes over a 25-month period.
In 2018, Choice Properties filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up
to $2 billion of Units and debt securities, or any combination thereof, over a 25-month period. Under this
Prospectus, Choice Properties issued $650 million of senior unsecured debentures.
In 2018, GWL filed a Base Shelf Prospectus allowing for the issuance of up to $1 billion of senior and
subordinated debt securities, and preferred shares, or any combination thereof over a 25-month period.
7.3
COMPONENTS OF TOTAL DEBT
Debentures The following table summarizes the debentures issued or assumed in the years ended as indicated:
($ millions except where otherwise indicated)
Loblaw Term Loans
– Loblaw Companies Limited Notes(i)
– Loblaw Companies Limited Notes(i)
Choice Properties senior unsecured debentures
– Series I(ii)
– Series J(ii)
– Series K(iii)
– Series L(iii)
– Series A-C(iv)
– Series B-C(iv)
– Series C-C(iv)
– Series D-C(iv)
Total debentures issued
Interest
Rate
Maturity
2018
Principal
Amount
2017
Principal
Amount
Date
3.92%
June 10, 2024
$
4.49% December 11, 2028
3.01%
3.55%
March 21, 2022
January 10, 2025
3.56% September 9, 2024
4.18%
3.68%
4.32%
March 8, 2028
July 24, 2018
January 15, 2021
2.56% November 30, 2019
2.95%
January 18, 2023
$
400
400
300
350
550
750
125
100
100
125
$
3,200
$
—
—
—
—
—
—
—
—
—
—
—
(i) On December 10, 2018, Loblaw issued debentures of $400 million bearing interest at rates of 3.92% and 4.49%, maturing
June 10, 2024 and December 11, 2028, respectively.
(ii) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus filed in the first quarter of 2018.
(iii) In the first quarter of 2018, the net proceeds from the issuance of Series K and L were held in escrow as a part of the financing for
the acquisition of CREIT. During the second quarter of 2018, the Company completed the acquisition of CREIT and the proceeds were
released from escrow.
(iv) Assumed by the Company in connection with the acquisition of CREIT.
28 George Weston Limited 2018 Annual Report
The following table summarizes the debentures, unsecured term loan facilities and term loans repaid in the years
ended as indicated:
($ millions except where otherwise indicated)
Shoppers Drug Mart Corporation Notes
Loblaw Companies Limited - Term Loan(i)
Loblaw Companies Limited - Term Loan(ii)
Loblaw Companies Limited - Term Loan(iii)
Choice Properties senior unsecured debentures
– Series A-C
– Series A
– Series 6
2018
Maturity
Principal
Amount
275
Date
May 24, 2018
$
Interest
Rate
2.36%
Variable
Variable
March 28, 2019
March 29, 2019
3.75%
March 12, 2019
3.68%
3.55%
3.00%
July 24, 2018
July 5, 2018(iv)
April 20, 2017(v)
$
2017
Principal
Amount
—
—
—
—
—
—
200
200
48
250
800
125
400
—
Total MTNs and debentures repaid
$
1,898
$
(i)
Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.45% or Bankers’ Acceptance rate plus
1.45% were redeemed on August 29, 2018.
(ii) Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.13% or Bankers’ Acceptance rate plus
1.13% were redeemed on August 29, 2018.
(iii) Redeemed on December 31, 2018.
(iv) Redeemed on February 12, 2018.
(v) Redeemed on January 23, 2017.
Unsecured Term Loan Facilities In the second quarter of 2018, Choice Properties obtained $800 million through
two unsecured term loan facilities, one $175 million 4-year unsecured term loan provided by a syndicate of
lenders maturing May 4, 2022 and one $625 million 5-year unsecured term loan provided by a syndicate of
lenders maturing May 4, 2023. The term loans bear interest at variable rates of either Prime plus 0.45% or
Bankers’ Acceptance rate plus 1.45%. The pricing of these term loans is contingent on Choice Properties’ credit
ratings from DBRS and S&P remaining at “BBB”.
During the second quarter of 2018, Loblaw repaid the remaining mortgage balance of $72 million at maturity.
Committed Credit Facilities The components of the committed lines of credit available as at year end 2018 and
2017 were as follows:
($ millions)
Loblaw committed credit facility
Choice Properties committed bi-lateral
credit facility
December 21, 2018
Choice Properties committed syndicated
credit facility
Choice Properties committed syndicated
credit facility
Total committed credit facilities
July 5, 2022
May 4, 2023
As at
Dec. 31, 2018
Dec. 31, 2017
Maturity
Date
Available
Credit
Drawn
Available
Credit
Drawn
June 10, 2021
$
1,000
$
—
—
1,500
2,500
$
$
325
325
—
—
—
$
1,000
$
250
500
—
$
1,750
$
—
250
311
—
561
George Weston Limited 2018 Annual Report 29
Management’s Discussion and Analysis
In the first half of 2018, Choice Properties repaid and cancelled the $250 million committed bi-lateral credit
facility and the $500 million committed syndicated credit facility.
In the second quarter of 2018, Choice Properties entered into a new syndicated $1.5 billion senior unsecured
committed revolving credit facility maturing May 4, 2023. The credit facility bears interest at variable rates of
either: Prime plus 0.45% or bankers’ acceptance rate plus 1.45%. The pricing of this credit facility is contingent
on Choice Properties’ credit ratings from DBRS and S&P remaining at “BBB”.
Independent Securitization Trusts Loblaw, through PC Bank, participates in various securitization programs
that provide a source of funds for the operation of its credit card business. PC Bank maintains and monitors the
co-ownership interest in credit card receivables with independent securitization trusts, including Eagle and the
Other Independent Securitization Trusts, in accordance with its financing requirements.
The following table summarizes the amounts securitized to independent securitization trusts:
($ millions)
Securitized to independent securitization trusts:
Securitized to Eagle Credit Card Trust
Securitized to Other Independent Securitization Trusts
Total securitized to independent securitization trusts
As at
Dec. 31, 2018
Dec. 31, 2017
$
$
750
915
1,665
$
$
900
640
1,540
In 2018, Eagle issued $250 million of senior and subordinated term notes with a maturity date of July 17, 2023 at
a weighted average interest rate of 3.10%. In connection with this issuance, $250 million of bond forward
agreements were settled, resulting in a realized fair value loss of $1 million, in Other Comprehensive Income and
a net effective interest rate of 3.15% on the Eagle notes issued.
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs
of PC Bank have been issued by major financial institutions. These standby letters of credit can be drawn upon in
the event of a major decline in the income flow from or in the value of the securitized credit card receivables.
Loblaw has agreed to reimburse the issuing banks for any amount drawn on the standby letters of credit. The
aggregate gross potential liability under these arrangements for the Other Independent Securitization Trusts was
$89 million (2017 – $62 million), which represented approximately 10% (2017 – 10%) of the securitized credit
card receivables amount.
Under its securitization programs, PC Bank is required to maintain, at all times, a credit card receivable pool
balance equal to a minimum of 107% of the outstanding securitized liability. PC Bank was in compliance with this
requirement as at year end 2018 and throughout 2018.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at year
end 2018 were $110 million (2017 – $160 million).
Independent Funding Trusts As at year end 2018, the independent funding trusts had drawn $536 million
(2017 – $551 million) from the revolving committed credit facility that is the source of funding to the
independent funding trusts. Loblaw provides credit enhancement in the form of a standby letter of credit for the
benefit of the independent funding trusts. As at year end 2018, Loblaw has agreed to provide a credit
enhancement of $64 million (2017 – $64 million) in the form of a standby letter of credit for the benefit of the
independent funding trusts representing not less than 10% (2017 – 10%) of the principal amount of the loans
outstanding.
30 George Weston Limited 2018 Annual Report
Guaranteed Investment Certificates The following table summarizes PC Bank’s GIC activity, before commissions,
for the years ended as follows:
($ millions)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2018
852
495
(206)
1,141
$
$
$
$
2017
928
76
(152)
852
As at year end 2018, $274 million in GICs were recorded as long term debt due within one year (2017 –
$193 million).
Associate Guarantees Loblaw has arranged for its Shoppers Drug Mart licensees (“Associates”) to obtain
financing to facilitate their inventory purchases and fund their working capital requirements by providing
guarantees to various Canadian chartered banks that support Associate loans. As at year end 2018, Loblaw’s
maximum obligation in respect of such guarantees was $580 million (2017 – $580 million) with an aggregate
amount of $466 million (2017 – $509 million) in available lines of credit was allocated to the Associates by the
various banks. As at year end 2018, Associates had drawn an aggregate amount of $56 million (2017 –
$110 million) against these available lines of credit. Any amounts drawn by the Associates are included in bank
indebtedness on the Company’s consolidated balance sheets. As recourse in the event that any payments are
made under the guarantees, Loblaw holds a first-ranking security interest on all assets of Associates, subject to
certain prior-ranking statutory claims.
7.4
FINANCIAL CONDITION
Adjusted return on average equity attributable to common shareholders
of the Company(1)
Adjusted return on capital(1)
As at
Dec. 31, 2018
Dec. 31, 2017
12.7%
12.0%
12.9%
13.0%
Adjusted return on average equity attributable to common shareholders of the Company(1) decreased for the
year end 2018 compared to year end 2017, due to the decline in Loblaw’s underlying operating performance and
the increase in equity as a result of issuance of common shares related to Loblaw’s spin out of Choice Properties.
Adjusted return on capital(1) decreased for the year end 2018 compared to year end 2017 due to the factors
described above, including an increase in total debt and a decrease in cash and cash equivalents and short term
investments.
CREDIT RATINGS
7.5
In 2018, subsequent to the announcement of the reorganization, Standard & Poor’s and Dominion Bond Rating
Service reaffirmed credit ratings and outlook for GWL, Loblaw and Choice Properties.
The following table sets out the current credit ratings of GWL:
Credit Ratings (Canadian Standards)
Issuer rating
Medium term notes
Other notes and debentures
Preferred shares
Dominion Bond Rating Service
Credit Rating
BBB
BBB
BBB
Pfd-3
Trend
Stable
Stable
Stable
Stable
Standard & Poor’s
Credit Rating
BBB
BBB
BBB
P-3 (high)
Outlook
Stable
n/a
n/a
n/a
George Weston Limited 2018 Annual Report 31
Management’s Discussion and Analysis
The following table sets out the current credit ratings of Loblaw:
Credit Ratings (Canadian Standards)
Issuer rating
Medium term notes
Other notes and debentures
Second Preferred shares, Series B
Dominion Bond Rating Service
Credit Rating
BBB
BBB
BBB
Pfd-3
Trend
Stable
Stable
Stable
Stable
Standard & Poor’s
Credit Rating
BBB
BBB
BBB
P-3 (high)
Outlook
Stable
n/a
n/a
n/a
The following table sets out the current credit ratings of Choice Properties:
Credit Ratings (Canadian Standards)
Issuer rating
Senior unsecured debentures
7.6
SHARE CAPITAL
Dominion Bond Rating Service
Credit Rating
BBB
BBB
Trend
Stable
Stable
Standard & Poor’s
Credit Rating
BBB
BBB
Outlook
Stable
n/a
Outstanding Share Capital and Capital Securities GWL’s outstanding share capital is comprised of common
shares and preferred shares. The following table details the authorized and outstanding common shares and
preferred shares as at December 31, 2018:
(number of common shares)
Common shares
Preferred shares – Series I
– Series II
– Series III
– Series IV
– Series V
Authorized
Unlimited
10,000,000
10,600,000
10,000,000
8,000,000
8,000,000
Outstanding
153,370,108
9,400,000
8,000,000
8,000,000
8,000,000
Common Share Capital Common shares issued are fully paid and have no par value. The following table
summarizes the activity in the Company’s common shares issued and outstanding for the years ended
December 31, 2018 and December 31, 2017:
($ millions except where otherwise indicated)
Number of
Common
Shares
Issued and outstanding, beginning of year
127,905,581
$
2018
Common
Share
Capital
221
2,547
12
(14)
Number of
Common
Shares
127,898,582
$
—
293,976
(286,977)
26,596,641
145,076
(1,277,190)
153,370,108
$
2,766
127,905,581
$
(228,803)
—
108,498
(120,305)
—
—
—
—
(266,999)
(70,198)
108,394
(228,803)
153,249,803
$
2,766
127,676,778
$
131,844,880
127,692,789
2017
Common
Share
Capital
195
—
26
—
221
—
—
—
—
221
Issued for Loblaw’s Spin-out of Choice Properties
Issued for settlement of stock options
Purchased and cancelled
Issued and outstanding, end of year
Shares held in trusts, beginning of year
Purchased for future settlement of RSUs and PSUs
Released for settlement of RSUs and PSUs
Shares held in trusts, end of year
Issued and outstanding, net of shares held in trusts,
end of year
Weighted average outstanding, net of shares held
in trusts
32 George Weston Limited 2018 Annual Report
As at year end 2018, a total of 1,548,044 GWL stock options were outstanding. The number of stock options
outstanding was within the Company’s guidelines as GWL may grant options for up to 6,453,726 of its common
shares. Each stock option is exercisable into one common share of GWL at the price specified in the terms of the
option agreement.
Preferred Share Capital GWL may, at its option, redeem for cash, in whole or in part, the preferred shares
Series I, Series III, Series IV and Series V outstanding on or after the redemption dates specified by the terms of
each series of preferred shares. GWL may at any time after issuance give the holders of these preferred shares
the right, at the option of the holder, to convert the holder’s preferred shares into preferred shares of a further
series designated by GWL on a share-for-share basis on a date specified by GWL.
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof
are at the discretion of the Company’s Board of Directors (“Board”) which takes into account the Company’s
financial results, capital requirements, available cash flow, future prospects of the Company’s business and other
factors considered relevant from time to time. Over time, it is the Company’s intention to increase the amount of
the dividend while retaining appropriate free cash flow to finance future growth. In the second quarter of 2017,
the Board raised the quarterly common share dividend by $0.015 to $0.455 per share. During 2018, the Board
raised the quarterly common share dividend by $0.035 to $0.49 in the second quarter and by $0.025 to $0.515 in
the fourth quarter. The Board declared dividends as follows:
($)
Dividends declared per share(i):
Common share
Preferred share:
Series I
Series III
Series IV
Series V
2018
1.950
1.45
1.30
1.30
1.1875
$
$
$
$
$
2017
1.805
1.45
1.30
1.30
1.1875
$
$
$
$
$
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V were payable on January 1, 2019 and
subsequently paid on January 2, 2019. Dividend declared on Preferred Shares, Series I were payable on December 15, 2018 and
subsequently paid on December 17, 2018.
The following table summarizes the Company’s cash dividends declared subsequent to year end 2018:
($)
Dividends declared per share(i) – Common share
– Preferred share:
Series I
Series III
Series IV
Series V
$
0.515
0.3625
$
0.3250
$
$
0.3250
$ 0.296875
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V are payable on April 1, 2019.
Dividends declared on Preferred Shares, Series I are payable on March 15, 2019.
At the time such dividends are declared, GWL identifies on its website (www.weston.ca) the designation of
eligible and ineligible dividends in accordance with the administrative position of the Canada Revenue Agency.
George Weston Limited 2018 Annual Report 33
Management’s Discussion and Analysis
Normal Course Issuer Bid (“NCIB”) Program The following table summarizes the Company’s activity under its
NCIB program:
($ millions except where otherwise indicated)
Purchased for future settlement of RSUs and PSUs (number of shares)
Purchased and cancelled (number of shares)
Cash consideration paid
Purchased and held in trusts
Purchased and cancelled
Premium charged to retained earnings
Reduction in share capital
2018
—
1,277,190
2017
70,198
286,977
$
$
$
$
— $
$
$
$
(123)
109
14
(7)
(31)
38
—
In the second quarter of 2018, GWL renewed its NCIB program to purchase on the Toronto Stock Exchange
(“TSX”) or through alternative trading systems up to 6,398,134 of its common shares, representing
approximately 5% of the common shares outstanding. In accordance with the rules of the TSX, the Company may
purchase its common shares from time to time at the then market price of such shares.
In the third quarter of 2018, GWL was granted an exemption from TSX in connection with GWL’s NCIB, which
commenced in the second quarter of 2018, subject to certain conditions. Pursuant to the exemption, GWL was
permitted to purchases up to 1.9 million common shares during the five trading days immediately following the
announcement of the reorganization, up to a daily maximum limit of 25% of the actual aggregate trading volume
of its common shares across all Canadian published markets on each such day.
In the third quarter of 2018, the Company entered into and completed an automatic share purchase plan
(“ASPP”) with a broker in order to facilitate the repurchase of the Company’s common shares under its current
NCIB, contingent on the closing of the reorganization. Under the Company’s ASPP, the Company’s broker
purchased common shares at times when the Company ordinarily would not be active in the market.
In the fourth quarter of 2018, GWL was granted an exemption from the TSX in connection with its NCIB. During
the two week period following the closing of the reorganization, GWL was permitted to purchase up to 1.36
million common shares, up to a daily maximum limit of 25% of the actual aggregate trading volume of its
common shares across all Canadian published markets on each such day.
As of December 31, 2018, the Company purchased 1,275,562 common shares under its current NCIB program, of
which 713,700 common shares were purchased under the exemption.
OFF-BALANCE SHEET ARRANGEMENTS
7.7
The following is a summary of the Company’s off-balance sheet arrangements. Certain significant arrangements
have also been discussed in Section 7.3, “Components of Total Debt”.
Letters of Credit Standby and documentary letters of credit are used in connection with certain obligations
mainly related to real estate transactions, benefit programs, purchase orders and performance guarantees,
securitization of PC Bank’s credit card receivables and third-party financing made available to Loblaw’s
franchisees. As at year end 2018, the aggregate gross potential liability related to the Company’s letters of credit
was approximately $649 million (2017 – $844 million).
Guarantees In addition to the letters of credit mentioned above, the Company has entered into various
guarantee arrangements including obligations to indemnify third parties in connection with leases, business
dispositions and other transactions in the normal course of the Company’s business. Additionally, Loblaw has
provided a guarantee on behalf of PC Bank to MasterCard® International Incorporated (“MasterCard®”) for
accepting PC Bank as a card member and licensee of MasterCard®. As at year end 2018, the guarantee on behalf
of PC Bank to MasterCard® was U.S. dollars $190 million (2017 – U.S. dollars $190 million).
34 George Weston Limited 2018 Annual Report
CPH Master LP guarantees certain debt assumed by purchasers in connection with past dispositions of properties
made by CREIT before the acquisition. These guarantees will remain until the debt is modified, refinanced or
extinguished. Credit risks arise in the event that the purchasers default on repayment of their debt. These credit
risks are mitigated by the recourse which the Trust has under these guarantees, in which case the Trust would
have a claim against the underlying property. The estimated amount of debt as at year end 2018 subject to such
guarantees, and therefore the maximum exposure to credit risk, was $38 million with an estimated weighted
average remaining term of 4.5 years.
Glenhuron Bank Limited Surety Bond In connection with the Canada Revenue Agency’s reassessment of Loblaw
on certain income earned by Glenhuron, Loblaw arranged for a surety bond to the Ontario Ministry of Finance in
order to appeal the reassessments. As a result of the decision of the Tax Court of Canada and incremental
payments by Loblaw, the amount of the surety bond was reduced to $46 million (2017 – $149 million).
Cash Collateralization As at year end 2018, GWL and Loblaw had agreements to cash collateralize certain
uncommitted credit facilities up to amounts of $45 million (2017 – $45 million) and $103 million (2017 –
$102 million), respectively. As at year end 2018, GWL and Loblaw had $45 million (2017 – $45 million) and
$2 million (2017 – $3 million) deposited with major financial institutions, respectively, and classified as security
deposits on the consolidated balance sheets.
CONTRACTUAL OBLIGATIONS
7.8
The following table summarizes certain of the Company’s significant contractual obligations and other
obligations as at year end 2018:
Summary of Contractual Obligations
Payments due by year
($ millions)
Total debt(i)
Foreign exchange forward
contracts
Operating leases(ii)
Contracts for purchases of
real property and capital
investment projects(iii)
Purchase obligations(iv)
Total contractual obligations
2019
4,382 $
2020
2,372 $
2021
1,438 $
2022
1,745 $
2023
3,200 $
Thereafter
Total
9,719 $ 22,856
$
446
708
—
666
—
602
—
523
—
447
—
1,880
446
4,826
218
363
6,117 $
84
257
3,379 $
8
260
2,308 $
—
77
2,345 $
$
—
1
310
970
3,648 $ 11,611 $ 29,408
—
12
(i)
Includes short term debt, bank indebtedness, Loblaw’s certain other liabilities, and the fair value of the equity forward included in
other assets. Total debt also includes fixed interest payments on long term debt which are based on the maturing face values and
annual interest for each instrument, including GICs, long term independent securitization trusts and an independent funding trust, as
well as annual payment obligations for consolidated structured entities, mortgages and finance lease obligations. Variable interest
payments are based on the forward rates as at year end 2018.
(ii) Represents the minimum or base rents payable. Amounts are not offset by any expected sub-lease income.
(iii) Includes agreements for the purchase of real property and capital commitments for construction, expansion and renovation of
buildings. These agreements may contain conditions that may or may not be satisfied. If the conditions are not satisfied, it is possible
the Company will no longer have the obligation to proceed with the underlying transactions.
(iv) Includes contractual obligations of a material amount to purchase goods or services where the contract prescribes fixed or minimum
volumes to be purchased or payments to be made within a fixed period of time for a set or variable price. These are only estimates of
anticipated financial commitments under these arrangements and the amount of actual payments will vary. The purchase obligations
do not include purchase orders issued or agreements made in the ordinary course of business which are solely for goods that are
meant for resale, nor do they include any contracts which may be terminated on relatively short notice or with insignificant cost or
liability to the Company. Also excluded are purchase obligations related to commodities or commodity-like goods for which a market
for resale exists.
As at year end 2018, the Company had additional long term liabilities which included post-employment and
other long term employee benefit plan liabilities, deferred vendor allowances, deferred income tax liabilities,
Trust Unit liability, and provisions, including insurance liabilities. These long term liabilities have not been
included in the table above as the timing and amount of future payments are uncertain.
George Weston Limited 2018 Annual Report 35
Management’s Discussion and Analysis
8.
QUARTERLY RESULTS OF OPERATIONS
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
8.1
The Company’s year end is December 31. Activities are reported on a fiscal year ending on the Saturday closest
to December 31. As a result, the Company’s fiscal year is usually 52 weeks in duration but includes a 53rd week
every five to six years. Each of the years ended December 31, 2018 and December 31, 2017 contained 52 weeks.
The 52-week reporting cycle is divided into four quarters of 12 weeks each except for the third quarter, which is
16 weeks in duration. When a fiscal year contains 53 weeks, the fourth quarter is 13 weeks in duration.
The following is a summary of selected consolidated financial information derived from the Company’s
unaudited interim period condensed consolidated financial statements for each of the eight most recently
completed quarters.
Selected Quarterly Information (Unaudited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
Total
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2017(5)
Total
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(audited)
(12 weeks)
(12 weeks)
(16 weeks)
(12 weeks)
(audited)
$ 48,568
$ 2,585
$ 4,528
$ 1,746
998
$ 10,744
502
$
918
$
$ 11,245
589
$
$ 1,073
$ 14,862
804
$
$ 1,391
$ 11,717
690
$
$ 1,146
$
$
$
$
$
$
$
400
378
190
180
1.41
1.40
1.38
$
$
$
$
$
$
$
400
78
38
28
0.22
0.21
1.63
$
$
$
$
$
$
$
530
130
65
51
0.40
0.40
2.25
$
$
$
$
$
$
$
416
412
281
271
1.86
1.86
1.59
$
$
$
$
$
$
$10,803
513
$
927
$
$11,436
640
$
$ 1,038
$14,648
$ 1,244
$ 1,307
$ 11,402
164
$
$ 1,065
$48,289
$ 2,561
$ 4,337
$
$
384
242
$
$
385
365
$
$
509
904
574
$
118
$
170
$
434
530
4.02
3.99
6.85
$
$
$
$
108
0.85
0.84
1.43
$
$
$
$
160
1.25
1.23
1.67
$
$
$
$
420
3.29
3.25
2.14
$
$
$
$
$
$
$
407
$ 1,685
78
$ 1,589
44
$
766
34
0.27
0.27
1.76
$
$
$
$
722
5.65
5.58
6.99
(4.1)%
(8.1)%
(5.7)%
(3.8)%
(5.4)%
(4.1)%
2.6 %
(0.7)%
(1.9)%
(1.1)%
(1.5)%
(5.7)%
(7.3)%
(5.9)%
(5.2)%
(1.6)%
0.2 %
1.0 %
0.9 %
0.2 %
1.2 %
0.1 %
0.3 %
1.7 %
0.8 %
(3.9)%
(1.4)%
0.3 %
1.0 %
(1.0)%
($ millions except where
otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Depreciation and
amortization(i)
Net earnings
Net earnings attributable to
shareholders of the
Company
Net earnings available to
common shareholders of
the Company
Net earnings per common
share ($) - basic
Net earnings per common
share ($) - diluted
Adjusted diluted net earnings
per common share(1) ($)
Weston Foods’ sales (decline)
growth
Weston Foods’ sales (decline)
growth excluding impact of
foreign currency translation
Average quarterly national
food price (deflation)
inflation (as measured
by CPI)
Loblaw’s Food retail same-
store sales (decline) growth
1.9 %
0.8 %
0.9 %
0.8 %
1.1 %
(1.2)%
1.2 %
1.4 %
0.5 %
0.6 %
Loblaw’s Drug retail same-
store sales growth
Choice Properties’ Funds
From Operations per unit -
diluted
Choice Properties’ Net
Operating income for same
properties, excluding
development activities
3.7 %
1.7 %
2.5 %
1.9 %
2.4 %
0.9 %
3.7 %
3.3 %
3.6 %
3.0 %
$ 0.255
$ 0.272
$ 0.253
$ 0.256
$ 1.033
$ 0.264
$ 0.262
$ 0.263
$ 0.282
$ 1.072
$
145
$
149
$
146
$
148
$
587
$
142
$
142
$
144
$
146
$
573
(i) Depreciation and amortization includes amortization of intangible assets acquired with Shoppers Drug Mart recorded by Loblaw
and accelerated depreciation recorded by Weston Foods, related to restructuring and other charges.
36 George Weston Limited 2018 Annual Report
Impact of Trends and Seasonality on Quarterly Results Consolidated quarterly results for the last eight quarters
were impacted by the following significant items: foreign currency exchange rates, seasonality and the timing of
holidays. The impact of Weston Foods seasonality is greatest in the third and fourth quarters and least in the first
quarter. The impact of Loblaw seasonality is greatest in the fourth quarter and least in the first quarter.
Sales Over the last eight quarters, consolidated sales have been impacted by each of the Company’s reportable
operating segments as follows:
• Weston Foods sales were impacted by changes in volume, the impact of pricing, and changes in sales mix;
starting in the second quarter of 2018, sales were impacted by product rationalization, and starting in the
third quarter of 2018 the loss of sales from key customers, when compared to the same periods in 2017.
• At Loblaw, due to macro-economic conditions impacting food and drug retail prices; the changes in the price
of fuel sold at Loblaw’s gas bars; the disposition of Loblaw’s gas bar operations in the third quarter of 2017;
and the consolidation of franchises. Over the past eight quarters, Loblaw’s net retail square footage
increased by 0.2 million square feet to 70.4 million square feet.
• Choice Properties revenue was impacted by the acquisition of CREIT in the second quarter of 2018.
Net earnings available to common shareholders of the Company and diluted net earnings per common share
Net earnings available to common shareholders of the Company and diluted net earnings per common share for
the last eight quarters were impacted by the underlying operating performance of each of the Company’s
reportable operating segments and certain adjusting items.
The Company’s underlying operating performance for the last eight quarters included the following:
• Weston Foods unfavourable year-over-year quarterly underlying operating performance during 2018
•
reflected the decline in sales and higher input and distribution costs, partially offset by productivity
improvements and net benefits realized from the transformation program;
Loblaw year-over-year quarterly underlying operating performance during 2018 reflected the changes in
underlying operating performance of Loblaw’s Retail segment, the negative impact of the disposition of
Loblaw’s gas bar operations in the third quarter of 2017, minimum wage increases and incremental
healthcare reform, cost savings and operating efficiencies from process and efficiency initiatives and benefits
from strategic initiatives;
• Choice Properties favourable year-over-year quarterly underlying operating performance during 2018 was
•
•
impacted by the acquisition of CREIT in the second quarter of 2018;
year-over year quarterly adjusted net interest and other financing charges(1) increases during of 2018 due to
the issuance of new debt and the debt acquired related to the acquisition of CREIT; and
year-over-year quarterly adjusted income tax rate(1) decreased in the first, second and third quarter of 2018
and increased in the fourth quarter of 2018.
The adjusting items impacting consolidated quarterly net earnings available to common shareholders of the
Company and diluted net earnings per common share for the last eight quarters are described in Section 5.2,
“Selected Annual Information”, and Section 18, “Non-GAAP Financial Measures”, of this MD&A.
George Weston Limited 2018 Annual Report 37
Management’s Discussion and Analysis
FOURTH QUARTER RESULTS (UNAUDITED)
8.2
The following is a summary of selected unaudited consolidated financial information for the fourth quarter. The
analysis of the data contained in the table focuses on the results of operations and changes in the financial
condition and cash flows in the fourth quarter.
Selected Consolidated Information
(unaudited)
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Net interest expense and other financing charges
Adjusted net interest expense and other
financing charges(1)
Income taxes
Adjusted income taxes(1)
Adjusted income tax rate(1)
Net earnings attributable to shareholders
of the Company
Net earnings available to common shareholders
of the Company
Adjusted net earnings available to common shareholders
of the Company(1)
Diluted net earnings per common share ($)
Adjusted diluted net earnings per common share(1) ($)
Dividends declared per share ($):
Common shares
Preferred shares – Series I
Preferred shares – Series III
Preferred shares – Series IV
Preferred shares – Series V
Quarters Ended
Dec. 31, 2018
11,717
$
690
$
1,146
$
9.8%
416
218
$
$
Dec. 31, 2017(5)
11,402
$
164
$
1,065
$
9.3%
407
115
$
$
$
$
$
133
(29) $
$
179
27.3%
44
34
226
0.27
1.76
$
$
$
$
$
0.455
0.3625
0.3250
0.3250
0.296875
$
$
$
$
$
$
$
$
$
$
$
$
$
208
60
178
27.7%
281
271
232
1.86
1.59
0.515
0.3625
0.3250
0.3250
0.296875
$
$
$
$
$
$
$
$
$
$
$
$
$
$ Change
315
$
526
$
81
$
% Change
2.8 %
320.7 %
7.6 %
9
103
75
89
(1)
237
237
6
1.59
(0.17)
2.2 %
89.6 %
56.4 %
306.9 %
(0.6)%
538.6 %
697.1 %
2.7 %
588.9 %
(9.7)%
(i) Depreciation and amortization includes $120 million (2017 – $121 million) of amortization of intangible assets, acquired with
Shoppers Drug Mart, recorded by Loblaw and $10 million in 2017 of accelerated depreciation and amortization recorded by Weston
Foods, related to restructuring and other charges.
In the second quarter of 2018, Choice Properties completed the acquisition of Canadian Real Estate Investment
Trust (“CREIT”) as set out in Section 6.3 “Choice Properties Operating Results” section of this MD&A. In the
fourth quarter of 2018, the acquisition resulted in increases in revenue of $103 million, adjusted EBITDA(1) of
approximately $71 million, adjusted net interest expense and other financing charges(1) of $68 million and
adjusted net earnings available to common shareholders of the Company(1) of $2 million.
Net earnings available to common shareholders of the Company
Net earnings available to common shareholders of the Company in the fourth quarter of 2018 were $271 million
($1.86 per common share), an increase of $237 million compared to the same period in 2017. The increase
included the favourable year-over-year net impact of adjusting items totaling $231 million and the improvement
in underlying operating performance of $6 million, as described below.
• The favourable year-over-year net impact of certain adjusting items totaling $231 million was primarily due
to:
the fair value adjustment to the Trust Unit Liability of $97 million;
38 George Weston Limited 2018 Annual Report
the year-over-year favourable impact of restructuring and other charges of $77 million;
the impact of prior year charges at Loblaw related to the PC Optimum Program of $67 million; and
the favourable impact of deferred tax recoveries of $52 million;
partially offset by,
the unfavourable year-over-year impact of the fair value adjustment of the forward sale agreement
for 9.6 million Loblaw common shares of $84 million.
• The improvement in underlying operating performance of $6 million was mainly due to the following:
the favourable underlying operating performance of Choice Properties, including the impact of the
acquisition of CREIT;
the favourable underlying operating performance of Loblaw’s Retail segment, which more than
offset the negative year-over-year impact of minimum wage increases and incremental healthcare
reform, partially offset by a decline in the underlying operating performance of Loblaw’s Financial
Services segment; and
the positive contribution from the increase in the Company’s ownership interest in Loblaw, as a
result of Loblaw’s share repurchases;
partially offset by,
an increase in adjusted net interest expense and other financing charges(1), including the impact of
the acquisition of CREIT, as described below;
an increase in depreciation and amortization expense, as described below; and
the unfavourable underlying operating performance of Weston Foods.
Adjusted net earnings available to common shareholders of the Company(1) in the fourth quarter of 2018 were
$232 million, an increase of $6 million, or 2.7%, compared to the same period in 2017, due to the improvement
in underlying operating performance, as described above.
Diluted net earnings per common share in the fourth quarter of 2018 were $1.86, an increase of $1.59 per
common share compared to the same period in 2017. The increase was mainly due to:
•
the favourable year-over-year impact of adjusting items totaling $1.76 per common share, primarily due
to the following:
the fair value adjustment to the Trust Unit Liability of $0.66 per common share;
the year-over-year favourable impact of restructuring and other charges of $0.61 per common
share;
the impact of prior year charges at Loblaw related to the PC Optimum Program of $0.51 per
common share; and
the favourable impact of deferred tax recoveries of $0.35 per common share;
partially offset by,
the unfavourable year-over-year impact of the fair value adjustment of the forward sale
agreement for 9.6 million Loblaw common shares of $0.58 per common share;
partially offset by:
• a decline of $0.17 per common share, including the net earnings improvement in the underlying
operating performance described above, which was more than offset by the dilutive impact of the
Company’s issuance of approximately 26.6 million common shares in connection with the
reorganization.
Adjusted diluted net earnings per common share(1) in the fourth quarter of 2018 were $1.59, a decline of $0.17
per common share, or 9.7% compared to the same period in 2017. Normalized for the dilutive impact of the
Company’s issuance of approximately 26.6 million common shares, adjusted diluted net earnings per common
share(1) increased by approximately $0.06 or 3.4%, which included the positive contribution from the increase in
the Company’s ownership interest in Loblaw of approximately $0.04 per common share.
George Weston Limited 2018 Annual Report 39
Management’s Discussion and Analysis
Sales
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Choice Properties
Intersegment
Consolidated
Quarters Ended
Dec. 31, 2018
507
$
11,218
$
323
$
(331)
$
11,717
$
$
$
$
$
$
Dec. 31, 2017(5)
527
10,992
211
(328)
11,402
$ Change
(20)
$
226
$
112
$
% Change
(3.8)%
2.1 %
53.1 %
$
315
2.8 %
Sales in the fourth quarter of 2018 were $11,717 million, an increase of $315 million compared to the same
period in 2017. The increase in sales in the fourth quarter of 2018 was impacted by each of its reportable
operating segments as follows:
• Negatively by 0.2% due to sales decline of 3.8% at Weston Foods, primarily due to the negative impact of
foreign currency translation. Excluding the favourable impact of foreign currency translation, sales decreased
by 5.9%, mainly due to a decrease in volumes, including the impact of product rationalization and the loss of
sales to key customers, and the negative impact of changes in sales mix.
• Positively by 2.0% due to sales growth of 2.1% at Loblaw, driven by an increase in Loblaw’s Retail segment
and Loblaw’s FInancial Services segment. Retail sales increased by $181 million, or 1.7%, compared to the
same period in 2017. Excluding the consolidation of franchises, Retail sales increased by $103 million, or
1.0%. The increase was primarily due to positive same-store sales growth.
• Positively by 1.0% due to sales growth of 53.1% at Choice Properties, primarily due to the acquisition of
CREIT of $106 million and an increase in base rent and operating cost recoveries from existing properties.
Operating income
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
Quarters Ended
Dec. 31, 2018
22
$
443
$
202
$
23
$
690
$
$
$
$
$
$
Dec. 31, 2017(5)
8
55
152
(51)
164
$ Change
14
$
388
$
50
$
% Change
175.0%
705.5%
32.9%
$
526
320.7%
Operating income in the fourth quarter of 2018 was $690 million, an increase of $526 million compared to the
same period in 2017. The increase in operating income in the fourth quarter of 2018 included improvements in
the underlying operating performance of $61 million, and the favourable year-over-year net impact of adjusting
items totaling $465 million, as described below:
•
the improvements in underlying operating performance of $61 million were primarily due to:
the underlying operating performance of Choice Properties, driven by the acquisition of CREIT; and
the underlying operating performance of Loblaw’s Retail segment, including the favourable year-
over-year contribution from the consolidation of Loblaw franchises in the quarter, partially offset by
a decline in the underlying operating performance of Loblaw’s Financial Services segment;
partially offset by,
the underlying operating performance of Weston Foods.
40 George Weston Limited 2018 Annual Report
•
the favourable year-over-year net impact of adjusting items totaling $465 million was primarily due to:
the year-over-year favourable impact of restructuring and other charges of $193 million;
the impact of prior year charges at Loblaw related to the PC Optimum Program of $187 million; and
the impact of prior year charges related to the Loblaw Card Program of $107 million;
partially offset by,
the unfavourable prior year impact of income earned, net of certain costs incurred, from the wind-
down of PC Financial banking services of $17 million; and
the year-over-year unfavourable impact of the fair value adjustment of derivatives of $13 million.
Adjusted EBITDA(1)
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
Quarters Ended
Dec. 31, 2018
55
$
893
$
229
$
(31)
$
1,146
$
Dec. 31, 2017
61
$
880
$
155
$
(31)
$
1,065
$
$
$
$
$
$ Change
(6)
13
74
% Change
(9.8)%
1.5 %
47.7 %
81
7.6 %
Adjusted EBITDA(1) in the fourth quarter of 2018 was $1,146 million, an increase of $81 million compared to the
same period in 2017. The increase in adjusted EBITDA(1) in the fourth quarter of 2018 was impacted by each of
its reportable operating segments as follows:
• Negatively by 0.6% due to a decrease of 9.8% in adjusted EBITDA(1) at Weston Foods driven by higher input
and distribution costs and the decline in sales, partially offset by productivity improvements and the net
benefits realized from the transformation program.
• Positively by 1.2% due to an increase of 1.5% in adjusted EBITDA(1) at Loblaw, primarily driven by
improvements in Loblaw’s Retail segment, partially offset by Loblaw’s Financial Services segment. The
improvement in Retail adjusted EBITDA(1) was primarily driven by an increase in Retail gross profit, partially
offset by an increase in Retail SG&A, and included the favourable contribution from the consolidation of
franchises in the quarter.
• Positively by 6.9% due to an increase of 47.7% in adjusted EBITDA(1) at Choice Properties primarily driven by
the acquisition of CREIT. The increase also included an increase in net operating income from existing
properties.
George Weston Limited 2018 Annual Report 41
Management’s Discussion and Analysis
Depreciation and Amortization
(unaudited)
($ millions except where otherwise indicated)
Weston Foods
Loblaw
Choice Properties
Other and Intersegment
Consolidated
Quarters Ended
Dec. 31, 2018
27
$
356
$
1
$
32
$
416
$
Dec. 31, 2017
$
35
$
342
$
$
$
$
$
— $
30
407
$
$ Change
(8)
14
1
% Change
(22.9)%
4.1 %
100.0 %
9
2.2 %
Depreciation and amortization in the fourth quarter of 2018 was $416 million, an increase of $9 million
compared to the same period in 2017, and included $120 million (2017 – $121 million) of amortization of
intangible assets related to the acquisition of Shoppers Drug Mart recorded by Loblaw and $10 million in 2017 of
accelerated depreciation recorded by Weston Foods related to restructuring and other charges. Excluding these
amounts, depreciation and amortization increased by $20 million driven by:
• an increase in depreciation from the consolidation of Loblaw franchises;
• higher depreciation due to an increase in Loblaw’s IT assets;
• higher depreciation due to investments in capital at Weston Foods; and
• an increase in depreciation on Choice Properties’ investment properties classified as fixed assets by the
Company and measured at cost.
Net Interest Expense and Other Financing Charges
(unaudited)
Quarters Ended
($ millions)
Net interest expense and other financing
charges
Add: Fair value adjustment of the Trust Unit
liability
Fair value adjustment of the forward sale
agreement for 9.6 million Loblaw
common shares
Loblaw’s Spin-out of Choice Properties
Adjusted net interest expense and other
financing charges(1)
Dec. 31, 2018
Dec. 31, 2017
$ Change
% Change
$
218
$
115
$
85
(94)
(1)
8
10
—
89.6%
103
77
(104)
(1)
$
208
$
133
$
75
56.4%
Net interest expense and other financing charges in the fourth quarter of 2018 were $218 million, an increase of
$103 million compared to the same period in 2017. The increase in net interest expense and other financing
charges in the fourth quarter of 2018 was primarily due to the year-over-year impact of adjusting items totaling
$28 million, itemized in the table above, and an increase in adjusted net interest expense and other financing
charges(1) of $75 million primarily due to:
• higher interest expense in Choice Properties segment, as a result of the issuance of new senior unsecured
debentures, debt assumed on the acquisition of CREIT, higher distributions from newly issued Trust Units to
former CREIT unitholders as part of the acquisition consideration, partially offset by the repayment of Series
A senior unsecured debentures and interest income on the joint ventures assumed on the acquisition of
CREIT; and
• higher interest expense in Loblaw’s Financial Services segment, primarily due to an increase in interest rates
on borrowings related to credit card receivables and a net increase in Guaranteed Investment Certificates
(“GICs”).
42 George Weston Limited 2018 Annual Report
Income Taxes
(unaudited)
($ millions except where otherwise indicated)
Income taxes
Add: Tax impact of items excluded from
adjusted earnings before taxes(1)(i)
Remeasurement of deferred tax balances
Statutory corporate income tax
rate change
Adjusted income taxes(1)
Effective income tax rate applicable to earnings
$
before taxes
Adjusted income tax rate applicable to adjusted
earnings before taxes(1)
Quarters Ended
Dec. 31, 2018
60
$
Dec. 31, 2017
$
(29) $
$ Change
89
% Change
306.9 %
56
62
—
178
170
19
19
$
179
$
(114)
43
(19)
(1)
(0.6)%
12.7%
(59.2)%
27.7%
27.3 %
(i)
See the adjusted EBITDA table and the adjusted net interest expense and other financing charges table included in Section 18,
“Non-GAAP Financial Measures”, of this MD&A for a complete list of items excluded from adjusted earnings before taxes(1).
The effective tax rate in the fourth quarter of 2018 was 12.7%, compared to negative 59.2% in the same period
in 2017. The increase in the effective tax rate was primarily attributable to an increase in earnings.
The adjusted income tax rate(1) for the fourth quarter of 2018 was 27.7%, compared to 27.3% in the same period
in 2017. The increase was primarily attributable to an increase in certain non-deductible items.
In the fourth quarter of 2018, the Company recorded a deferred tax recovery of $62 million resulting primarily
from the change in the manner by which the Company expects to recover certain assets.
In the fourth quarter of 2017, the Company recorded a deferred tax recovery of $19 million resulting from a
change in the applicable provincial income tax rate used to measure certain deferred tax balances caused by a
change in the location of certain business activities.
In the fourth quarter of 2017, the U.S. government enacted a 14.0% decrease in the U.S. federal statutory
corporate income tax rate from 35.0% to 21.0%. As a result, Weston Foods recorded a recovery of $19 million in
2017 related to the remeasurement of its deferred tax liabilities.
George Weston Limited 2018 Annual Report 43
Management’s Discussion and Analysis
Cash Flows
(unaudited)
($ millions)
Cash and cash equivalents, beginning of period
Cash flows from operating activities
Cash flows used in investing activities
Cash flows used in financing activities
Effect of foreign currency exchange rate changes on
cash and cash equivalents
Cash and cash equivalents, end of period
Quarters Ended
Dec. 31, 2018
1,853
$
455
$
(117)
$
(678)
$
Dec. 31, 2017
$
1,838
$
1,213
$
$
(950) $
$
(69) $
$
$
$
8
1,521
$
$
2
2,034
$
$
Change
15
(758)
833
(609)
6
(513)
Cash Flows from Operating Activities The year-over-year decrease in cash inflows in the fourth quarter of 2018
was $758 million, primarily due to an unfavourable change in non-cash working capital and a reduction in
provision balances, partially offset by higher cash earnings.
Cash Flows used in Investing Activities The year-over-year decrease in cash outflows in the fourth quarter of
2018 was $833 million, primarily due to the change in security deposits and short term investments and
proceeds from the disposal of assets.
The following table summarizes the Company’s capital investments by each of its reportable operating segments
for the quarters ended as indicated:
(unaudited)
($ millions)
Weston Foods
Loblaw
Choice Properties
Total capital investments
Quarters Ended
Dec. 31, 2018
91
$
414
115
620
$
Dec. 31, 2017
88
$
399
88
575
$
Cash Flows used in Financing Activities The year-over-year increase in cash outflows in the fourth quarter of
2018 was $609 million, primarily due to higher net payment of debt and share repurchases conducted by GWL.
Free Cash Flow(1)
(unaudited)
($ millions)
Cash flows from operating activities
Less:
Interest paid
Fixed asset purchases
Intangible asset additions
Free cash flow(1)
Quarters Ended
Dec. 31, 2018
455
$
224
546
74
(389)
$
Dec. 31, 2017
1,213
$
104
486
89
534
$
$
$
Change
(758)
120
60
(15)
(923)
The year-over-year decrease in free cash flow(1) in the fourth quarter of 2018 was $923 million, primarily due
to lower cash flows from operating activities and higher interest paid.
44 George Weston Limited 2018 Annual Report
FOURTH QUARTER RESULTS OF REPORTABLE OPERATING SEGMENTS
9.
The following discussion provides details of the 2018 fourth quarter results of operations of each of the
Company’s reportable operating segments.
9.1 WESTON FOODS FOURTH QUARTER OPERATING RESULTS (UNAUDITED)
(unaudited)
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Quarters Ended
Dec. 31, 2018
507
$
22
$
55
$
10.8%
27
$
Dec. 31, 2017
$
$
$
527 $
8 $
61 $
$ Change
(20)
14
(6)
11.6%
% Change
(3.8)%
175.0 %
(9.8)%
$
35 $
(8)
(22.9)%
(i)
In the fourth quarter of 2017, depreciation and amortization includes $10 million of accelerated depreciation related to restructuring
and other charges.
Sales Weston Foods sales in the fourth quarter of 2018 were $507 million, a decrease of $20 million, or 3.8%,
compared to the same period in 2017. Sales included the favourable impact of foreign currency translation of
approximately 2.1%. Excluding the favourable impact of foreign currency translation, sales decreased by 5.9%,
mainly due to a decrease in volumes, including the impact of product rationalization and the loss of sales to key
customers, and the negative impact of changes in sales mix.
Operating income Weston Foods operating income in the fourth quarter of 2018 was $22 million, an increase of
$14 million compared to the same period in 2017. The increase included the favourable year-over-year net
impact of adjusting items totaling $22 million partially offset by the decline in underlying operating performance
of $8 million. The year-over-year net impact of adjusting items included the following:
•
partially offset by,
•
the unfavourable year-over-year impact of inventory losses, net of recoveries, of $2 million.
the favourable year-over-year impact of restructuring and other charges of $24 million;
Adjusted EBITDA(1) Weston Foods adjusted EBITDA(1) in the fourth quarter of 2018 was $55 million, a decrease of
$6 million compared to the same period in 2017. Excluding the impact of a net gain related to the sale leaseback
of a property for $10 million, the decrease was driven by higher input and distribution costs and the decline in
sales, partially offset by productivity improvements and the net benefits realized from the transformation
program.
Weston Foods adjusted EBITDA margin(1) in the fourth quarter of 2018 was 10.8% compared to 11.6% in the
same period in 2017. The decline in adjusted EBITDA margin(1) in the fourth quarter of 2018 was mainly due to
the factors impacting adjusted EBITDA(1), as described above.
Depreciation and Amortization Weston Foods depreciation and amortization in the fourth quarter of 2018 was
$27 million, a decrease of $8 million compared to the same period in 2017. Depreciation and amortization in the
fourth quarter of 2018 included a nominal amount (2017 – $10 million) of accelerated depreciation related to
the closure of an unprofitable facility in the U.S. Excluding this amount, depreciation and amortization in the
fourth quarter of 2018 increased by $2 million due to investments in capital.
Weston Foods Other Business Matters
For details see section 6.1, “Weston Foods Operating Results”, of this MD&A.
George Weston Limited 2018 Annual Report 45
Management’s Discussion and Analysis
9.2
LOBLAW FOURTH QUARTER OPERATING RESULTS (UNAUDITED)(4)
(unaudited)
($ millions except where otherwise indicated)
Sales
Operating income
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)
Depreciation and amortization(i)
Quarters Ended
Dec. 31, 2018
11,218
$
443
$
893
$
8.0%
356
$
$ Change
226
388
13
Dec. 31, 2017(5)
$
$
$
10,992 $
55 $
880 $
8.0%
342 $
$
% Change
2.1%
705.5%
1.5%
14
4.1%
(i) Depreciation and amortization includes $120 million (2017 – $121 million) in the fourth quarter of 2018 of amortization of intangible
assets acquired with Shoppers Drug Mart.
Immediately following Loblaw’s spin-out of Choice Properties, Loblaw no longer retained its interest in Choice
Properties and has ceased to consolidate its equity interest in Choice Properties from its consolidated financial
statements. As a result, Loblaw’s current and comparative financial results are restated to present Continuing
Operations of Loblaw. For further details, see Section 5.3 “Consolidated Other Business Matters” of this MD&A.
As previously announced, Loblaw’s year-over-year financial performance was negatively impacted by minimum
wage increases and incremental healthcare reform.
Sales Loblaw sales in the fourth quarter of 2018 were $11,218 million, an increase of $226 million, or 2.1%,
compared to the same period in 2017, primarily driven by Retail. Retail sales increased by $181 million, or 1.7%,
compared to the same period in 2017 and included food retail sales of $7,750 million (2017 – $7,623 million) and
drug retail sales of $3,226 million (2017 – $3,172 million). Excluding the consolidation of franchises, Retail sales
increased by $103 million, or 1.0% due to positive same-store sales growth, primarily driven by the following
factors:
•
food retail same-store sales growth was 0.8%. Loblaw’s food retail average quarterly internal food price index
was moderately lower than the average quarterly national food price inflation of 1.7% as measured by CPI.
CPI does not necessarily reflect the effect of inflation on the specific mix of goods sold in Loblaw stores; and
• drug retail same-store sales growth was 1.9%, including pharmacy same-store sales growth of 0.6% and front
store same-store sales growth of 2.8%. Pharmacy same-store sales growth included the impact of
incremental healthcare reform.
In the last 12 months, 17 food and drug stores were opened and 22 food and drug stores were closed, resulting
in a net increase in Retail square footage of 0.1 million square feet, or 0.1%.
The redemption of Loblaw Cards resulted in the delivery of approximately $4 million of free products to
customers in the fourth quarter of 2018, which was provided for in the fourth quarter of 2017. The redemptions
did not benefit sales or Loblaw’s financial performance and Loblaw’s management does not believe it had a
significant impact on food retail same-store sales.
Operating income Loblaw operating income in the fourth quarter of 2018 was $443 million, an increase of
$388 million compared to the same period in 2017, primarily driven by the favourable year-over-year net impact
of adjusting items totaling $390 million, partially offset by a decline in underlying operating performance of
$2 million, as described below:
•
•
the decline in underlying operating performance of $2 million was primarily driven by Financial Services,
partially offset by the improvements in the underlying operating performance of Retail, including the
favourable year-over-year contribution from the consolidation of franchises in the quarter; and
the favourable year-over-year net impact of adjusting items totaling $390 million was primarily due to the
following:
prior year charges related to the PC Optimum Program of $187 million;
the year-over-year favourable impact of restructuring and other related charges of $175 million; and
46 George Weston Limited 2018 Annual Report
the year-over-year favourable impact of prior year charges related to the Loblaw Card Program of
$107 million;
partially offset by,
the year-over-year unfavourable impact of asset impairments, net of recoveries, of $30 million;
the unfavourable impact of prior year income earned, net of certain costs incurred, from the wind-
down of PC Financial banking services of $17 million;
the unfavourable change in fair value adjustment on fuel and foreign currency contracts of
$13 million; and
the unfavourable impact of the prior year recovery related to land transfer tax assessment of
$9 million.
Adjusted EBITDA(1) Loblaw adjusted EBITDA(1) in the fourth quarter of 2018 was $893 million, an increase of
$13 million compared to the same period in 2017. The increase was primarily driven by improvements in Retail
including the favourable contribution from the consolidation of franchises in the quarter, partially offset by
Financial Services.
Retail adjusted EBITDA(1) was $855 million, an increase of $26 million compared to the same period in 2017,
driven by an increase in gross profit, partially offset by an increase in SG&A.
• Retail gross profit percentage of 29.6% increased by 20 basis points compared to the fourth quarter of 2017.
Excluding the consolidation of franchises, Retail gross profit percentage was 27.7%, a decrease of 30 basis
points compared to the fourth quarter of 2017. Margins were negatively impacted by health care reform and
positively impacted by food retail.
• Retail SG&A as a percentage of sales was 21.9%, an increase of 20 basis points compared to the fourth
quarter of 2017. Excluding the consolidation of franchises, SG&A decreased $19 million and as a percentage
of sales was 20.1%, an improvement of 30 basis points compared to the fourth quarter of 2017, mainly
driven by the following factors:
lower store costs driven by process efficiencies and a decrease in advertising costs, partially offset by
minimum wage increases; and
lower store support costs driven by previously announced costs savings initiatives;
partially offset by,
the unfavourable year-over-year impact of foreign exchange.
Financial Services adjusted EBITDA(1) decreased by $13 million compared to the same period in 2017, primarily
driven by lower core banking income attributable to the discontinuation of the personal banking services under
the PC Financial brand, higher operating costs including investments in digital strategy and higher customer
acquisition costs, partially offset by higher net interchange income attributable to the growth in the credit card
portfolio.
Loblaw adjusted EBITDA(1) in the fourth quarter of 2018 also included a net gain of $8 million (2017 – $7 million)
related to the sale leaseback of properties.
Depreciation and Amortization Loblaw’s depreciation and amortization in the fourth quarter of 2018 was
$356 million, an increase of $14 million compared to the same period in 2017. The increase in depreciation
and amortization was primarily driven by the consolidation of franchises, an increase in IT assets and the change
in estimated useful life of certain building components as a result of the spin-out of Choice Properties.
Depreciation and amortization included $120 million (2017 – $121 million) in the fourth quarter of 2018 of
amortization of intangible assets acquired with Shoppers Drug Mart.
Loblaw Other Business Matters
For details see Section 6.2, “Loblaw Operating Results”, of this MD&A.
George Weston Limited 2018 Annual Report 47
Management’s Discussion and Analysis
9.3
CHOICE PROPERTIES FOURTH QUARTER OPERATING RESULTS (UNAUDITED)
(unaudited)
($ millions except where otherwise indicated)
Revenue
Net interest (income) expense and other
financing charges(i)
Net income
Funds from operations(1)
Quarters Ended
Dec. 31, 2018
323
$
Dec. 31, 2017
211
$
$ Change
112
$
% Change
53.1 %
$
$
$
(80)
281
172
$
$
$
116
36
117
$
$
$
(196)
245
55
(169.0)%
680.6 %
47.0 %
(i) Net interest expense and other financing charges includes a fair value adjustment on Class B Limited Partnership units.
Choice Properties’ current and comparative financial results are presented as a reportable operating segment of
the Company on a full year basis.
Revenue Revenue in the fourth quarter of 2018 was $323 million, an increase of $112 million compared to the
fourth quarter of 2017, and included $185 million (2017 – $180 million) generated from tenants within Loblaw
Retail. The increase in revenue was primarily driven by:
• additional revenue generated from the investment properties included in the CREIT acquisition of
$106 million; and
• an increase in base rent and operating cost recoveries from existing properties.
Net Interest (Income) Expense and Other Financing Charges Net interest expense and other financing charges
in the fourth quarter of 2018 resulted in income of $80 million, compared to net interest expense of $116 million
in the fourth quarter of 2017. The change of $196 million was primarily driven by:
• a favourable change in the fair value adjustment on Class B Limited Partnership units of $234 million;
partially offset by,
• higher interest expense resulting from the issuance of new debt related to the acquisition of CREIT; including
senior unsecured debentures, term loans and draws on the syndicated credit facility and interest expense on
the debt assumed on the acquisition of CREIT.
Net income Net income in the fourth quarter of 2018 was $281 million, an increase of $245 million compared to
the fourth quarter of 2017. The increase was primarily driven by:
• an increase in net operating income from investment properties acquired as part of the acquisition of CREIT;
• an increase in net operating income from existing properties;
•
partially offset by,
• an unfavourable change in the fair value adjustment to investment properties; and
• acquisition and other costs related to the acquisition of CREIT of $11 million.
the favourable change in net interest expense and other financing charges, described above;
Funds from Operations(1) Funds from Operations(1) in the fourth quarter of 2018 were $172 million, an increase
of $55 million compared to the fourth quarter of 2017, primarily driven by additional property operating income
attributable to the acquired portfolio, partially offset by higher interest expense due to the acquisition of CREIT.
Other Matters For details see Section 6.3 “Choice Properties Operating Results”, of this MD&A.
48 George Weston Limited 2018 Annual Report
DISCLOSURE CONTROLS AND PROCEDURES
10.
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to
provide reasonable assurance that all material information relating to the Company and its subsidiaries is
gathered and reported to senior management on a timely basis so that appropriate decisions can be made
regarding public disclosure.
As required by National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim
Filings” (“NI 52-109”) the Chief Executive Officer, and Chief Financial Officer caused the effectiveness of the
disclosure controls and procedures to be evaluated. Based on that evaluation, they concluded that the design
and operation of the system of disclosure controls and procedures were effective as at December 31, 2018.
INTERNAL CONTROL OVER FINANCIAL REPORTING
11.
Management is responsible for establishing and maintaining adequate internal controls over financial reporting
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance with IFRS.
As required by NI 52-109, the Chief Executive Officer (“CEO”), and the Chief Financial Officer (“CFO”) have
caused the effectiveness of the internal controls over financial reporting to be evaluated using the framework
established in ‘Internal Control - Integrated Framework (COSO Framework)’ published by The Committee of
Sponsoring Organizations of the Treadway Commission (COSO), 2013. Based on that evaluation, they have
concluded that the design and operation of the Company’s internal controls over financial reporting were
effective as at December 31, 2018.
In designing such controls, it should be recognized that due to inherent limitations, any control, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives
and may not prevent or detect misstatements. Projections of any evaluations of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Additionally, management is required to
use judgment in evaluating controls and procedures.
Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal controls
over financial reporting in 2018 that materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting, except as noted below:
As permitted by the provisions of National Instrument 52-109, “Certification of Disclosures in Issuers’ Annual and
Interim Filings”, management, including the CEO and CFO, limited the scope of their design of the Company’s
disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and
procedures of CREIT. Choice Properties acquired the assets and liabilities of CREIT and its subsidiaries on
May 4, 2018. The assessment on CREIT’s design effectiveness of disclosure controls and procedures and the
harmonization of the internal controls over financial reporting frameworks is expected to be completed by the
first quarter of 2019.
Further details related to the acquisition of CREIT are set out in Section 6.3, “Choice Properties Segment Results”
and in Note 6, “Business Acquisitions” of the Company’s audited annual consolidated financial statements for
the year ended December 31, 2018.
ENTERPRISE RISKS AND RISK MANAGEMENT
12.
The Company is committed to maintaining a framework that ensures risk management is an integral part of its
activities. To ensure the continued growth and success of the Company, risks are identified and managed through
the Company’s Enterprise Risk Management (“ERM”) program.
ERM program The ERM program assists all areas of the business in managing risks within appropriate levels of
tolerance by bringing a systematic approach and methodology for evaluating, measuring and monitoring key risks.
The results of the ERM program and other business planning processes are used to identify emerging risks to the
Company, prioritize risk mitigation activities and develop a risk-based internal audit plan.
George Weston Limited 2018 Annual Report 49
Management’s Discussion and Analysis
Risks are not eliminated through the ERM program, but rather, are identified and managed in line with the
Company’s risk appetite and within understood risk tolerances. The ERM program is designed to:
facilitate effective corporate governance by providing a consolidated view of risks across the Company;
•
• enable the Company to focus on key risks that could impact its strategic objectives in order to reduce harm
to financial performance through responsible risk management;
• ensure that the Company’s risk appetite and tolerances are defined and understood;
• promote a culture of awareness of risk management and compliance within the Company;
• assist in developing consistent risk management methodologies and tools across the Company including
methodologies for the identification, assessment, measurement and monitoring of the risks; and
• anticipate and provide early warnings of risks through key risk indicators.
Risk appetite and governance The Board oversees the ERM program, including a review of the Company’s risks
and risk prioritization and annual approval of the ERM policy and risk appetite statement. The risk appetite
statement articulates key aspects of the Company’s businesses, values, and brands and provides directional
guidance on risk taking. Key risk indicators are used to monitor and report on risk performance and whether the
Company is operating within its risk appetite. Risk owners are assigned relevant risks by management and are
responsible for managing risk and implementing risk mitigation strategies.
ERM framework Risk identification and assessments are important elements of the Company’s ERM process and
framework. An annual ERM assessment is completed to assist in the update and identification of internal and
external risks. This assessment is carried out in parallel with strategic planning through interviews, surveys and
facilitated workshops with management and the Board to align stakeholders’ views. This assessment is
completed for each business unit and aggregated where appropriate. Risks are assessed and evaluated based on
the Company’s vulnerability to the risk and the potential impact that the underlying risks would have on the
Company’s ability to execute on its strategies and achieve its objectives and on the Company’s financial
performance.
Risk monitoring and reporting Management provides periodic updates to the Board (or a Committee of the
Board) on the status of the key risks based on significant changes from the prior update, anticipated impacts in
future periods and significant changes in key risk indicators. In addition, the long term (three year) risk levels are
assessed to monitor potential long term risk impacts, which may assist in risk mitigation planning activities.
Any of the key risks have the potential to negatively affect the Company and its financial performance. The
Company has risk management strategies in place for key risks. However, there can be no assurance that the
risks will be mitigated or will not materialize or that events or circumstances will not occur that could adversely
affect the reputation, operations or financial condition or performance of the Company.
12.1 OPERATING RISKS AND RISK MANAGEMENT
Operating Risks The following risks are a subset of the key risks identified through the ERM program. They
should be read in conjunction with the full set of risks inherent in the Company’s business, as included in the
Company’s AIF for the year ended December 31, 2018, which is hereby incorporated by reference:
Healthcare Reform
Cyber Security, Privacy and Data Breaches
IT Systems Implementations and Data Management
Governance, Change Management, Process and Efficiency
Competitive Environment and Strategy
Distribution and Supply Chain
Electronic Commerce and Disruptive Technologies
Food, Drug, Product Safety and Public Health
Legal Proceedings
Regulatory Compliance
Commodity Prices
Execution of Strategic Initiatives
Consumer and Retail Customer Trends
Healthcare Reform Loblaw is reliant on prescription drug sales for a significant portion of its sales and profits.
Prescription drugs and their sales are subject to numerous federal, provincial, territorial and local laws and
regulations. Changes to these laws and regulations, including the potential implementation of a national
pharmacare system, changes in the models used to fund prescription drugs such as the introduction of a
50 George Weston Limited 2018 Annual Report
pharmacare system, or non-compliance with these laws and regulations, could adversely affect the reputation,
operations or financial performance of the Company.
Federal and provincial laws and regulations that establish public drug plans typically regulate prescription drug
coverage, patient eligibility, pharmacy reimbursement, drug product eligibility and drug pricing and may also
regulate manufacturer allowance funding that is provided to or received by pharmacies or pharmacy suppliers.
With respect to pharmacy reimbursement, such laws and regulations typically regulate the allowable drug cost
of a prescription drug product, the permitted mark-up on a prescription drug product and the professional or
dispensing fees that may be charged on prescription drug sales to patients eligible under the public drug plan.
With respect to drug product eligibility, such laws and regulations typically regulate the requirements for listing
the manufacturer’s products as a benefit or partial benefit under the applicable governmental drug plan, drug
pricing and, in the case of generic prescription drug products, the requirements for designating the product as
interchangeable with a branded prescription drug product. In addition, other federal, provincial, territorial and
local laws and regulations govern the approval, packaging, labeling, sale, marketing, advertising, handling,
storage, distribution, dispensing and disposal of prescription drugs.
Sales of prescription drugs, pharmacy reimbursement and drug prices may be affected by changes to the health
care industry, including legislative or other changes that impact patient eligibility, drug product eligibility, the
allowable cost of a prescription drug product, the mark-up permitted on a prescription drug product, the amount
of professional or dispensing fees paid by payers or the provision or receipt of manufacturer allowances by
pharmacies and pharmacy suppliers.
The majority of prescription drug sales are reimbursed or paid by three types of payers: (i) government or public,
(ii) private insurers or employers, and (iii) out-of-pocket by the patient or cash. These payers have pursued and
continue to pursue measures to manage the costs of their drug plans. Each provincial jurisdiction has
implemented legislative and/or other measures directed towards managing pharmacy service costs and
controlling increasing drug costs incurred by public drug plans and private payers, which impact pharmacy
reimbursement levels and the availability of manufacturer allowances. Legislative measures to control drug
costs include lowering of generic drug pricing, restricting or prohibiting the provision of manufacturer allowances
and placing limitations on private label prescription drug products. Other measures that have been
implemented by certain government payers include restricting the number of interchangeable prescription drug
products which are eligible for reimbursement under provincial drug plans. Additionally, the Council of the
Federation, an institution created by the provincial Premiers in 2003 to collaborate on intergovernmental
relations, continues its work regarding cost reduction initiatives for pharmaceutical products and services.
Legislation in certain provincial jurisdictions establishes listing requirements that ensure that the selling price for
a prescription drug product will not be higher than any selling price established by the manufacturer for the
same prescription drug product under other provincial drug insurance programs. In some provinces, elements of
the laws and regulations that impact pharmacy reimbursement and manufacturer allowances for sales to the
public drug plans are extended by legislation to sales to private payers sector. Also, private payers (such as
corporate employers and their insurers) are looking or may look to benefit from any measures implemented by
government payers to reduce prescription drug costs for public plans by attempting to extend these measures to
prescription drug plans they own or manage. Accordingly, changes to pharmacy reimbursement and
manufacturer allowances for a public drug plan could also impact pharmacy reimbursement and manufacturer
allowances for private payers. In addition, private payers could reduce pharmacy reimbursement for prescription
drugs provided to their members or could elect to reimburse members only for products included on closed
formularies or available from preferred providers.
Changes impacting pharmacy reimbursement programs, prescription drug pricing, manufacturer allowance
funding and private label prescription drug products, legislative or otherwise, are expected to continue to put
downward pressure on prescription drug sales. These changes may have a material adverse effect on Loblaw’s
business, sales and profitability. In addition, Loblaw could incur significant costs in the course of complying with
any changes in the regulatory regime affecting prescription drugs. Non-compliance with any such existing or
proposed laws or regulations, particularly those that provide for the licensing and conduct of wholesalers, the
George Weston Limited 2018 Annual Report 51
Management’s Discussion and Analysis
licensing and conduct of pharmacists, the regulation and ownership of pharmacies, the advertising of
pharmacies and prescription services, the provision of information concerning prescription drug products, the
pricing of prescription drugs and restrictions on manufacturer allowance funding, could result in audits, civil or
regulatory proceedings, fines, penalties, injunctions, recalls or seizures, any of which could adversely affect the
reputation, operations or financial performance of the Company.
Cyber Security, Privacy and Data Breaches The Company depends on the uninterrupted operation of its IT
systems, networks and services including internal and public internet sites, data hosting and processing facilities,
cloud-based services and hardware, such as point-of-sale processing at stores, to operate its business.
In the ordinary course of business, the Company collects, processes, transmits and retains confidential, sensitive
and personal information, including personal health and financial information (“Confidential Information”)
regarding the Company and its employees, franchisees, Associates, vendors, customers, patients, credit card
holders and loyalty program members. Some of this Confidential Information is held and managed by third party
service providers. As with other large and prominent companies, the Company is regularly subject to
cyberattacks and such attempts are occurring more frequently, are constantly evolving in nature and are
becoming more sophisticated.
The Company has implemented security measures, including employee training, monitoring and testing,
maintenance of protective systems and contingency plans, to protect and to prevent unauthorized access of
Confidential Information and to reduce the likelihood of disruptions to its IT systems. The Company also has
security processes, protocols and standards that are applicable to its third party service providers.
Despite these measures, all of the Company’s information systems, including its back-up systems and any third
party service provider systems that it employs, are vulnerable to damage, interruption, disability or failures due
to a variety of reasons, including physical theft, electronic theft, fire, power loss, computer and
telecommunication failures or other catastrophic events, as well as from internal and external security breaches,
denial of service attacks, viruses, worms and other known or unknown disruptive events.
The Company or its third party service providers may be unable to anticipate, timely identify or appropriately
respond to one or more of the rapidly evolving and increasingly sophisticated means by which computer hackers,
cyber terrorists and others may attempt to breach the Company’s security measures or those of our third party
service providers’ information systems.
As cyber threats evolve and become more difficult to detect and successfully defend against, one or more cyber
threats might defeat the Company’s security measures or those of its third party service providers. Moreover,
employee error or malfeasance, faulty password management or other irregularities may result in a breach of
the Company’s or its third party service providers’ security measures, which could result in a breach of
employee, franchisee, Associate, customer, credit card holder or loyalty program member privacy or Confidential
Information.
If the Company does not allocate and effectively manage the resources necessary to build and sustain reliable IT
infrastructure, fails to timely identify or appropriately respond to cybersecurity incidents, or the Company’s or its
third party service providers’ information systems are damaged, destroyed, shut down, interrupted or cease to
function properly, the Company’s business could be disrupted and the Company could, among other things, be
subject to: transaction errors; processing inefficiencies; the loss of, or failure to attract new customers; the loss
of revenue; the loss or unauthorized access to Confidential Information or other assets; the loss of or damage to
intellectual property or trade secrets; damage to its reputation; litigation; regulatory enforcement actions;
violation of privacy, security or other laws and regulations; and remediation costs.
IT Systems Implementations and Data Management The Company continues to undertake investments in new
IT systems to improve the operating effectiveness of the organization. Failure to successfully migrate from legacy
systems to the new IT systems or a significant disruption in the Company’s current IT systems during the
implementation of new systems could result in a lack of accurate data to enable management to effectively
52 George Weston Limited 2018 Annual Report
manage day-to-day operations of the business or achieve its operational objectives, causing significant
disruptions to the business and potential financial losses.
Failure to successfully adopt or implement appropriate processes to support the new IT systems, or failure to
effectively leverage or convert data from one system to another, may preclude the Company from optimizing its
overall performance and could result in inefficiencies and duplication in processes, which could in turn adversely
affect the reputation, operations or financial performance of the Company. Failure to realize the anticipated
strategic benefits including revenue growth, anticipated cost savings or operating efficiencies associated with the
new IT systems could adversely affect the reputation, operations or financial performance of the Company.
The Company also depends on relevant and reliable information to operate its business. As the volume of data
being generated and reported continues to increase across the Company, data accuracy, quality and governance
are required for effective decision making. Failure by the Company to leverage data, including customer data, in
a timely manner may adversely affect the Company’s ability to execute its strategy and therefore its financial
performance.
Governance, Change Management, Process and Efficiency Many initiatives are underway to reduce the
complexity and cost of the Company’s business operations, ensuring a low cost operating structure that allows
for continued investments in the Company’s strategic growth areas. These efforts include initiatives focused on
improving processes and generating efficiencies across its administrative, store, manufacturing, and distribution
network infrastructures, and other organizational changes.
In 2018, the Company completed the acquisition of CREIT and Loblaw’s spin-out of Choice Properties. In
addition, Weston Foods continues with the implementation of the multi-year transformation program, to
position it for long term growth and profitability. This transformation program includes changes to the
organization and its operation, and significant capital investments including upgrade of its IT system.
The success of these initiatives is dependent on effective leadership and realizing intended benefits. Ineffective
change management could result in a lack of integrated processes and procedures, unclear accountabilities and
decision-making rights, decreased colleague engagement, ineffective communication and training or a lack of
requisite knowledge. Any of the foregoing could disrupt operations, increase the risk of customer dissatisfaction,
adversely affect the Company’s reputation or financial performance or adversely affect the ability of the
Company to implement and achieve its long term strategic objectives.
Competitive Environment and Strategy The Company operates in highly competitive industries.
Loblaw competes against a wide variety of retailers including supermarket and retail drug store operators, as
well as mass merchandisers, warehouse clubs, online retailers, mail order prescription drug distributors, limited
assortment stores, discount stores, convenience stores and specialty stores. Many of these competitors now
offer a selection of food, drug and general merchandise. Others remain focused on supermarket-type
merchandise. In addition, Loblaw is subject to competitive pressures from new entrants into the marketplace
and from the expansion or renovation of existing competitors, particularly those expanding into the grocery and
retail drug markets and those offering e-Commerce retail platforms. Loblaw’s loyalty program is a valuable
offering to customers and provides a key differentiating marketing tool for the business. The marketing,
promotional and other business activities related to Loblaw’s loyalty program must be well managed and
coordinated to preserve positive customer perception. Loblaw has made significant investments in support of
certain strategic priorities. Failure to achieve these strategic priorities could adversely affect its ability to
compete with competitors, which could in turn affect the Company’s financial position.
Loblaw’s inability to effectively predict market activity, leverage customer preferences and spending patterns and
respond timely to trends, or compete effectively with its current or future competitors could result in, among
other things, reduced market share and reduced profitability. If Loblaw is ineffective in responding to consumer
trends or in executing its strategic plans, its financial performance could be adversely affected. Loblaw’s failure to
effectively respond to customer trends may adversely impact Loblaw’s relationship with its customers. Loblaw
closely monitors its competitors and their strategies, market developments and market share trends.
George Weston Limited 2018 Annual Report 53
Management’s Discussion and Analysis
Weston Foods’ competitors include multi-national food processing companies as well as national and smaller-
scale bakery operations in North America.
Failure by Weston Foods or Loblaw to sustain their competitive position could adversely affect the Company’s
financial performance.
Distribution and Supply Chain The Company’s ability to satisfy its customers’ demands and achieve its cost
objectives depends on its ability to maintain key logistic and transport arrangements. The Company’s
distribution and supply chain could be negatively affected by unforeseen disruptions due to fire, severe weather
conditions, natural disasters, or other catastrophic events, labour disagreements, or other shipping problems.
The loss of or disruption to these types of arrangements could interrupt product supply, which in turn could
adversely affect the assortment and product availability at store level. If not effectively managed or remedied,
these events could negatively impact customer experience and the Company’s ability to attract and retain
customers, and could adversely affect the Company’s operations or financial performance.
Electronic Commerce and Disruptive Technologies Loblaw’s electronic commerce strategy is a growing business
initiative. As part of the e-commerce initiative, customers expect innovative concepts and a positive customer
experience, including a user-friendly website, certain websites and customer offerings that are integrated with
Loblaw’s loyalty program, reliable data, safe and reliable processing of payments and a well-executed
merchandise pick up or delivery process. If systems are damaged or cease to function properly, capital
investment may be required. Loblaw is also vulnerable to various additional uncertainties associated with e-
commerce including website downtime and other technical failures, changes in applicable federal and provincial
regulations, security breaches, and consumer privacy concerns. If these technology-based systems do not
function effectively, Loblaw’s ability to grow its e-commerce business could be adversely affected. Loblaw has
increased its investment in improving the digital customer experience, but there can be no assurances that the
Company will be able to recover the costs incurred to date.
The retail landscape is quickly changing due to the rise of the digitally influenced shopping experience and the
emergence of disruptive technologies, such as digital payments, drones, driverless cars and robotics. In addition,
the effect of increasing digital advances could have an impact on the physical space requirements of retail
businesses. Although the importance of a retailer’s physical presence has been demonstrated, the size
requirements and locations may be subject to further disruption. Any failure to adapt the business models to
recognize and manage this shift in a timely manner could adversely affect Loblaw’s operations or financial
performance.
Food, Drug, Product Safety and Public Health The Company’s products may expose it to risks associated with
product safety and defects and product handling in relation to the manufacturing, design, packaging and
labeling, storage, distribution, and display of products. The Company cannot assure that active management of
these risks, including maintaining strict and rigorous controls and processes in its manufacturing facilities and
distribution systems, will eliminate all the risks related to food and product safety. The Company could be
adversely affected in the event of a significant outbreak of food-borne illness or food safety issues including food
tampering or contamination. In addition, failure to trace or locate any contaminated or defective products or
ingredients could affect the Company’s ability to be effective in a recall situation. Loblaw is also subject to risk
associated with errors made through medication dispensing or errors related to patient services or consultation.
The occurrence of such events or incidents, as well as the failure to maintain the cleanliness and health
standards at Loblaw’s store level or the Company’s manufacturing facilities, could result in harm to customers,
negative publicity or could adversely affect the Company’s brands, reputation, operations or financial
performance and could lead to unforeseen liabilities from legal claims or otherwise.
Legal Proceedings In the ordinary course of business, the Company is involved in and potentially subject to legal
proceedings. The proceedings may involve suppliers, customers, Associates, franchisees, regulators, tax
authorities or other persons. The potential outcome of legal proceedings and claims is uncertain.
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the
Ontario Superior Court of Justice (“the Superior Court”) against the Company, Loblaw and certain of its
54 George Weston Limited 2018 Annual Report
subsidiaries and others in connection with the collapse of the Rana Plaza complex in Dhaka, Bangladesh in 2013.
The claim seeks approximately $2 billion in damages.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a class action proceeding that has
been filed in the Superior Court by two licensed Associates, claiming various declarations and damages resulting
from Shoppers Drug Mart’s alleged breaches of the Associate Agreement, in the amount of $500 million. The
class action comprises all of Shoppers Drug Mart’s current and former licensed Associates residing in Canada,
other than in Québec, who are parties to Shoppers Drug Mart’s 2002 and 2010 forms of the Associate
Agreement. On July 9, 2013, the Superior Court certified as a class proceeding portions of the action. The
Superior Court imposed a class closing date based on the date of certification. New Associates after July 9, 2013
are not members of the class.
In 2017, the Company and Loblaw announced actions taken to address their role in an industry-wide price-fixing
arrangement involving certain packaged bread products. The arrangement involved the coordination of retail
and wholesale prices of certain packaged bread products over a period extending from late 2001 to March 2015.
Under the arrangement, the participants regularly increased prices on a coordinated basis. Class action lawsuits
have been commenced against the Company and Loblaw as well as a number of other major grocery retailers
and another bread wholesaler. It is too early to predict the outcome of such legal proceedings. Neither the
Company nor Loblaw believes that the ultimate resolution of such legal proceedings will have a material adverse
impact on its financial condition or prospects. The Company’s cash balances far exceed any realistic damages
scenario and therefore it does not anticipate any impacts on its dividend, dividend policy or share buyback plan.
The Company has not recorded any amounts related to the potential civil liability associated with the class action
lawsuits in 2018 on the basis that a reliable estimate of the liability cannot be determined at this time. The
Company will continue to assess whether a provision for civil liability associated with the class action lawsuits
can be reliably estimated and will record an amount in the period at the earlier of when a reliable estimate of
liability can be determined or the matter is ultimately resolved.
As part of its response to this issue, Loblaw and the Company acknowledged their involvement in an industry
wide price-fixing arrangement. In connection with the arrangement, Loblaw offered customers a $25 Loblaw
Card, which can be used to purchase items sold in Loblaw grocery stores across Canada. Loblaw recorded a
charge of $107 million associated with the Loblaw Card Program in the fourth quarter of 2017. In 2018, on a
year-to-date basis, Loblaw had recorded an additional charge of $4 million. The Company expects that Loblaw
Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card
Program should not be viewed as an estimate of damages.
As a result of their admission that they participated in the arrangement and their cooperation in the Competition
Bureau’s investigation, the Company and Loblaw will not face criminal charges or penalties.
In August 2018, the Province of British Columbia filed a class action against numerous opioid manufacturers and
distributors, including Loblaw and its subsidiaries, Shoppers Drug Mart Inc. and Sanis Health Inc. The claim
contains allegations of breach of the Competition Act, fraudulent misrepresentation and deceit and negligence,
and seeks damages (unquantified) for the expenses incurred by the province in paying for opioid prescriptions
and other healthcare costs related to opioid addiction and abuse in British Columbia.
Regulatory Compliance The Company is subject to a wide variety of laws, regulations and orders across all
countries in which it does business, including those laws involving product liability, labour and employment, anti-
trust and competition, pharmacy, food safety, intellectual property, privacy, environmental and other matters.
The Company is subject to taxation by various taxation authorities in Canada and a number of foreign
jurisdictions. Changes to any of the laws, rules, regulations or policies (collectively, “laws”) applicable to the
Company’s business, including tax laws, minimum wage laws, and laws affecting the production, processing,
preparation, distribution, packaging and labelling of food, pharmaceuticals, and general merchandise products,
could adversely affect the operations or financial condition or performance of the Company.
George Weston Limited 2018 Annual Report 55
Management’s Discussion and Analysis
Failure by the Company to comply with applicable laws, regulations and orders could subject the Company to
civil or regulatory actions, investigations or proceedings, including fines, assessments, injunctions, recalls or
seizures, which in turn could adversely affect the reputation, operations or financial condition or performance of
the Company. In the course of complying with changes to laws, the Company could incur significant costs.
Changing laws or interpretations of such laws or enhanced enforcement of existing laws could restrict the
Company’s operations or profitability and thereby threaten the Company’s competitive position and ability to
efficiently conduct business.
On December 19, 2017, the Company and Loblaw announced actions taken to address their role in an industry-
wide price-fixing arrangement involving certain packaged bread products. The arrangement involved the
coordination of retail and wholesale prices of certain packaged bread products over a period extending from late
2001 to March 2015. Under the arrangement, the participants regularly increased prices on a coordinated basis.
Please refer to the “Legal Proceedings” risk on page 54 of this MD&A.
The Régie de l'assurance maladie du Québec (“RAMQ”) has been investigating certain aspects of Shoppers Drug
Mart’s contractual arrangements with pharmacists and drug manufacturers. Shoppers Drug Mart has and will
continue to cooperate with RAMQ in its review of these practices. If RAMQ is not satisfied with Shoppers Drug
Mart’s practices, then RAMQ may pursue remedies that could have a material adverse effect on the Company’s
reputation, operations, or financial condition or performance.
The Company is subject to tax audits from various tax authorities on an ongoing basis. As a result, from time to
time, tax authorities may disagree with the positions and conclusions taken by the Company in its tax filings or
legislation could be amended or interpretations of current legislation could change, any of which events could
lead to reassessments.
Loblaw is subject to externally imposed capital requirements from OSFI, the primary regulator of PC Bank.
PC Bank’s capital management objectives are to maintain a consistently strong capital position while considering
the economic risks generated by its credit card receivables portfolio and to meet all regulatory capital
requirements as defined by OSFI. PC Bank uses Basel III as its regulatory capital management framework which
includes a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8%.
In addition to the regulatory capital ratios requirement, PC Bank is subject to the Basel III Leverage ratio and
OSFI’s Guideline on Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based
on the Basel III framework. PC Bank would be assessed fines and other penalties for non-compliance with these
and other regulations. In addition, failure by PC Bank to comply, understand, acknowledge and effectively
respond to applicable regulators could result in regulatory intervention and reputational damages.
Choice Properties is currently classified as a “unit trust” and a “mutual fund trust” under the Income Tax Act
(Canada). It also qualifies for the Real Estate Investment Trust Exception under the Income Tax Act (Canada) and
as such is not subject to specified investment flow through rules. There can be no assurance that the Canadian
federal income tax laws will not be changed in a manner which adversely affects Choice Properties. If Choice
Properties ceases to qualify for these and other classifications and exceptions, the taxation of Choice Properties
and unitholders, including Loblaw and certain wholly owned subsidiaries of GWL, could be materially adversely
different in certain respects, which could in turn materially adversely affect the trading price of the Units.
Commodity Prices Weston Foods’ costs are directly impacted by fluctuations in the prices of commodity linked
raw materials such as wheat flours, sugars, vegetable oils, cocoa powders and chocolate. Loblaw is also exposed
to fluctuations in the commodity prices as a result of the indirect effect of changing commodity prices on the
price of consumer products. In addition, both Weston Foods and Loblaw are exposed to increases in the prices of
energy in operating, in the case of Weston Foods, its bakeries and distribution networks, and, in the case of
Loblaw, its stores and distribution networks. Both Weston Foods and Loblaw use purchase commitments and
derivative instruments in the form of futures contracts, option contracts and forward contracts to manage their
current and anticipated exposure to fluctuations in commodity prices.
Execution of Strategic Initiatives The Company undertakes from time to time acquisitions and dispositions that
meet its strategic objectives. The Company holds cash and short term investments and is continuing to evaluate
56 George Weston Limited 2018 Annual Report
strategic opportunities for the use or deployment of these funds. The use or deployment of the funds and the
execution of the Company’s capital plans could pose a risk if they do not align with the Company’s strategic
objectives or if the Company experiences integration difficulties on the acquisition of any businesses. Execution
of the strategic plan requires prudent operational planning, availability and attention of key personnel, timely
implementation and effective change management. In addition, the Company may not be able to realize upon
the synergies, business opportunities and growth prospects expected from any such investment opportunities or
from the execution of the Company’s strategies. Finally, any acquisition or divestiture activities may present
unanticipated costs and managerial and operational risks, including the diversion of management’s time and
attention from day-to-day activities. If the Company’s strategies are not effectively developed and executed, it
could negatively affect the reputation, operations or financial performance of the Company.
Consumer and Retail Customer Trends The North American bakery market continues to evolve as consumer
preferences and consumption patterns shift. As a result of evolving retail customer trends, the Company must
anticipate and meet these trends in a highly competitive environment on a timely basis. The failure of Weston
Foods to anticipate, identify and react to shifting consumer and retail customer trends and preferences through
successful innovation and enhanced manufacturing capability could adversely result in reduced demand for its
products, which could in turn negatively affect the financial performance of the Company.
12.2
FINANCIAL RISKS AND RISK MANAGEMENT
Financial Risks The Company is exposed to a number of financial risks, including those associated with financial
instruments, which have the potential to affect its operating and financial performance. The Company uses over-
the-counter derivative instruments to offset certain of these risks. Policies and guidelines prohibit the use of any
derivative instrument for trading or speculative purposes. The fair value of derivative instruments is subject to
changing market conditions which could adversely affect the financial performance of the Company.
The following is a summary of the Company’s financial risks which are discussed in detail below:
Liquidity
Foreign Currency Exchange Rates
Credit
Common Share and Trust Unit Prices
Interest Rates
Liquidity Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its
equivalents in a cost effective manner to fund its obligations as they come due. The Company is exposed to
liquidity risk through, among other areas, PC Bank and its credit card business, which requires a reliable source
of funding for its credit card business. PC Bank relies on its securitization programs and the acceptance of GIC
deposits to fund the receivables of its credit cards. The Company would experience liquidity risk if it fails to
maintain appropriate levels of cash and short term investments, is unable to access sources of funding or fails to
appropriately diversify sources of funding. If any of these events were to occur, they could adversely affect the
financial performance of the Company.
Liquidity risk is mitigated by maintaining appropriate levels of cash and cash equivalents and short term
investments, actively monitoring market conditions, and by diversifying sources of funding, including the
Company’s committed credit facilities, and maintaining a well diversified maturity profile of debt and capital
obligations.
Foreign Currency Exchange Rates The Company’s consolidated financial statements are expressed in Canadian
dollars, however a portion of the Company’s (excluding Loblaw’s) net assets are denominated in U.S. dollars
through both its net investment in foreign operations in the U.S. and its foreign subsidiaries held by Dunedin
Holdings GmbH and certain of its affiliates with a functional currency that is the same as that of the Company.
The U.S. dollar denominated net assets are translated into Canadian dollars at the foreign currency exchange
rate in effect at the balance sheet date. As a result, the Company is exposed to foreign currency translation gains
and losses. Those gains and losses arising from the translation of the U.S. dollar denominated assets of foreign
subsidiaries with a functional currency that is the same as that of the Company are included in operating income,
George Weston Limited 2018 Annual Report 57
Management’s Discussion and Analysis
while translation gains and losses on the net investment in foreign operations in the U.S. are recorded in
accumulated other comprehensive income (loss).
Revenues and expenses of all foreign operations are translated into Canadian dollars at the foreign currency
exchange rates that approximate the rates in effect at the dates when such items are recognized. An appreciating
U.S. dollar relative to the Canadian dollar will positively impact operating income and net earnings, while a
depreciating U.S. dollar relative to the Canadian dollar will have the opposite impact.
Weston Foods and Loblaw are also exposed to fluctuations in the prices of U.S. dollar denominated purchases
as a result of changes in U.S. dollar exchange rates. A depreciating Canadian dollar relative to the U.S. dollar will
negatively impact operating income and net earnings, while an appreciating Canadian dollar relative to the
U.S. dollar will have the opposite impact. Weston Foods and Loblaw entered into derivative instruments in the
form of futures contracts and forward contracts to manage their current and anticipated exposure to
fluctuations in U.S. dollar exchange rates.
Credit The Company is exposed to credit risk resulting from the possibility that counterparties could default on
their financial obligations to the Company including derivative instruments, cash and cash equivalents, short
term investments, security deposits, PC Bank’s credit card receivables, Loblaw’s franchise loans receivable,
pension assets held in the Company’s defined benefit plans, Loblaw’s accounts receivable including amounts due
from franchisees, government, prescription sales and third-party drug plans, independent accounts and amounts
owed from vendors, and other receivables from Weston Foods’ customers and suppliers. Failure to manage
credit risk could adversely affect the financial performance of the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security
deposits is reduced by policies and guidelines that require that the Company enters into transactions only with
counterparties or issuers that have a minimum long term “A-” credit rating from a recognized credit rating
agency and place minimum and maximum limits for exposures to specific counterparties and instruments.
Choice Properties mitigates the risk of credit loss relating to rent receivables by evaluating the creditworthiness
of new tenants, obtaining security deposits wherever permitted by legislation, ensuring its tenant mix is
diversified and by limiting its exposure to any one tenant except Loblaw. Choice Properties establishes an
allowance for doubtful accounts that represents the estimated losses with respect to rents receivable. The
allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques, actively
monitoring the credit card portfolio and reviewing techniques and technology that can improve the effectiveness
of the collection process. In addition, these receivables are dispersed among a large, diversified group of credit
card customers.
Loblaw’s franchise loans receivable and Loblaw’s accounts receivable including amounts due from franchisees,
governments, prescription sales covered by third-party drug plans, independent accounts and amounts owed
from vendors, and other receivables from Weston Foods’ customers and suppliers, are actively monitored on an
ongoing basis and settled on a frequent basis in accordance with the terms specified in the applicable
agreements.
Despite the mitigation strategies described above, it is possible that the Company’s financial performance could
be negatively impacted by the failure of a counterparty to fulfill its obligations.
Common Share and Trust Unit Prices Changes in the Loblaw common share price impact the Company’s net
interest expense and other financing charges. In 2001, Weston Holdings Limited (“WHL”) entered into an equity
forward sale agreement based on 9.6 million Loblaw common shares at an original forward price of $48.50 per
Loblaw common share which, under the terms of the agreement, had increased to a forward price of $118.42
(2017 – $113.45) per Loblaw common share as at year end 2018. The forward matures in 2031 and will be
settled in cash as follows: WHL will receive the forward price and will pay the market value of the underlying
Loblaw common shares at maturity. The obligation of WHL under this forward is secured by the underlying
Loblaw common shares. WHL recognizes a non-cash charge or income, which is included in consolidated net
58 George Weston Limited 2018 Annual Report
interest expense and other financing charges, representing the fair value adjustment of WHL’s forward sale
agreement for 9.6 million shares. The fair value adjustment in the forward contract is a non-cash item resulting
from fluctuations in the market price of the underlying Loblaw shares that WHL owns. WHL does not record any
change in the market price associated with the Loblaw common shares it owns. At maturity, if the forward price
is greater (less) than the market price, WHL will receive (pay) cash equal to the difference between the notional
value and the market value of the forward contract. Any cash paid under the forward contract could be offset by
the sale of Loblaw common shares.
The Company is exposed to market price risk from Choice Properties’ Trust Units that are held by unitholders
other than the Company. These Trust Units are presented as a liability on the Company’s consolidated balance
sheets as they are redeemable for cash at the option of the holders. The liability is recorded at fair value at each
reporting period based on the market price of Trust Units. The change in the fair value of the liability negatively
impacts net earnings when the Trust Unit price increases and positively impacts net earnings when the Trust Unit
price declines.
Interest Rates The Company is exposed to interest rate risk from fluctuations in interest rates on its floating rate
debt and from the refinancing of existing financial instruments. The Company manages interest rate risk by
monitoring the respective mix of fixed and floating rate debt and by taking action as necessary to maintain an
appropriate balance considering current market conditions, with the objective of maintaining the majority of its
debt at fixed interest rates.
RELATED PARTY TRANSACTIONS
13.
The Company’s majority shareholder is Mr. W. Galen Weston, who beneficially owns, directly and indirectly
through private companies which he controls, including Wittington Investments, Limited (“Wittington”), a total
of 81,465,025 of GWL’s common shares, representing approximately 53.1% (2017 – 63.2%) of GWL’s outstanding
common shares.
The Company’s policy is to conduct all transactions and settle all balances with related parties on market terms
and conditions. Transactions between the Company and its consolidated entities have been eliminated on
consolidation and are not disclosed below.
In 2018, the Company made rental payments to Wittington in the amount of $4 million (2017 – $4 million). As at
year end 2018 and 2017, there were no rental payments outstanding.
In 2018, inventory purchases from Associated British Foods plc, a related party by virtue of Mr. W. Galen Weston
being a director of such entity’s parent company, amounted to $44 million (2017 – $39 million). As at year end
2018, $3 million (2017 – $6 million) was included in trade payables and other liabilities relating to these
inventory purchases.
Joint Venture In 2014, a joint venture, formed between Choice Properties and Wittington, completed the
acquisition of property from Loblaw. The joint venture intends to develop the acquired site into a mixed-used
property, anchored by a Loblaw food store. As at year end 2018, the joint venture did not have any operating
activity. Choice Properties uses the equity method of accounting to record its 40% interest in the joint venture,
which is included in other assets.
Operating Lease Choice Properties entered into a ten-year lease for office space with Wittington that
commenced in 2014. Lease payments will total $3 million over the term of the lease. Effective January 1, 2018,
Choice Properties entered into a sub-lease for additional office space with a subsidiary of the Company, with a
term effective until the end of the existing lease in 2024. Over the term of the sub-lease, lease payments will
total $1 million.
Post-Employment Benefit Plans The Company sponsors a number of post-employment plans, which are related
parties. Contributions made by the Company to these plans are disclosed in the notes to the consolidated
financial statements.
George Weston Limited 2018 Annual Report 59
Management’s Discussion and Analysis
Income Tax Matters From time to time, the Company and Wittington may enter into agreements to make
elections that are permitted or required under applicable income tax legislation with respect to affiliated
corporations.
Compensation of Key Management Personnel The Company’s key management personnel is comprised of
certain members of the executive team of GWL, Loblaw, Weston Foods and Wittington, as well as members of
the Boards of GWL, Loblaw and Wittington to the extent that they have the authority and responsibility for
planning, directing and controlling the day-to-day activities of the Company.
Annual compensation of key management personnel that is directly attributable to the Company was as follows:
($ millions)
Salaries, director fees and other short term employee benefits
Share-based compensation
Total compensation
2018
8
12
20
$
$
2017
9
13
22
$
$
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
14.
The preparation of the consolidated financial statements requires management to make estimates and
judgments in applying the Company’s accounting policies that affect the reported amounts and disclosures made
in the consolidated financial statements and accompanying notes.
Within the context of this MD&A, a judgment is a decision made by management in respect of the application of
an accounting policy, a recognized or unrecognized financial statement amount and/or note disclosure, following
an analysis of relevant information that may include estimates and assumptions. Estimates and assumptions are
used mainly in determining the measurement of balances recognized or disclosed in the consolidated financial
statements and are based on a set of underlying data that may include management’s historical experience,
knowledge of current events and conditions and other factors that are believed to be reasonable under the
circumstances. Management continually evaluates the estimates and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that
the Company believes could have the most significant impact on the amounts recognized in the consolidated
financial statements.
Basis of Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the
entities that it controls and therefore consolidates. The Company controls an entity when the Company has the
existing rights that give it the current ability to direct the activities that significantly affect the entity’s returns.
The Company consolidates all of its wholly owned subsidiaries. Judgment is applied in determining whether the
Company controls the entities in which it does not have ownership rights or does not have full ownership rights.
Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power
over the entity) or protective rights (protecting the Company’s interest without giving it power).
Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the
Company to utilize estimates related to fluctuations in shrink, future retail prices, the impact of vendor rebates
on cost, seasonality and costs necessary to sell the inventory.
Impairment of non-financial assets (goodwill, intangible assets and fixed assets)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in
determining the grouping of assets to identify their cash generating units (“CGU”) for the purposes of testing
fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs for the
level at which goodwill and intangible assets are tested for impairment. The Company has determined that each
retail location is a separate CGU for purposes of fixed asset impairment testing. For the purpose of goodwill and
indefinite life intangible assets impairment testing, CGUs are grouped at the lowest level at which goodwill and
60 George Weston Limited 2018 Annual Report
indefinite life intangible assets are monitored for internal management purposes. In addition, judgment is used
to determine whether a triggering event has occurred requiring an impairment test to be completed.
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various
estimates are employed. The Company determines fair value less costs to sell using such estimates as market
rental rates for comparable properties, recoverable operating costs for leases with tenants, non-recoverable
operating costs, discount rates, capitalization rates and terminal capitalization rates. The Company determines
value in use by using estimates including projected future revenues, earnings and capital investment consistent
with strategic plans presented to the Boards at GWL and Loblaw. Discount rates are consistent with external
industry information reflecting the risk associated with the specific cash flows.
Impairment of Franchise loans receivable and certain other financial assets
Judgments Made in Relation to Accounting Policies Applied Management reviews franchise loans receivable,
trade receivables and certain other financial assets relating to Loblaw’s franchise business at each balance sheet
date utilizing judgment to determine whether a triggering event has occurred requiring an impairment test to
be completed.
Key Sources of Estimation Management determines the initial fair value of Loblaw’s franchise loans and certain
other financial assets using discounted cash flow models. The process of assessing the recoverability of these
loans and certain other financial assets requires management to make estimates of a long term nature regarding
discount rates, projected revenues and margins, as applicable. These estimates are derived from past
experience, actual operating results and budgets.
Customer Loyalty Awards Programs
Key Sources of Estimation Loblaw defers revenue at the time the award is earned by members based on the
relative fair value of the award. The relative fair value is determined by allocating consideration between the fair
value of the loyalty awards earned by loyalty program members, net of breakage, and the goods and services on
which the awards were earned, based on their relative stand-alone selling price. The estimated fair value per
point for the PC Optimum program is determined based on the program reward schedule and is $1 for every
1,000 points earned. The breakage rate of the program is an estimate of the amount of points that will never be
redeemed. The rate is reviewed on an ongoing basis and is estimated utilizing historical redemption activity and
anticipated earn and redeem behaviour of members.
Impairment of Credit card receivables
Judgments Made in Relation to Accounting Policies Applied In each stage of the impairment model, impairment is
determined based on the probability of default, loss given default, and expected exposures at default on drawn
and undrawn exposures on credit card receivables, discounted using an average portfolio yield rate. The
application of the ECL model requires management to apply the following significant judgments, assumptions
and estimations:
• Movement of impairment measurement between the three stages of the ECL model, based on the
assessment of increase in credit risks on credit card receivables. The assessment of changes in credit risks
includes qualitative and quantitative factors of the accounts, such as historical credit loss experience and
external credit scores;
• Thresholds for significant increase in credit risks based on changes in probability of default over the expected
life of the instrument relative to initial recognition; and
• Forecasts of future economic conditions.
Fair Value of Investment Properties
Key Sources of Estimation The fair value of investment properties is dependent on available comparable
transactions, future cash flows over the holding period, and discount rates and capitalization rates applicable to
those assets. The review of anticipated cash flow involves assumptions relating to occupancy, market rental
rates, net operating expenses, and residual value. In addition to reviewing anticipated cash flows, management
assesses changes in the business climate and other factors, which may affect the ultimate value of the property.
These assumptions may not ultimately be achieved.
George Weston Limited 2018 Annual Report 61
Management’s Discussion and Analysis
Income and other taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes
requires management to make certain judgments regarding the tax rules in jurisdictions where the Company
performs activities. Application of judgments is required regarding the classification of transactions and in
assessing probable outcomes of claimed deductions including expectations about future operating results and
the timing and reversal of temporary differences.
Provisions
Judgments made in Relation to Accounting Policies Applied and Key Sources of Estimation The recording of
provisions requires management to make certain judgments regarding whether there is a present legal or
constructive obligation as a result of a past event, it is probable that the Company will be required to settle the
obligation and if a reliable estimate of the amount of the obligation can be made. The Company has recorded
provisions primarily in respect of restructuring, environmental and decommissioning liabilities, onerous lease
arrangements and legal claims. The Company reviews the merits, risks and uncertainties of each provision, based
on current information, and the amount expected to be required to settle the obligation. Provisions are reviewed
on an ongoing basis and are adjusted accordingly when new facts and events become known to the Company.
15.
ACCOUNTING STANDARDS IMPLEMENTED
On January 1, 2018, the Company implemented IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”)
and IFRS 9, “Financial Instruments” (“IFRS 9”), in accordance with IAS 8, “Accounting Policies, Changes in
Accounting Estimates and Errors”. The impacts on implementation of IFRS 15 and IFRS 9 on the Company’s
consolidated financial statements are described below.
IFRS 15 In 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”, replacing IAS 18,
“Revenue” (“IAS 18”), IAS 11, “Construction Contracts”, and related interpretations. IFRS 15 provides a
comprehensive framework for the recognition, measurement and disclosure of revenue from contracts with
customers, excluding contracts within the scope of the accounting standards on leases, insurance contracts and
financial instruments. IFRS 15 is effective for annual periods beginning on or after January 1, 2018.
The Company adopted the standard on January 1, 2018 and applied the requirements of the standard
retrospectively with the cumulative effects of initial application recorded in opening retained earnings on
January 1, 2017 and with the restatement of comparative periods. IFRS 15 permits the use of exemptions and
practical expedients. The Company applied the practical expedient in which contracts that began and were
completed within the same annual reporting period before December 31, 2017 or were completed on or before
January 1, 2017 do not require restatement.
The implementation of IFRS 15 did not have a significant impact on Weston Foods’, Loblaw’s or Choice
Properties’ segment revenue streams, including Loblaw’s franchise arrangements with non-consolidated stores.
IFRS 15 impacted the allocation of revenue that is deferred in relation to the Loblaw’s customer loyalty award
programs. Under IAS 18 and related interpretations, revenue was allocated to the customer loyalty awards using
the residual fair value method. Under this method, a portion of the consideration equaling the fair value of the
points was allocated to the loyalty awards and deferred until the points were ultimately redeemed. The residual
consideration was allocated to the goods and services sold and recognized as revenue. Under IFRS 15,
consideration is allocated between the loyalty awards and the goods and services on which the awards were
earned, based on their relative stand-alone selling prices. Using this relative fair value approach, the amount
allocated to the loyalty points and recorded as deferred revenue will be, on average, lower than the amounts
allocated under the residual value method. The majority of Loblaw’s loyalty liability, which is a contract liability,
is expected to be redeemed and recognized as revenue within one year of issuance.
In addition, in the fourth quarter of 2017, Loblaw recorded a charge before income taxes of $189 million under
IAS 18 and related interpretations, related to the revaluation of the existing loyalty liability for outstanding points
to reflect a higher anticipated redemption rate under the new PC Optimum program. Under IFRS 15, using the
relative fair value approach, this revaluation of the loyalty liability decreased by $24 million resulting in a charge
before income taxes of $165 million.
62 George Weston Limited 2018 Annual Report
The impact of the above changes on equity as at January 1, 2017 and December 31, 2017 is as follows:
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Loyalty liability
Income taxes payable
Deferred income tax liabilities
Equity
$
As at
As at
January 1, 2017 December 31, 2017
(64)
11
7
46
(43)
12
—
31
$
The impact of this change on the comparative periods for 12 weeks and 52 weeks ended December 30, 2017
is as follows:
Consolidated Statements of Earnings
Increase (Decrease)
($ millions)
Revenue
SG&A
Income taxes
(unaudited)
(audited)
$
12 Weeks Ended
December 31, 2017
(7)
(24)
5
$
52 Weeks Ended
December 31, 2017
(3)
(24)
6
The implementation of IFRS 15 had an impact on basic and diluted net earnings per share of $0.05 for 52 weeks
ended December 31, 2017.
The quarterly and annual impacts of this change in 2017 are as follows:
Summary of Condensed Consolidated Quarterly Statement of Earnings (unaudited)
March 25, 2017
Increase (Decrease)
(12 weeks)
($ millions)
Revenue
3
—
SG&A
1
Income taxes
2
Net earnings
June 17, 2017 October 7, 2017 December 31, 2017 December 31, 2017
(52 weeks)
(3)
(24)
6
15
(12 weeks)
1
—
—
1
— $
—
—
—
(24)
5
12
(12 weeks)
(16 weeks)
(7) $
$
$
$
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments:
Recognition and Measurement” (“IAS 39”), and related interpretations. IFRS 9 includes revised guidance on
the classification and measurement of financial assets, including impairment and a new general hedge
accounting model. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. The Company
implemented the new requirements for classification and measurement, impairment and general hedging on
December 31, 2017 by applying the requirements for classification and measurement, including impairment,
retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at
December 31, 2017 with no restatement of comparative periods. The Company also applied related
amendments to IFRS 7, “Financial Instruments: Disclosures”. Refer to the Financial Instruments and Derivative
Instruments policy for significant accounting policies under IFRS 9.
Classification and measurement IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and their cash flow characteristics. Financial
assets are not reclassified subsequent to their initial recognition unless the Company identifies changes in its
business model in managing financial assets. The adoption of the new classification requirements under IFRS 9
did not result in significant changes in measurement or the carrying amount of financial assets and liabilities,
with the exception of credit card receivables discussed below.
George Weston Limited 2018 Annual Report 63
Management’s Discussion and Analysis
The following table summarizes the classification impacts upon adoption of IFRS 9:
Asset/Liability
Classification under IFRS 9
Classification under IAS 39
Fair value through profit and loss(i) Amortized cost
Cash and cash equivalents
Fair value through profit and loss(i) Amortized cost
Short term investments
Amortized cost
Loans and receivables
Accounts receivable
Amortized cost
Loans and receivables
Credit card receivables
Fair value through profit and loss(i)
Fair value through profit and loss
Security deposits
Amortized cost
Loans and receivables
Franchise loans receivable
Certain other assets(ii)
Amortized cost / fair value through profit and loss
Loans and receivables
Fair value through other comprehensive income
Available-for-sale
Certain long term investments
Amortized cost
Bank indebtedness
Other liabilities
Amortized cost
Trade payables and other liabilities Other liabilities
Amortized cost
Other liabilities
Short term debt
Other liabilities
Long term debt
Amortized cost
Fair value through profit and loss(iii) Fair value through profit and loss
Trust Unit liability
Other liabilities
Certain other liabilities
Fair value through profit and loss(iii) Fair value through profit and loss / fair value
Derivatives
Amortized cost
through other comprehensive income
Financial instruments designated at fair value through profit and loss.
(i)
(ii) Certain other assets Include mortgages, loans and notes receivable which are classified as either amortized cost or fair value through
profit and loss.
(iii) Financial instruments required to be classified at fair value through profit and loss.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit
loss’ (“ECL”) model. The new impairment model is applied, at each balance sheet date, to financial assets
measured at amortized cost or those measured at fair value through other comprehensive income, except for
investments in equity instruments.
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the increase in credit risks
of a financial instrument. Refer to the Impairment of Financial Assets policy for details of each stage.
The ECL model had a significant impact on PC Bank’s impairment of credit card receivables. The Company revised
certain inputs of the ECL model since the implementation of IFRS 9 in the first quarter of 2018 and has
retrospectively applied the impact of these revisions with no impact to earnings. As a result of the refinements,
the cumulative impact arising from the ECL model on the impairment of credit card receivables as at
January 1, 2018 was as follows:
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Credit card receivables
Deferred income tax assets
Income taxes payable
Deferred income tax liabilities
Equity
$
As at
January 1, 2018
(98)
26
4
(4)
(72)
The Company also applied ECL models to the assessment of impairment on trade receivables and other financial
assets of the Company. The Company adopted the practical expedient to determine ECL on trade receivables
using a provision matrix based on historical credit loss experiences to estimate lifetime ECL. The ECL models
applied to other financial assets also required judgment, assumptions and estimations on changes in credit risks,
forecasts of future economic conditions and historical information on the credit quality of the financial asset. The
64 George Weston Limited 2018 Annual Report
provision matrix and ECL models applied do not have a material impact on trade receivables and other financial
assets of the Company.
General hedging IFRS 9 requires the Company to ensure that hedge accounting relationships are aligned with
the Company’s risk management objectives and strategy and to apply a more qualitative and forward-looking
approach to assessing hedge effectiveness. The Company’s risk management strategy and hedging activities are
disclosed in Note 33 “Financial Instruments” and Note 34 “Financial Risk Management”.
Changes to Significant Accounting Policies
The following significant accounting policies reflect certain impacts to the presentation of the Company’s annual
consolidated financial statements.
Investment Properties Investment properties are properties owned by the Company that are held to either earn
rental income, for capital appreciation, or both. The Company’s investment properties include single tenant
properties held to earn rental income and certain multi-tenant properties.
The Company elected to change the measurement of investment properties from the cost model to the fair
value model retrospectively with restatement. Refer to the Investment Properties policy for the fair value policy.
Prior to the second quarter of 2018, the Company recognized investment property assets at cost less
accumulated depreciation and any accumulated impairment losses.
The Company applied this change in accounting policy retrospectively in the second quarter of 2018. The
impacts to the Company’s comparative consolidated balance sheets are as follow:
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Investment Properties
Deferred income tax liabilities
Equity
$
As at
December 31, 2017
41
5
36
$
As at
January 1, 2017
41
5
36
16.
FUTURE ACCOUNTING STANDARDS
The future accounting standard noted below will impact the Company’s business processes, internal controls
over financial reporting, data systems, and information technology (“IT”), as well as financing and compensation
arrangements. As a result, the Company has developed a comprehensive project plan to guide the
implementation.
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing IAS 17, “Leases” (“IAS 17”) and related
interpretations. The standard introduces a single, on-balance sheet recognition and measurement model for
lessees, eliminating the distinction between operating and finance leases. Lessees recognize a right-of-use asset
representing its control of and right to use the underlying asset and a lease liability representing its obligation to
make future lease payments. Lessor accounting remains similar to IAS 17.
Substantially all of the Company's operating leases are real estate leases for retail stores, production plants,
distribution centers and corporate offices. Other leased assets include passenger vehicles, trucks and IT
equipment. The Company also has owned and leased properties which are leased and subleased to third parties,
respectively. The subleases are mainly related to non-consolidated franchisees, ancillary tenants and gas bar
land.
As a lessee, the Company will recognize right-of-use assets and lease liabilities primarily for its operating leases
of real estate properties, vehicles and equipment. The depreciation expense on right-of-use assets and interest
expense on lease liabilities will replace rent expense, previously recognized on a straight-line basis under IAS 17
over the term of a lease. No significant impacts are expected for the Company’s existing finance leases.
George Weston Limited 2018 Annual Report 65
Management’s Discussion and Analysis
As a lessor, the Company will continue to classify leases as finance and operating leases. The Company will also
reassess the classification of its subleases by reference to the right-of-use assets arising from the head lease and
will recognize a corresponding finance lease receivable if the reassessment concludes that the sublease is a
finance lease. No significant impacts are expected for leases where the Company is the lessor.
IFRS 16 becomes effective for annual periods beginning on or after January 1, 2019. For leases where the
Company is the lessee, it has the option of adopting a fully retrospective approach or a modified retrospective
approach on transition to IFRS 16. The Company has adopted the standard on January 1, 2019 using the
modified retrospective approach. The modified retrospective approach applies the requirements of the standard
retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at
January 1, 2019, and no restatement of the comparative period. Under the modified retrospective approach, the
Company chose to measure all right-of-use assets retrospectively as if the standard had been applied since lease
commencement dates.
IFRS 16 permits the use of exemptions and practical expedients. The Company has applied the following
recognition exemptions and practical expedients:
• grandfather lease definition for existing contracts at the date of initial application;
• exclude low-value and short term leases from IFRS 16 lease accounting;
• use portfolio application for leases with similar characteristics, such as vehicle and equipment leases;
• apply a single discount rate to a portfolio of leases with reasonably similar characteristics at the date of
initial application;
• exclude initial direct costs from the measurement of the right-of-use assets at the date of initial application;
and
• use hindsight in determining lease term at the date of initial application.
While the standard was adopted on January 1, 2019, the Company continues to assess the impact of the
standard on the Company’s business processes, internal controls over financial reporting, data systems, IT, and
financing and compensation arrangements. The Company has implemented a lease management system and is
in the final stages of refining and validating the inputs and key assumptions used in its calculation of the
cumulative effects of initial application to be recorded in opening retained earnings as at January 1, 2019.
Based on the information currently available, as a result of the initial application of IFRS 16 as at January 1, 2019,
Management anticipates recognizing approximately $4 billion of right-of-use assets and approximately $5 billion
of lease liabilities, inclusive of current finance leases, on its consolidated balance sheet, and derecognizing
approximately $130 million of deferred rent obligation from its consolidated balance sheet, with the difference,
net of the deferred tax impact, recorded in opening retained earnings. Certain other balance sheet accounts are
impacted through reclassification to applicable IFRS 16 balance sheet line items.
The final impacts of the initial application of IFRS 16 may vary from the estimates provided for the following
reasons:
•
the Company has not finalized the assessment and testing of applicable internal controls over financial
reporting; and
the new accounting policies and critical accounting estimates and judgments are subject to change until the
Company issues its first quarter report to shareholders for the 12 weeks ending March 23, 2019.
•
66 George Weston Limited 2018 Annual Report
OUTLOOK(3)
17.
Weston Foods is focused on becoming a premier North American bakery and delivering solid financial results. In
2019, Weston Foods will focus on growing its core business, selectively innovating in new segments and markets,
and strengthening key processes.
In 2019, on a full-year comparative basis, Weston Foods expects its business performance to stabilize:
• Sales will be lower when compared to 2018, due to the impact of lapping sales lost from key customers last
year and the impact of product rationalization, partially offset by growth in key categories and pricing;
• Excluding the prior year gains on the sale leaseback of properties, adjusted EBITDA(1) will be slightly lower
when compared to 2018. Adjusted EBITDA(1) will be impacted by headwinds from higher input and
distribution costs in an inflationary environment and by sales trends as described above, partially offset by
improvements driven from productivity and the transformation program;
Investment in capital expenditures to decrease to approximately $200 million; and
•
• Depreciation will increase compared to 2018.
Loblaw is focused on its strategic framework, delivering best in food and health and beauty, using data driven
insights underpinned by process and efficiency excellence. This framework is supported by Loblaw’s financial
plan of maintaining a stable trading environment that targets positive same-store sales and stable gross margin,
creating efficiencies to deliver operating leverage, investing for the future and returning capital to shareholders.
Loblaw will remain focused on delivering Process and Efficiency improvements to offset increasing costs and to
fund continued incremental investments in its strategic growth areas of Everyday Digital Retail, Connected
Healthcare and Payments & Rewards.
In 2019, on a full-year comparative basis, Loblaw expects to:
• deliver positive same-store sales and stable gross margin in its Retail segment in a highly competitive market;
• deliver positive adjusted net earnings(1) growth;
•
•
invest approximately $1.1 billion in capital expenditures, net of proceeds from property disposals; and
return capital to shareholders by allocating a significant portion of free cash flow to share repurchases.
Choice Properties’ strategy is to grow and manage its portfolio and cash flow by leveraging its sizable base of
assets, its relationship with Loblaw and its solid capital structure. With the acquisition of CREIT on May 4, 2018,
Choice Properties has evolved into two primary functional areas: an existing income producing property portfolio
and a development business. The income producing property portfolio provides a solid foundation for stable
cash flows and is diversified by both geographic location and product type including retail, industrial, office and
residential assets. Development initiatives provide the opportunity to add high quality real estate by focusing
primarily on retail intensification projects and well located rental residential projects at various stages of
development. Looking forward, Choice Properties will continue to focus on financial and operational stability,
the advancement of retail and industrial development projects and the expansion of its multi-residential
platform.
In 2019, Choice Properties will continue to focus on financial and operational stability. This includes
improvement to its portfolio quality through property acquisition and dispositions, the advancement of retail
and industrial development projects, the expansion of its multi-residential platform and prudent management of
maturing debt and variable interest rate exposure.
For 2019, the Company expects adjusted net earnings(1) to increase due to the results from its operating
segments as described above.
George Weston Limited 2018 Annual Report 67
Management’s Discussion and Analysis
NON-GAAP FINANCIAL MEASURES
18.
The Company uses the following non-GAAP financial measures: adjusted EBITDA and adjusted EBITDA margin,
adjusted net earnings attributable to shareholders of the Company, adjusted net earnings available to common
shareholders of the Company, adjusted diluted net earnings per common share, adjusted return on average
equity attributable to common shareholders of the Company, adjusted return on capital and free cash flow; and
with respect to Choice Properties: funds from operations. In addition to these items, the following measures are
used by management in calculating adjusted diluted net earnings per common share: adjusted operating
income, adjusted net interest expense and other financing charges, adjusted income taxes and adjusted income
tax rate. The Company believes these non-GAAP financial measures provide useful information to both
management and investors in measuring the financial performance and financial condition of the Company for
the reasons outlined below.
Management uses these and other non-GAAP financial measures to exclude the impact of certain expenses and
income that must be recognized under GAAP when analyzing consolidated and segment underlying operating
performance. The excluded items are not necessarily reflective of the Company’s underlying operating
performance and make comparisons of underlying financial performance between periods difficult. From time to
time, the Company may exclude additional items if it believes doing so would result in a more effective analysis
of underlying operating performance. The exclusion of certain items does not imply that they are non-recurring.
These measures do not have a standardized meaning prescribed by GAAP and therefore they may not be
comparable to similarly titled measures presented by other publicly traded companies, and they should not be
construed as an alternative to other financial measures determined in accordance with GAAP.
68 George Weston Limited 2018 Annual Report
Adjusted EBITDA The Company believes adjusted EBITDA is useful in assessing and making decisions regarding
the underlying operating performance of the Company’s ongoing operations and in assessing the Company’s
ability to generate cash flows to fund its cash requirements, including its capital investment program.
The following table reconciles adjusted EBITDA to operating income, which is reconciled to GAAP net earnings
attributable to shareholders of the Company reported for the periods ended as indicated.
Quarters Ended
Dec. 31, 2018
Dec. 31, 2017(5)
(unaudited)
($ millions)
Weston
Foods
Loblaw(4)
Choice
Properties(4)
Other &
Intersegment(4)
Consolidated
Weston
Foods
Loblaw(4)
Choice
Properties(4)
Other &
Intersegment(4)
Consolidated
Net earnings attributable to
shareholders of the Company
Add impact of the following:
Non-controlling interests
Income taxes
Net interest expense and other
financing charges
Operating income
Add impact of the following:
Amortization of intangible assets
acquired with Shoppers
Drug Mart
Asset impairments, net of
recoveries
Restructuring and other charges
Loblaw’s Spin-out of Choice
Properties
Loblaw Card Program
Fair value adjustment on
investment properties
Fair value adjustment of derivatives
Wind-down of PC Financial banking
services
CREIT acquisition and other
related costs
Inventory loss, net of recoveries
PC Optimum Program
Certain prior period items
Prior year land transfer tax
recovery
Foreign currency translation(i)
Adjusting items
Adjusted operating income
Depreciation and amortization
excluding the impact of the above
adjustments(ii)
Adjusted EBITDA
$
281
$
44
$
22 $ 443 $ 202 $
23 $
131
60
218
690
$
8 $
55 $ 152 $
(51) $
34
(29)
115
164
$ — $ 120 $ — $
— $
120
$ — $ 121 $ — $
— $
121
—
9
—
—
—
(3)
—
—
—
—
—
—
83
(4)
2
—
5
8
—
—
—
—
—
—
—
—
—
—
15
—
—
11
—
—
—
—
(77)
—
8
—
(16)
—
—
—
—
—
—
—
6
5
10
—
4
5
—
11
—
—
—
—
—
33
—
—
—
(3)
—
—
(2)
—
—
—
53
171
—
107
—
(5)
(17)
—
—
187
(4)
(9)
—
—
—
—
3
—
—
—
—
—
—
—
—
(6)
—
—
(3)
—
—
—
—
—
—
—
—
—
—
6 $ 214 $
26 $
28 $ 657 $ 228 $
$
$
(1)
(86) $
(63) $
(1)
160
850
—
—
—
28 $ 604 $
3 $
36 $ 659 $ 155 $
$
$
(1)
(10) $
(61) $
53
198
—
107
—
(8)
(17)
—
(2)
187
(4)
(9)
(1)
625
789
27
236
1
32
296
25
221
—
30
276
$
55 $ 893 $ 229 $
(31) $ 1,146
$
61 $ 880 $ 155 $
(31) $
1,065
(i) Represents the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short
term investments held by foreign operations.
(ii) Depreciation and amortization for the calculation of adjusted EBITDA excludes $120 million (2017 – $121 million) of amortization of
intangible assets, acquired with Shoppers Drug Mart, recorded by Loblaw and $10 million recorded in 2017 of accelerated
depreciation and amortization recorded by Weston Foods, related to restructuring and other charges.
George Weston Limited 2018 Annual Report 69
Management’s Discussion and Analysis
(unaudited)
($ millions)
Weston
Foods
Loblaw(4)
Choice
Properties(4)
Other &
Intersegment(4)
Consolidated
Weston
Foods
Loblaw(4)
Choice
Properties(4)
Other &
Intersegment(4)
Consolidated
Years Ended
Dec. 31, 2018
Dec. 31, 2017(5)
Net earnings attributable to
shareholders of the Company
Add impact of the following:
Non-controlling interests
Income taxes
Net interest expense and other
financing charges
Operating income
Add impact of the following:
Amortization of intangible assets
acquired with Shoppers
Drug Mart
Asset impairments, net of
recoveries
Impact of healthcare reform on
inventory balances
Restructuring and other charges
Loblaw’s Spin-out of Choice
Properties
Loblaw Card Program
Fair value adjustment on
investment properties
Pension annuities and buy-outs
Fair value adjustment of derivatives
Wind-down of PC Financial banking
services
CREIT acquisition and other
related costs
Inventory loss, net of recoveries
Gain on sale of air rights
PC Optimum Program
Certain prior period items
Prior year land transfer tax
recovery
Gain on disposition of Loblaw’s gas
bar operations
Foreign currency translation(i)
Adjusting items
Adjusted operating income
Depreciation and amortization
excluding the impact of the above
adjustments(ii)
Adjusted EBITDA
$
574
$
766
424
639
948
823
449
523
$
73 $ 1,915 $ 593 $
4 $ 2,585
$
91 $ 2,041 $ 756 $
(327) $
2,561
$ — $
521 $ — $
— $
521
$ — $
524 $ — $
— $
524
—
—
38
—
—
—
—
(12)
—
—
(1)
—
—
—
—
—
83
19
10
8
4
6
1
(3)
(20)
—
—
—
—
—
—
—
—
—
—
—
—
89
—
—
—
141
—
—
—
—
—
—
—
—
—
25 $
629 $ 230 $
98 $ 2,544 $ 823 $
$
$
(77)
—
(15)
12
—
(47)
—
—
—
—
—
(13)
—
—
—
—
6
19
33
20
4
48
1
(15)
(20)
141
(1)
(13)
—
—
—
—
(17)
(17)
(157) $
727
(153) $ 3,312
—
—
48
—
—
—
2
14
—
—
(6)
—
—
—
—
—
53
—
177
—
107
—
12
20
(24)
—
—
—
187
(4)
(9)
(501)
—
—
—
—
—
—
3
—
(12)
—
—
(160)
160
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
34
185 $
(142) $
56
—
213
—
107
—
14
34
(24)
—
(6)
—
187
(4)
(9)
(501)
34
625
3,186
—
58 $
$
542 $ (160) $
$ 149 $ 2,583 $ 596 $
121
976
1
118
1,216
107
930
1
113
1,151
$ 219 $ 3,520 $ 824 $
(35) $ 4,528
$ 256 $ 3,513 $ 597 $
(29) $
4,337
(i) Represents the effect of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short
term investments held by foreign operations.
(ii) Depreciation and amortization for the calculation of adjusted EBITDA excludes $521 million (2017 – $524 million) of amortization of
intangible assets, acquired with Shoppers Drug Mart, recorded by Loblaw and $9 million (2017 – $10 million) of accelerated
depreciation and amortization recorded by Weston Foods, related to restructuring and other charges.
70 George Weston Limited 2018 Annual Report
The following items impacted operating income in 2018 and 2017:
Amortization of intangible assets acquired with Shoppers Drug Mart The acquisition of Shoppers Drug Mart
in 2014 included approximately $6 billion of definite life intangible assets, which are being amortized over their
estimated useful lives. Loblaw expects to recognize annual amortization associated with the acquired intangible
assets of approximately $525 million until 2024, and decreasing thereafter.
Asset impairments, net of recoveries At each balance sheet date, the Company assesses and, when required,
records impairments and recoveries of previous impairments related to the carrying value of its fixed assets,
investment properties and intangible assets.
Impact of healthcare reform on inventory balances In the first quarter of 2018, Loblaw recorded an inventory
provision for the write-down of inventories below cost to net realizable value, related to its generic drug
inventory, as a result of healthcare reform announced in the first quarter of 2018, effective April 1, 2018.
Restructuring and other charges The Company continuously evaluates strategic and cost reduction initiatives
related to its store infrastructure, manufacturing assets, distribution networks and administrative infrastructure
with the objective of ensuring a low cost operating structure. Restructuring activities related to these initiatives
are ongoing. For details on the restructuring and other charges incurred by each of the Company’s operating
segments see Section 6.1, “Weston Foods Operating Results” and Section 6.2, “Loblaw Operating Results” of this
MD&A.
Loblaw’s Spin-out of Choice Properties In the second half of 2018, the Company and Loblaw recorded
transaction and other related costs in connection with the spin-out of Loblaw’s interest in Choice properties.
Loblaw Card Program In the fourth quarter of 2017, the Company and Loblaw acknowledged their involvement
in an industry wide price-fixing arrangement. In connection with the arrangement, Loblaw offered customers
a $25 Loblaw Card, which can be used to purchase items sold in Loblaw grocery stores across Canada. Loblaw
has recorded a charge of $107 million associated with the Loblaw Card Program in the fourth quarter of 2017. In
2018, Loblaw recorded an additional charge of $4 million.
Fair value adjustment to investment properties In conjunction with the acquisition of CREIT, the Company
elected to change the measurement of investment properties from cost model to fair value model. Prior to the
second quarter of 2018, the Company recognized investment properties at cost less accumulated depreciation
and any accumulated impairment losses. Under the fair value model, investment properties are initially
measured at cost and subsequently measured at fair value. Fair value is determined based on available market
evidence. If market evidence is not readily available in less active markets, the Company uses alternative
valuation methods such as discounted cash flow projections or recent transaction prices. Gains and losses on fair
value are recognized in operating income in the period in which they are incurred. Gains and losses from disposal
of investment properties are determined by comparing the fair value of disposal proceeds and the carrying
amount and are recognized in operating income.
Pension annuities and buy-outs The Company is undertaking annuity purchases and pension buy-outs in respect
of former employees designed to reduce its defined benefit pension plan obligation and decrease future pension
volatility and risks.
Fair value adjustment of derivatives The Company is exposed to commodity price and U.S. dollar exchange
rate fluctuations primarily as a result of purchases of certain raw materials, fuels and utilities. In accordance
with the Company’s commodity risk management policy, the Company enters into commodity and foreign
currency derivatives to reduce the impact of price fluctuations in forecasted raw material and fuel purchases
over a specified period of time. These derivatives are not acquired for trading or speculative purposes. Pursuant
to the Company’s derivative instruments accounting policy, certain changes in fair value, which include realized
and unrealized gains and losses related to future purchases of raw materials and fuel, are recorded in
operating income. Despite the impact of accounting for these commodity and foreign currency derivatives on the
Company’s reported results, the derivatives have the economic impact of largely mitigating the associated risks
arising from price and exchange rate fluctuations in the underlying commodities and U.S. dollar commitments.
George Weston Limited 2018 Annual Report 71
Management’s Discussion and Analysis
Wind-down of PC Financial banking services In the third quarter of 2017, PC Bank entered into an agreement to
end its business relationship with a major Canadian chartered bank, which represented the personal banking
services offered under the PC Financial brand. As a result of this agreement, PC Bank received a payment of
approximately $44 million, net of certain costs incurred, $20 million of which was recognized in the first half of
2018 and $24 million which was recognized in 2017.
CREIT acquisition and other related costs During 2018, Choice Properties recorded acquisition and other related
costs in connection with the acquisition of CREIT.
Inventory loss, net of recoveries In 2016, Weston Foods’ damaged inventory of $11 million (U.S. $9 million) was
written-off and was recorded in SG&A in the Company’s consolidated statement of earnings. The Company
received partial proceeds from the insurance claim in 2018 and 2017. The insurance claim remains in progress
and further proceeds are expected to be recorded as the claim progresses.
Gain on sale of air rights In the third quarter of 2018, a joint venture owned by Choice Properties completed
the sale of air rights on one of its properties. The Company recorded a gain of $13 million in the third quarter
related to the sale.
PC Optimum Program In the fourth quarter of 2017, Loblaw announced plans to bring together the Shoppers
Optimum and PC Plus reward programs to create one program, PC Optimum. As a result, Loblaw recorded a
charge of $165 million, related to the revaluation of the existing liability for outstanding points to reflect a higher
anticipated redemption rate under the new program, and $22 million, related to the impairment of certain IT
assets that support the existing loyalty programs in the fourth quarter of 2017.
Certain prior period items In the fourth quarter of 2017, Management identified excess impairment that was
recorded against Loblaw’s Franchise Loans Receivable balance on the consolidated balance sheets and recorded
a gain to correct this prior period error. Management determined that the impact of this item on the Company’s
previously issued annual and interim financial statements and the current period financial statements was not
material. This gain was partially offset by certain charges associated with a prior period regulatory matter
recorded in the fourth quarter of 2017.
Prior year land transfer tax recovery In the fourth quarter of 2017, Loblaw recorded a recovery of $9 million in
SG&A in Loblaw’s Retail segment related to a partial recovery of a prior year land transfer tax assessment.
Gain on disposition of Loblaw’s gas bar operations On July 17, 2017, Loblaw sold its gas bar operations, for
proceeds of approximately $540 million. Loblaw has recorded a pre-tax gain on sale of $501 million (post-tax gain
of $432 million), net of related costs, in the third quarter of 2017.
72 George Weston Limited 2018 Annual Report
Foreign currency translation The Company’s consolidated financial statements are expressed in Canadian
dollars. A portion of the Company’s (excluding Loblaw’s) net assets are denominated in U.S. dollars and as a
result, the Company is exposed to foreign currency translation gains and losses. The impact of foreign currency
translation on a portion of the U.S. dollar denominated net assets, primarily cash and cash equivalents and
short term investments held by foreign operations, is recorded in SG&A and the associated tax, if any, is
recorded in income taxes. In the fourth quarter of 2018, a foreign currency translation gain of $1 million (2017 –
$1 million) was recorded in SG&A as a result of the appreciation of the U.S. dollar relative to the Canadian dollar.
Year-to-date, a foreign currency translation gain of $17 million (2017 – loss of $34 million) was recorded in SG&A
as a result of the appreciation (2017 – depreciation) of the U.S. dollar relative to the Canadian dollar.
Adjusted Net Interest Expense and Other Financing Charges The Company believes adjusted net interest
expense and other financing charges is useful in assessing the ongoing net financing costs of the Company.
The following table reconciles adjusted net interest expense and other financing charges to GAAP net interest
expense and other financing charges reported for the periods ended as indicated.
(unaudited)
($ millions)
Net interest expense and other financing charges
Add:
Loblaw’s charge related to Glenhuron Bank Limited
Fair value adjustment of the Trust Unit liability
Fair value adjustment of the forward sale agreement for
9.6 million Loblaw common shares
Loblaw’s Spin-out of Choice Properties
Adjusted net interest expense and other financing charges
$
Quarters Ended
Years Ended
Dec. 31, 2018
218
$
—
85
Dec. 31, 2017
115
$
—
8
Dec. 31, 2018
948
$
(176)
41
Dec. 31, 2017
523
$
—
7
(94)
(1)
208
$
10
—
133
$
(50)
(1)
762
$
25
—
555
In addition to certain items described in the “Adjusted EBITDA” section above, the following items impacted net
interest expense and other financing charges in 2018 and 2017:
Loblaw’s charge related to Glenhuron Bank Limited In the third quarter of 2018, Loblaw recorded a charge of
$367 million related to the Tax Court’s decision on Glenhuron. Of the total charge, $176 million was recorded in
net interest expense and other financing charges and $191 million was recorded in income taxes.
Fair value adjustment of the Trust Unit liability The Company is exposed to market price fluctuations as a result
of the Choice Properties Trust Units held by unitholders other than the Company. These Trust Units are
presented as a liability on the Company’s consolidated balance sheets as they are redeemable for cash at the
option of the holder, subject to certain restrictions. This liability is recorded at fair value at each reporting
date based on the market price of Trust Units at the end of each period. An increase (decrease) in the market
price of Trust Units results in a charge (income) to net interest expense and other financing charges.
Fair value adjustment of the forward sale agreement for 9.6 million Loblaw common shares The fair value
adjustment of the forward sale agreement for 9.6 million Loblaw common shares is non-cash and is included in
net interest expense and other financing charges. The adjustment is determined by changes in the value of
the underlying Loblaw common shares. An increase (decrease) in the market price of Loblaw common shares
results in a charge (income) to net interest expense and other financing charges.
George Weston Limited 2018 Annual Report 73
Management’s Discussion and Analysis
Adjusted Income Taxes and Adjusted Income Tax Rate The Company believes the adjusted income tax rate
applicable to adjusted earnings before taxes is useful in assessing the underlying operating performance of its
business.
The following table reconciles the effective income tax rate applicable to adjusted earnings before taxes to the
GAAP effective income tax rate applicable to earnings before taxes as reported for the periods ended as
indicated.
(unaudited)
($ millions except where otherwise indicated)
Adjusted operating income(i)
Adjusted net interest expense and other
financing charges(i)
Adjusted earnings before taxes
Income taxes
Add:
earnings before taxes(ii)
Tax impact of items excluded from adjusted
Loblaw’s charge related to Glenhuron
Bank Limited
Remeasurement of deferred tax balances
Statutory corporate income tax rate change
Adjusted income taxes
Effective income tax rate applicable to earnings
before taxes
Adjusted income tax rate applicable to adjusted
earnings before taxes
Quarters Ended
Years Ended
Dec. 31, 2018
850
$
$
$
$
208
642
60
56
—
62
—
178
12.7%
27.7%
Dec. 31, 2017(5)
$
$
$
$
789
133
656
(29)
170
—
19
19
179
(59.2)%
27.3 %
Dec. 31, 2018
3,312
$
Dec. 31, 2017(5)
3,186
$
$
$
$
$
$
$
762
2,550
639
170
(191)
62
—
680
39.0%
26.7%
555
2,631
449
225
—
19
19
712
22.0%
27.1%
See reconciliations of adjusted operating income and adjusted net interest expense and other financing charges above.
(i)
(ii) See the adjusted EBITDA table and the adjusted net interest expense and other financing charges table above for a complete list of
items excluded from adjusted earnings before taxes.
In addition to certain items described in the “Adjusted EBITDA” and “Adjusted Net Interest Expense and Other
Financing Charges” sections above, the following item impacted income taxes and the effective income tax rate
in 2018 and 2017:
Loblaw’s charge related to Glenhuron Bank Limited In the third quarter of 2018, Loblaw recorded a charge of
$367 million related to the Tax Court’s decision on Glenhuron. Of the total charge, $176 million was recorded in
net interest expense and other financing charges and $191 million was recorded in income taxes.
Remeasurement of deferred tax balances In the fourth quarter of 2018, the Company recorded a deferred tax
recovery of $62 million resulting from the change in the manner by which the Company expects to recover
certain assets. In the fourth quarter of 2017, the Company recorded a deferred tax recovery of $19 million
resulting from a change in the applicable provincial income tax rate used to measure certain deferred tax
balances caused by a change in the location of certain business activities.
Statutory corporate income tax rate change The Company’s deferred income tax assets and liabilities are
impacted by changes to provincial and federal statutory corporate income tax rates resulting in a charge or
benefit to earnings. The Company implements changes in the statutory corporate income tax rate in the same
period the change is substantively enacted by the legislative body.
In the fourth quarter of 2017, the U.S. government enacted a 14.0% decrease in the U.S. federal statutory
corporate income tax rate from 35.0% to 21.0%. As a result, Weston Foods recorded a recovery of $19 million in
2017 related to the remeasurement of its deferred tax liabilities.
74 George Weston Limited 2018 Annual Report
Adjusted Net Earnings Available to Common Shareholders and Adjusted Diluted Net Earnings per Common
Share The Company believes adjusted net earnings available to common shareholders and adjusted diluted net
earnings per common share are useful in assessing the Company’s underlying operating performance and in
making decisions regarding the ongoing operations of its business.
The following table reconciles net earnings attributable to shareholders of the Company to net earnings available
to common shareholders of the Company and then to adjusted net earnings available to common shareholders
of the Company reported for the periods ended as indicated.
(unaudited)
($ millions except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Less: Prescribed dividends on preferred shares in share capital
Net earnings available to common shareholders
of the Company
Less: Reduction in net earnings due to dilution at Loblaw
Net earnings available to common shareholders for diluted
earnings per share
Net earnings attributable to shareholders of the Company
Adjusting items (refer to the following table)
Adjusted net earnings attributable to shareholders
of the Company
Less: Prescribed dividends on preferred shares in share capital
Adjusted net earnings available to common shareholders
of the Company
Less: Reduction in net earnings due to dilution at Loblaw
Adjusted net earnings available to common shareholders for
diluted earnings per share
Quarters Ended
Years Ended
Dec. 31, 2018
281
$
Dec. 31, 2017(5) Dec. 31, 2018
574
$
44
$
Dec. 31, 2017(5)
$
766
(10)
271
—
271
281
(39)
242
(10)
232
—
232
$
$
$
$
$
$
(10)
34
—
34
44
192
236
(10)
226
—
226
$
$
$
$
$
$
(44)
530
(2)
528
574
378
952
(44)
908
(2)
906
$
$
$
$
$
$
(44)
722
(6)
716
766
181
947
(44)
903
(6)
897
$
$
$
$
$
$
Weighted average common shares outstanding (millions)(i)
145.7
128.3
132.2
128.3
(i)
Includes impact of dilutive instruments for purposes of calculating adjusted diluted net earnings per common share.
George Weston Limited 2018 Annual Report 75
Management’s Discussion and Analysis
The following table reconciles adjusted net earnings available to common shareholders of the Company and
adjusted diluted net earnings per common share to GAAP net earnings available to common shareholders of the
Company and diluted net earnings per common share as reported for the periods ended as indicated.
(unaudited)
($ except where otherwise indicated)
As reported
Add (deduct) impact of the following(i):
Amortization of intangible assets acquired with Shoppers
Drug Mart
Asset impairments, net of recoveries
Restructuring and other charges
Loblaw’s Spin-out of Choice Properties
Loblaw Card Program
Fair value adjustment on investment properties
Fair value adjustment of derivatives
Wind-down of PC Financial banking services
CREIT acquisition and other related costs
Inventory loss, net of recoveries
PC Optimum Program
Certain prior period items
Prior year land transfer tax recovery
Fair value adjustment of the forward sale agreement for
9.6 million Loblaw common shares
Remeasurement of deferred tax balances
Fair value adjustment of the Trust Unit liability
Statutory corporate income tax rate change
Foreign currency translation
Quarters Ended
Dec. 31, 2018
Dec. 31, 2017(5)
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
271
$
1.86
$
$
44
$
(26)
5
9
—
4
1
—
9
—
—
—
—
77
(62)
(99)
—
(1)
$
$
$
$
34
$
0.27
44
19
82
—
39
—
(5)
(7)
—
(1)
67
(6)
(3)
(7)
(10)
(2)
(19)
1
192
226
$
$
$
0.35
0.15
0.64
—
0.30
—
(0.04)
(0.05)
—
(0.01)
0.51
(0.05)
(0.02)
(0.05)
(0.08)
(0.02)
(0.15)
0.01
1.49
1.76
0.30
(0.17)
0.03
0.06
—
0.03
0.01
—
0.06
—
—
—
—
0.53
(0.43)
(0.68)
—
(0.01)
(0.27)
1.59
Adjusting items
Adjusted
$
$
(39) $
232
$
(i) Net of income taxes and non-controlling interests, as applicable.
76 George Weston Limited 2018 Annual Report
(unaudited)
($ except where otherwise indicated)
As reported
Add (deduct) impact of the following(i):
Amortization of intangible assets acquired with Shoppers
Drug Mart
Loblaw’s charge related to Glenhuron Bank Limited
Asset impairments, net of recoveries
Impact of healthcare reform on inventory balances
Restructuring and other charges
Loblaw’s Spin-out of Choice Properties
Loblaw Card Program
Fair value adjustment on investment properties
Pension annuities and buy-outs
Fair value adjustment of derivatives
Wind-down of PC Financial banking services
CREIT acquisition and other related costs
Inventory loss, net of recoveries
Gain on sale of air rights
PC Optimum Program
Certain prior period items
Prior year land transfer tax recovery
Gain on disposition of Loblaw’s gas bar operations
Fair value adjustment of the forward sale agreement for
9.6 million Loblaw common shares
Remeasurement of deferred tax balances
Fair value adjustment of the Trust Unit liability
Statutory corporate income tax rate change
Foreign currency translation
Adjusting items
Adjusted
Years Ended
Dec. 31, 2018
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Diluted
Net
Earnings
Per
Common
Share
Net Earnings
Available to
Common
Shareholders of
the Company
($ millions)
Dec. 31, 2017(5)
Diluted
Net
Earnings
Per
Common
Share
$
$
$
$
530
$
3.99
191
$
184
(26)
7
26
16
1
23
1
(10)
(7)
68
(1)
(6)
—
—
—
—
45
(62)
(57)
—
(15)
378
908
$
$
1.45
1.39
(0.19)
0.05
0.19
0.12
0.01
0.17
0.01
(0.08)
(0.05)
0.51
(0.01)
(0.05)
—
—
—
—
0.35
(0.47)
(0.43)
—
(0.11)
2.86
6.85
$
$
$
$
722
$
5.58
184
$
—
22
—
93
—
39
—
5
17
(9)
—
(3)
—
67
(6)
(3)
(207)
(18)
(10)
(2)
(19)
31
181
903
$
$
1.43
—
0.17
—
0.73
—
0.30
—
0.04
0.13
(0.07)
—
(0.02)
—
0.52
(0.05)
(0.02)
(1.61)
(0.14)
(0.08)
(0.02)
(0.15)
0.25
1.41
6.99
(i) Net of income taxes and non-controlling interests, as applicable.
Free Cash Flow The Company believes free cash flow is useful in assessing the Company’s cash available for
additional financing and investing activities.
The following table reconciles free cash flow to GAAP measures reported for the periods ended as indicated.
(unaudited)
($ millions)
Cash flows from operating activities
Less:
Interest paid
Fixed asset purchases
Intangible asset additions
Free cash flow
Quarters Ended
Years Ended
Dec. 31, 2018
455
$
Dec. 31, 2017
1,213
$
Dec. 31, 2018
2,719
$
Dec. 31, 2017
3,425
$
224
546
74
$
(389)
$
104
486
89
534
992
1,250
343
$
134
$
556
1,177
297
1,395
George Weston Limited 2018 Annual Report 77
Management’s Discussion and Analysis
Choice Properties’ Funds from Operations The following table reconciles Choice Properties’ Funds from
Operations to net income for the periods ended as indicated. Choice Properties considers Funds from Operations
to be a useful measure of operating performance as it adjusts for items included in net income that do not arise
from operating activities or do not necessarily provide an accurate depiction of the Trust’s performance.
(unaudited)
($ millions)
Net income
Add (deduct) impact of the following:
Fair value adjustments on Class B Limited
Partnership units
Distributions on Class B Limited Partnership units
Fair value adjustments on investment properties
CREIT acquisition and other related costs
Fair value adjustments of investment property held
in equity accounted joint ventures
Internal expenses for leasing
Capitalized interest on equity accounted
joint venture
Accelerated amortization of debt premium
Net income attributable to non-controlling interests
Fair value adjustments on unit-based compensation
Quarters Ended
Years Ended
Dec. 31, 2018
281
$
Dec. 31, 2017
36
$
Dec. 31, 2018
650
$
Dec. 31, 2017
405
$
(215)
72
19
11
1
2
1
—
—
—
19
59
3
—
—
1
—
—
(1)
—
(594)
271
89
141
5
6
3
37
—
(4)
(38)
232
(159)
—
1
2
—
—
(1)
1
Funds from Operations
$
172
$
117
$
604
$
443
ADDITIONAL INFORMATION
19.
Additional information about the Company, including its 2018 AIF and other disclosure documents, has been
filed electronically with the Canadian securities regulatory authorities through the System for Electronic
Document Analysis and Retrieval (SEDAR) and is available online at www.sedar.com.
This Annual Report includes selected information on Loblaw, a public company with shares trading on the TSX.
For information regarding Loblaw, readers should also refer to the materials filed by Loblaw with SEDAR from
time to time. These filings are also available on Loblaw’s website at www.loblaw.ca.
This Annual Report includes selected information on Choice Properties. The Trust is listed on the TSX. For
information regarding Choice Properties, readers should also refer to the materials filed by Choice Properties
with SEDAR from time to time. These filings are also available on Choice Properties’ website at
www.choicereit.ca.
Toronto, Canada
February 25, 2019
78 George Weston Limited 2018 Annual Report
Financial Results
Management’s Statement of Responsibility for Financial Reporting
Independent Auditors’ Report
Consolidated Financial Statements
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Intangible Assets
Income Taxes
Basic and Diluted Net Earnings per Common Share
Significant Accounting Policies
Critical Accounting Estimates and Judgments
Future Accounting Standards
Loblaw's Spin-out of Choice Properties Real Estate Investment Trust
Business Acquisitions
Note 1. Nature and Description of the Reporting Entity
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7. Net Interest Expense and Other Financing Charges
Note 8.
Note 9.
Note 10. Cash and Cash Equivalents, Short Term Investments and Security Deposits
Note 11. Accounts Receivable
Note 12. Credit Card Receivables
Note 13.
Inventories
Note 14. Assets Held for Sale and Disposition
Note 15. Fixed Assets
Note 16.
Investment Properties
Note 17. Equity Accounted Joint Ventures
Note 18.
Note 19. Goodwill
Note 20. Other Assets
Note 21. Customer Loyalty Awards Program Liability
Note 22. Provisions
Note 23. Short Term Debt
Note 24. Long Term Debt
Note 25. Other Liabilities
Note 26. Share Capital
Note 27. Loblaw Capital Transactions
Note 28. Capital Management
Note 29. Post-Employment and Other Long Term Employee Benefits
Note 30. Share-Based Compensation
Note 31. Employee Costs
Note 32. Leases
Note 33. Financial Instruments
Note 34. Financial Risk Management
Note 35. Contingent Liabilities
Note 36. Financial Guarantees
Note 37. Related Party Transactions
Note 38. Segment Information
Three Year Summary
Glossary
80
81
84
84
84
85
86
87
88
88
88
108
110
111
112
114
115
117
117
118
119
120
121
121
123
125
125
127
128
128
128
130
131
135
135
139
140
142
149
155
156
158
161
164
166
168
169
172
174
George Weston Limited 2018 Annual Report 79
Management’s Statement of Responsibility for Financial Reporting
The management of George Weston Limited is responsible for the preparation, presentation and integrity of the
accompanying consolidated financial statements, Management’s Discussion and Analysis and all other
information in the Annual Report. This responsibility includes the selection and consistent application of
appropriate accounting principles and methods in addition to making the judgments and estimates necessary to
prepare the consolidated financial statements in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board. It also includes ensuring that the financial information
presented elsewhere in the Annual Report is consistent with that in the consolidated financial statements.
Management is also responsible for providing reasonable assurance that assets are safeguarded and that
relevant and reliable financial information is produced. Management is required to design a system of internal
controls and certify as to the design and operating effectiveness of internal controls over financial reporting. A
dedicated control compliance team reviews and evaluates internal controls, the results of which are shared with
management on a quarterly basis.
KPMG LLP, whose report follows, were appointed as independent auditors by a vote of the Company’s
shareholders to audit the consolidated financial statements.
The Board of Directors, acting through an Audit Committee comprised solely of directors who are independent,
is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated
financial statements and the financial control of operations. The Audit Committee recommends the independent
auditors for appointment by the shareholders. The Audit Committee meets regularly with senior and financial
management, internal auditors and the independent auditors to discuss internal controls, auditing activities and
financial reporting matters. The independent auditors and internal auditors have unrestricted access to the Audit
Committee. These consolidated financial statements and Management’s Discussion and Analysis have been
approved by the Board of Directors for inclusion in the Annual Report based on the review and recommendation
of the Audit Committee.
[signed]
Galen G. Weston
Chairman and
Chief Executive Officer
Toronto, Canada
February 25, 2019
[signed]
Richard Dufresne
President and
Chief Financial Officer
80 George Weston Limited 2018 Annual Report
Independent Auditors’ Report
To the Shareholders of George Weston Limited:
Opinion
We have audited the consolidated financial statements of George Weston Limited (the “Entity”),
which comprise:
•
•
•
•
•
the consolidated balance sheets as at December 31, 2018 and December 31, 2017
the consolidated statements of earnings for the years then ended
the consolidated statements of comprehensive income for the years then ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
• and notes to the consolidated financial statements, including a summary of significant
accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Entity as at December 31, 2018 and December 31, 2017, and
its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the
Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to
our audit of the financial statements in Canada and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included
in a document entitled “2018 Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not and will
not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the audit and remain alert
for indications that the other information appears to be materially misstated.
George Weston Limited 2018 Annual Report 81
Independent Auditors’ Report
We obtained the information included in Management’s Discussion and Analysis and a document
entitled “2018 Annual Report” filed with the relevant Canadian Securities Commissions as at the
date of this auditors’ report. If, based on the work we have performed on this other information, we
conclude that there is a material misstatement of this other information, we are required to report
that fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Entity or to
cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting
process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’
report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
82 George Weston Limited 2018 Annual Report
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Entity's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the Entity's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in
our auditors’ report to the related disclosures in the financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditors’ report. However, future events or conditions may cause
the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including
the disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the group Entity to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Sebastian Distefano.
Toronto, Canada
February 25, 2019
George Weston Limited 2018 Annual Report 83
Consolidated Statements of Earnings
For the years ended December 31
(millions of Canadian dollars except where otherwise indicated)
Revenue
Operating Expenses
Cost of inventories sold (note 13)
Selling, general and administrative expenses (note 33)
Operating Income
Net Interest Expense and Other Financing Charges (note 7)
Earnings Before Income Taxes
Income Tax (note 8)
Net Earnings
Attributable to:
Shareholders of the Company (note 9)
Non-Controlling Interests
Net Earnings
Net Earnings per Common Share ($) (note 9)
Basic
Diluted
(i) Certain comparative figures have been restated (note 2).
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the years ended December 31
(millions of Canadian dollars)
Net earnings
Other comprehensive income (loss)
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation adjustment (note 33)
Unrealized gains on cash flow hedges (note 33)
Items that will not be reclassified to profit or loss:
Net defined benefit plan actuarial gains (losses) (note 29)
Adjustment to fair value of investment properties (note 16)
Other comprehensive income (loss)
Comprehensive Income
Attributable to:
Shareholders of the Company
Non-Controlling Interests
Comprehensive Income
(i) Certain comparative figures have been restated (note 2).
See accompanying notes to the consolidated financial statements.
84 George Weston Limited 2018 Annual Report
2018
48,568
$
$
33,378
12,605
45,983
2,585
948
1,637
639
998
574
424
998
4.02
3.99
$
$
$
2017(i)
48,289
33,836
11,892
45,728
2,561
523
2,038
449
1,589
766
823
1,589
5.65
5.58
2018
998
$
2017(i)
1,589
84
4
92
16
196
1,194
717
477
1,194
$
(64)
2
(20)
—
(82)
1,507
692
815
1,507
$
$
$
$
$
Consolidated Balance Sheets
As at December 31
(millions of Canadian dollars)
ASSETS
Current Assets
Cash and cash equivalents (note 10)
Short term investments (note 10)
Accounts receivable (note 11)
Credit card receivables (note 12)
Inventories (note 13)
Prepaid expenses and other assets
Assets held for sale (note 14)
Total Current Assets
Fixed Assets (note 15)
Investment Properties (note 16)
Equity Accounted Joint Venture (note 17)
Intangible Assets (note 18)
Goodwill (note 19)
Deferred Income Taxes (note 8)
Security Deposits (note 10)
Franchise Loans Receivable (note 33)
Other Assets (note 20)
Total Assets
LIABILITIES
Current Liabilities
Bank indebtedness (note 36)
Trade payables and other liabilities
Loyalty liability (note 21)
Provisions (note 22)
Income taxes payable
Short term debt (note 23)
Long term debt due within one year (note 24)
Associate interest
Total Current Liabilities
Provisions (note 22)
Long Term Debt (note 24)
Trust Unit Liability (note 33)
Deferred Income Taxes (note 8)
Other Liabilities (note 25)
Total Liabilities
EQUITY
Share Capital (note 26)
Retained Earnings
Contributed Surplus (notes 27 & 30)
Accumulated Other Comprehensive Income
Total Equity Attributable to Shareholders of the Company
Non-Controlling Interests
Total Equity
Total Liabilities and Equity
(i) Certain comparative figures have been restated (note 2).
Contingent liabilities (note 35).
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board
[signed]
Galen G. Weston
Chairman and
Chief Executive Officer
2018
2017(i)
$
$
$
$
1,521
281
1,309
3,329
5,001
370
44
11,855
12,101
4,847
734
7,958
4,781
286
87
78
1,087
43,814
56
5,762
228
205
171
1,579
1,343
260
9,604
167
13,975
2,658
2,515
691
29,610
3,583
5,017
(799)
239
8,040
6,164
14,204
43,814
$
$
$
$
2,034
1,113
1,324
3,100
4,623
236
33
12,463
11,689
276
19
8,368
4,377
247
86
166
849
38,540
110
5,451
349
325
148
1,258
1,635
263
9,539
190
10,457
634
2,163
762
23,745
1,038
7,188
(432)
140
7,934
6,861
14,795
38,540
[signed]
Barbara G. Stymiest
Director
George Weston Limited 2018 Annual Report 85
Consolidated Statements of Changes in Equity
(millions of Canadian dollars except
where otherwise indicated)
Balance as at Dec. 31, 2017(i)
Impact of adopting IFRS 9(i)
Restated balance as at
Jan. 1, 2018
Net earnings
Other comprehensive
income(ii)
Comprehensive income
Effect of share-based
compensation (notes 26 & 30)
Shares purchased and
cancelled (note 26)
Net effect of shares held in
trusts (notes 26 & 30)
Spin-out of Choice Properties
Loblaw capital
transactions and dividends
(notes 27 & 30)
Dividends declared
Per common share ($)
– $1.950
Per preferred share ($)
– Series I – $1.45
– Series III – $1.30
– Series IV – $1.30
– Series V – $1.1875
Tax impact on conversion of
Class C LP Units (note 6)
Common
Shares
Preferred
Shares
Total
Share
Capital
Retained
Earnings
Contributed
Surplus
Foreign
Currency
Translation
Adjustment
Cash Flow
Hedges
Adjustment to
Fair Value on
Transfer of
Investment
Properties
Total
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total
Equity
$
221 $
817 $ 1,038 $ 7,188 $
(432) $
139 $
1 $
—
—
—
(36)
—
—
—
$
221 $
817 $ 1,038 $ 7,152 $
(432) $
139 $
1 $
— $
—
— $
140 $ 6,861 $ 14,795
—
(36) $
(72)
140 $ 6,825 $ 14,723
—
—
—
12
(14)
—
2,547
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12
574
47
621
—
(14)
(109)
—
10
— 2,547
(2,353)
—
—
—
(9)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(350)
(261)
(13)
(10)
(10)
(10)
—
—
—
—
—
—
(8)
—
85
85
—
—
—
—
—
—
—
—
—
—
—
—
3
3
—
—
—
3
—
—
—
—
—
—
—
—
8
8
—
—
—
—
—
—
—
—
—
—
—
—
96
96
—
—
—
3
424
53
477
(1)
—
—
(73)
998
196
1,194
2
(123)
10
124
— (1,064)
(1,414)
—
—
—
—
—
—
—
—
—
—
—
—
(261)
(13)
(10)
(10)
(10)
(8)
Balance as at Dec. 31, 2018
2,545
$ 2,766 $
— 2,545
(2,756)
817 $ 3,583 $ 5,017 $
(367)
(799) $
—
224 $
3
7 $
—
8 $
3
(1,138)
(1,713)
239 $ 6,164 $ 14,204
(millions of Canadian dollars except
where otherwise indicated)
Balance as at Dec. 31, 2016(i)
Impact of adopting IFRS 15(i)
Restated balance as at
Jan. 1, 2017
Net earnings
Other comprehensive
income (loss)(ii)
Comprehensive income (loss)
Effect of share-based
compensation (notes 26 & 30)
Shares purchased and
cancelled (note 26)
Net effect of shares held in
trusts (notes 26 & 30)
Loblaw capital transactions
and dividends (notes 27 & 30)
Dividends declared
Per common share ($)
– $1.805
Per preferred share ($)
Common
Shares
Preferred
Shares
Total
Share
Capital
Retained
Earnings
Contributed
Surplus
Foreign
Currency
Translation
Adjustment
Cash
Flow
Hedges
Total
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Interests
Total
Equity
195 $
817 $ 1,012 $
6,722 $
(156) $
204 $ — $
204 $
7,044 $ 14,826
—
—
—
15
—
—
—
—
16
31
195 $
817 $ 1,012 $
6,737 $
(156) $
204 $ — $
204 $
7,060 $ 14,857
$
$
—
—
—
26
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26
—
—
—
—
766
(10)
756
(1)
(31)
2
—
—
(1)
—
—
(275)
(232)
—
(65)
(65)
—
—
—
—
—
1
1
—
—
—
—
—
823
(8)
815
(4)
—
—
1,589
(82)
1,507
20
(31)
2
(1,010)
(1,285)
—
(232)
(64)
(64)
—
—
—
—
—
– Series I – $1.45
– Series III – $1.30
– Series IV – $1.30
– Series V – $1.1875
(14)
(10)
(9)
(10)
(305)
7,188 $
Certain opening retained earnings and non-controlling interests adjustments have been made to reflect the implementation of IFRS 9 and 15 and a change in accounting
policy (note 2).
(14)
—
(10)
—
(9)
—
(10)
—
(1,569)
(1,014)
6,861 $ 14,795
—
—
—
—
(276)
(432) $
—
—
—
—
—
140 $
—
—
—
—
26
221 $
—
—
—
—
—
139 $
—
—
—
—
—
1 $
Balance as at Dec. 31, 2017
(i)
817 $ 1,038 $
—
—
—
—
26
—
—
—
—
—
$
(ii) Other comprehensive loss includes actuarial gains of $92 million (2017 – losses of $20 million), gains of $47 million (2017 – losses of $10 million) of which is presented
above in retained earnings and gains of $45 million (2017 – losses of $10 million) in non-controlling interests. Also included in non-controlling interests is a foreign currency
translation loss of $1 million, an unrealized gain on cash flow hedges of $1 million and fair value gain on transfer of investment properties of $8M.
See accompanying notes to the consolidated financial statements.
86 George Weston Limited 2018 Annual Report
Consolidated Statements of Cash Flows
For the years ended December 31
(millions of Canadian dollars)
Operating Activities
Net earnings
Add:
Net interest expense and other financing charges (note 7)
Income taxes (note 8)
Depreciation and amortization
Adjustment to fair value of investment properties
Gain on disposition of Loblaw’s gas bar operations (note 14)
Asset impairments, net of recoveries
Foreign currency translation loss (note 33)
Change in provisions (note 22)
PC Optimum Program (note 21)
Change in credit card receivables (note 12)
Change in non-cash working capital
Income taxes paid
Interest received
Other
Cash Flows from Operating Activities
Investing Activities
Fixed asset and investment properties purchases
Intangible asset additions (note 18)
Business acquisition, net of cash acquired (note 6)
Cash assumed on initial consolidation of franchises (note 6)
Change in short term investments (note 10)
Change in security deposits (note 10)
Proceeds from disposal of assets
Proceeds from sale of Loblaw’s gas bar operations (note 14)
Other
Cash Flows used in Investing Activities
Financing Activities
Change in bank indebtedness
Change in short term debt (note 23)
Interest paid
Long term debt – Issued (note 24)
– Retired (note 24)
Share capital – Issued (notes 26 & 30)
– Purchased and held in trusts (note 26)
– Purchased and cancelled (note 26)
Loblaw common share capital – Issued (notes 27 & 30)
– Purchased and held in trusts (note 27)
– Purchased and cancelled (note 27)
Dividends – To common shareholders
– To preferred shareholders
– To minority shareholders
Other
Cash Flows used in Financing Activities
Effect of foreign currency exchange rate changes on cash and cash equivalents
Change in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
$
(i) Certain comparative figures have been restated (note 2).
See accompanying notes to the consolidated financial statements.
2018
2017(i)
$
998
$
1,589
948
639
1,746
48
—
21
(17)
(188)
—
4,195
(327)
(624)
(557)
44
(12)
2,719
(1,250)
(343)
(1,619)
18
832
(1)
189
—
(82)
(2,256)
(54)
321
(992)
4,880
(3,565)
134
—
(123)
78
(36)
(1,082)
(241)
(44)
(228)
(35)
(987)
11
(513)
2,034
1,521
$
523
449
1,685
—
(501)
109
34
238
165
4,291
(174)
147
(892)
23
30
3,425
(1,177)
(297)
—
26
(135)
—
24
540
(56)
(1,075)
(5)
17
(556)
686
(450)
22
(7)
(31)
41
(48)
(1,091)
(229)
(44)
(175)
5
(1,865)
(11)
474
1,560
2,034
George Weston Limited 2018 Annual Report 87
Notes to the Consolidated Financial Statements
Note 1. Nature and Description of the Reporting Entity
George Weston Limited (“GWL” or the “Company”) is a Canadian public company incorporated in 1928, with its
registered office located at 22 St. Clair Avenue East, Toronto, Canada M4T 2S7. The Company’s parent is
Wittington Investments, Limited (“Wittington”).
On November 1, 2018, the Company and Loblaw completed a reorganization under which Loblaw Companies
Limited (“Loblaw”) spun out its approximate 61.6% effective interest in Choice Properties Real Estate Investment
Trust (“Choice Properties”) (the “reorganization”), as described in Note 5 “Loblaw's Spin-out of Choice Properties
Real Estate Investment Trust”. In connection with the reorganization, the Company issued approximately 26.6
million common shares to Loblaw shareholders other than the Company and its subsidiaries (“Loblaw minority
shareholders”). Following the reorganization, the Company owned an approximate 65.4% effective interest in
Choice Properties directly (which includes the approximate 3.8% interest in Choice Properties directly owned by
GWL prior to the reorganization) and Choice Properties became a reportable operating segment of the Company.
The Company operates through its three reportable operating segments, Weston Foods, Loblaw and Choice
Properties. The Company also holds cash and short term investments. The Weston Foods operating segment
includes a leading North American bakery that offers packaged bread and rolls in Canada as well as frozen and
artisan bread and rolls, cakes, donuts, pies, biscuits and alternatives throughout Canada and the U.S.
Loblaw has two reportable operating segments, Retail and Financial Services. Loblaw provides Canadians with
grocery, pharmacy, health and beauty, apparel, general merchandise, financial services and wireless mobile
products and services. Loblaw is one reportable operating segment of the Company.
Choice Properties owns, manages and develops a high quality portfolio of commercial retail, industrial, office
and residential properties across Canada.
As at year end 2018, GWL’s ownership interests in Loblaw and Choice Properties were approximately 50.4%
(2017 – 48.6%) and 65.4% (2017 – 88.5%), respectively.
Note 2. Significant Accounting Policies
Statement of Compliance The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting
Standards Board (“IASB”) and using the accounting policies described herein.
These consolidated financial statements were authorized for issuance by the Company’s Board of Directors
(“Board”) on February 25, 2019.
Basis of Preparation The consolidated financial statements were prepared on a historical cost basis except for
the following items that were measured at fair value:
•
investment properties as described in note 16;
• defined benefit pension plan assets with the obligations related to these pension plans measured at their
discounted present value as described in note 29;
• amounts recognized for cash-settled share-based compensation arrangements as described in note 30; and
•
certain financial instruments as described in note 33.
The significant accounting policies set out below have been applied consistently in the preparation of the
consolidated financial statements for all periods presented.
The consolidated financial statements are presented in Canadian dollars.
88 George Weston Limited 2018 Annual Report
Fiscal Year The Company’s year end is December 31. Activities are reported on a fiscal year ending on the
Saturday closest to December 31.
As a result, the Company’s fiscal year is usually 52 weeks in duration but includes a 53rd week every five
to six years. Each of the years ended December 31, 2017 and December 31, 2016 contained 52 weeks. The
next 53-week year will occur in fiscal year 2020.
Basis of Consolidation The consolidated financial statements include the accounts of GWL and other entities
that the Company controls. Control exists when the Company has the existing rights that give it the current
ability to direct the activities that significantly affect the entities’ returns. The Company assesses control on an
ongoing basis. The Company’s interest in the voting share capital of its subsidiaries is 100%, except for Choice
Properties, with an effective interest of approximately 65.4% (2017 - 88.5%) and for Loblaw, which is
approximately 50.4% (2017 – 48.6%). GWL’s ownership in Choice Properties and Loblaw is impacted by changes
in Choice Properties’ trust units and Loblaw’s common share equity, respectively.
Structured entities are entities controlled by the Company which were designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity. Structured entities are consolidated if, based on
an evaluation of the substance of its relationship with the Company, the Company concludes that it controls the
structured entity. Structured entities controlled by the Company were established under terms that impose strict
limitations on the decision-making powers of the structured entities’ management and that results in the
Company receiving the majority of the benefits related to the structured entities’ operations and net assets,
being exposed to the majority of risks incident to the structured entities’ activities, and retaining the majority of
the residual or ownership risks related to the structured entities or their assets.
Transactions and balances between the Company and its consolidated entities have been eliminated on
consolidation.
Non-controlling interests are recorded in the consolidated financial statements and represent the
non-controlling shareholders’ portion of the net assets and net earnings of Loblaw. Transactions with
non-controlling interests are treated as transactions with equity owners of the Company. Changes in GWL’s
ownership interest in its subsidiaries are accounted for as equity transactions.
Choice Properties’ Trust Units held by non-controlling interests are presented as a liability as the Trust Units are
redeemable for cash at the option of the holder, subject to certain restrictions.
Loblaw consolidates the Shoppers Drug Mart Corporation (“Shoppers Drug Mart”) licensees (“Associates”) as
well as the franchisees of its food retail stores that are subject to a new, simplified franchise agreement
(“Franchise Agreement”). An Associate is a pharmacist-owner of a corporation that is licensed to operate a retail
drug store at a specific location using Shoppers Drug Mart’s trademarks. The consolidation of the Associates and
the new franchisees is based on the concept of control, for accounting purposes, which was determined to exist,
through agreements that govern the relationships between Loblaw and the Associates and franchisees. Loblaw
does not have any direct or indirect shareholdings in the corporations that operate the Associates. Associate
interest reflects the investment the Associates have in the net assets of their businesses. Under the terms of the
Associate Agreements, Shoppers Drug Mart agrees to purchase the assets that the Associates use in store
operations, primarily at the carrying value to the Associate, when Associate Agreements are terminated by either
party. The Associates’ corporations and the franchisees remain separate legal entities.
Business Combinations Business combinations are accounted for using the acquisition method as of the date
when control is transferred to the Company. The Company measures goodwill as the excess of the sum of the fair
value of the consideration transferred over the net identifiable assets acquired and liabilities assumed, all
measured as at the acquisition date. Transaction costs that the Company incurs in connection with a business
combination, other than those associated with the issue of debt or equity securities, are expensed as incurred.
George Weston Limited 2018 Annual Report 89
Notes to the Consolidated Financial Statements
Net Earnings per Common Share (“EPS”) Basic EPS is calculated by dividing the net earnings available to
common shareholders by the weighted average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the net earnings available to common shareholders and the weighted
average number of common shares outstanding for the effects of all potential dilutive instruments.
Revenue Recognition The Company recognizes revenue when the amount can be reliably measured, when it is
probable that future economic benefits will flow to the Company and when specific criteria have been met as
described below.
Weston Foods recognizes sales upon delivery of its products to customers and acceptance of its products by
customers net of provisions for returns, discounts and allowances.
Loblaw Retail revenue includes the sale of goods and services to customers through corporate stores and
consolidated franchise stores and Associates, and sales to non-consolidated franchise stores and independent
wholesale account customers. Revenue is measured at the amount of consideration to which the Company
expects to be entitled to, net of estimated returns, sales incentives and franchise fee reductions. The Company
recognizes revenue made through corporate stores, consolidated franchise stores and Associates at the time the
point of sale is made or when service is delivered to the customers. The Company recognizes revenue made
through non-consolidated franchise stores and independent wholesale customers at the time of delivery of
inventory and when administrative and management services are rendered.
On the initial sale of franchising arrangements, the Company offered products and services as part of an
arrangement with multiple performance obligations. Prior to the implementation of the Franchise Agreement
implemented in 2015, the initial sale to non-consolidated franchise stores were recorded using a relative fair
value approach.
Customer loyalty awards are accounted for as a separate performance obligation of the sales transaction in
which they are granted. The Company defers revenue at the time the award is earned by members based on the
relative fair value of the award. The relative fair value is determined by allocating consideration between the fair
value of the loyalty awards earned by loyalty program members, net of breakage, and the goods and services on
which the awards were earned, based on their relative stand-alone selling price.
For certain sale of goods in which the Company earns commissions, including but not limited to lottery and third
party gift cards, the Company records net revenue as an agent on the basis that the Company does not control
pricing or bear inventory risk.
Financial Services revenue includes interest income on credit card loans, credit card service fees, commissions,
and other revenue related to financial services. Interest income is recognized using the effective interest
method. Credit card service fees are recognized when services are rendered. Commission revenue is recorded on
a net basis. Other revenue is recognized periodically or according to contractual provisions.
Choice Properties revenue includes rental revenue on base rents earned from tenants under lease agreements,
realty tax and operating cost recoveries and other incidental income, including intersegment revenue earned
from Loblaw’s Retail segment. The rental revenue is recognized on a straight-line basis over the terms of the
respective leases. Property tax and operating cost recoveries are recognized in the period that recoverable costs
are chargeable to tenants. Percentage participation rents are recognized when tenants’ specified sales targets
have been met as set out in the lease agreements.
Income Taxes Current and deferred taxes are recognized in the consolidated statements of earnings, except for
current and deferred taxes related to a business combination, or amounts charged directly to equity or other
comprehensive income, which are recognized in the consolidated balance sheets.
Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax
rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of
previous years.
90 George Weston Limited 2018 Annual Report
Deferred tax is recognized using the asset and liability method of accounting on temporary differences arising
between the financial statement carrying values of existing assets and liabilities and their respective income tax
bases. Deferred tax is measured using enacted or substantively enacted income tax rates expected to apply in
the years in which those temporary differences are expected to be recovered or settled. A deferred tax asset is
recognized for temporary differences as well as unused tax losses and credits to the extent that it is probable
that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at
each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realized.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities
and assets and they relate to income taxes levied by the same taxation authority on the same taxable entity,
or on different taxable entities where the Company intends to settle its current tax assets and liabilities on a
net basis.
Deferred tax is recorded on temporary differences arising on investments in subsidiaries, except where the
timing of the reversal of the temporary difference is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Choice Properties qualifies as a “mutual fund trust” and a real estate investment trust (“REIT”) under the Income
Tax Act (Canada). Certain legislation relating to the federal income taxation of Specified Investment Flow
Through trusts or partnerships (“SIFT”) provides that certain distributions from a SIFT will not be deductible in
computing the SIFT’s taxable income and that the SIFT will be subject to tax on such distributions at a rate that is
substantially equivalent to the general tax rate applicable to Canadian corporations.
Under the SIFT rules, the taxation regime will not apply to a REIT that meets prescribed conditions relating to the
nature of its assets and revenue (the “REIT Conditions”) and distributions may be deducted against the REIT’s
taxable income. Choice Properties has reviewed the SIFT rules and has assessed its interpretation and application
to Choice Properties’ assets and revenue and has determined that it meets the REIT Conditions. The Trustees
intend to annually distribute all taxable income directly earned by Choice Properties to Unitholders and to
deduct such distributions for income tax purposes and, accordingly, no net current income tax expense or
deferred income tax assets or liabilities have been recorded in the consolidated financial statements of Choice
Properties related to its Canadian investment properties.
The Trust also consolidates certain taxable entities in Canada and in the United States for which current and
deferred income taxes are recorded. Current tax is the expected tax payable or receivable on the taxable income
or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment
to tax payable in respect of previous years.
Cash Equivalents Cash equivalents consist of highly liquid marketable investments with an original maturity date
of 90 days or less from the date of acquisition.
Short Term Investments Short term investments consist of marketable investments with an original maturity
date greater than 90 days and less than 365 days from the date of acquisition.
Security Deposits Security deposits consist of cash and cash equivalents and short term investments. Security
deposits also include amounts which are required to be placed with counterparties as collateral to enter into and
maintain certain outstanding letters of credit and certain financial derivative contracts.
Accounts Receivable Accounts receivable consists primarily of receivables from Loblaw’s non-consolidated
franchisees, government and third-party drug plans arising from prescription drug sales, independent accounts
and receivables from Weston Foods customers and suppliers, and are recorded net of allowances.
George Weston Limited 2018 Annual Report 91
Notes to the Consolidated Financial Statements
Credit Card Receivables Loblaw, through President’s Choice Bank (“PC Bank”), a wholly-owned subsidiary of
Loblaw, has credit card receivables that are stated net of an allowance. Interest income is recorded in revenue
and interest expense is recorded in net interest expense and other financing charges using the effective interest
method. The effective interest rate is the rate that discounts the estimated future cash receipts through the
expected life of the credit card receivable (or, where appropriate, a shorter period) to the carrying amount.
When calculating the effective interest rate, Loblaw estimates future cash flows considering all contractual terms
of the financial instrument, but not future credit losses. For credit-impaired credit card receivables, a credit-
adjusted effective interest rate is calculated using estimated future cash flows including expected credit losses.
The Company implemented IFRS 9, “Financial Instruments” (“IFRS 9”), replacing International Accounting
Standard 39, “Financing Instruments: Recognition and Measurement” (“IAS 39”), on December 31, 2017 by
applying the requirements for classification and measurement, including impairment, retrospectively with the
cumulative effects of initial application recorded in opening retained earnings as at January 1, 2018 with no
restatement of comparative periods. Therefore, the comparative information has not been restated and
continues to be reported under IAS 39.
Prior to January 1, 2018, under IAS 39, credit card receivables are considered past due when a cardholder has
not made a payment by the contractual due date, taking into account a grace period. The amount of credit card
receivables that fall within the grace period is considered current. Credit card receivables past due but not
impaired are those receivables that are either less than 90 days past due or whose past due status is reasonably
expected to be remedied. Any credit card receivables with a payment that is contractually 180 days in arrears, or
where the likelihood of collection is considered remote, is written off.
As at January 1, 2018 and thereafter, under IFRS 9, the Company applies the “expected credit loss” (“ECL”) model
to assess for impairment on its credit card receivables at each balance sheet date. Credit card receivables are
assessed collectively for impairment by applying the three-stage approach. Refer to the Impairment of Financial
Assets policy for details of each stage. The application of the ECL model required PC Bank to apply significant
judgments, assumptions and estimations (see note 3).
Impairment losses are recorded in selling, general and administrative expenses (“SG&A”) in the consolidated
statement of earnings with the carrying amount of the credit card receivables reduced through the use of
impairment allowance accounts. In periods subsequent to the impairment where the impairment loss has
decreased, and such decrease can be related objectively to conditions and changes in factors occurring after the
impairment was initially recognized, the previously recognized impairment loss is reversed through the
consolidated statement of earnings. The impairment reversal is limited to the lesser of the decrease in
impairment or the extent that the carrying amount of the credit card receivables at the date the impairment is
reversed does not exceed what the amortized cost would have been had the impairment not been recognized,
after the reversal.
Loblaw, through PC Bank, participates in various securitization programs that provide the primary source of
funds for the operation of its credit card business. PC Bank maintains and monitors co-ownership interest in
credit card receivables with independent securitization trusts, in accordance with its financing requirements.
PC Bank is required to absorb a portion of the related credit losses. As a result, Loblaw has not transferred all of
the risks and rewards related to these assets and continues to recognize these assets in credit card receivables.
The transferred receivables are accounted for as financing transactions. The associated liabilities secured by
these assets are included in either short term debt or long term debt based on their characteristics and are
carried at amortized cost. Loblaw provides a standby letter of credit for the benefit of the independent
securitization trusts.
Eagle Credit Card Trust® PC Bank participates in a single seller revolving co-ownership securitization program
with Eagle Credit Card Trust® (“Eagle”) and continues to service the credit card receivables on behalf of Eagle,
but does not receive any fee for its servicing obligations and has a retained interest in the securitized receivables
represented by the right to future cash flows after obligations to investors have been met. Loblaw consolidates
Eagle as a structured entity.
92 George Weston Limited 2018 Annual Report
Other Independent Securitization Trusts The Other Independent Securitization Trusts administer multi-seller,
multi-asset securitization programs that acquire assets from various participants, including credit card
receivables from PC Bank. These trusts are managed by major Canadian chartered banks. PC Bank does not
control the trusts through voting interests and does not exercise any control over the trusts’ management,
administration or assets. The activities of these trusts are conducted on behalf of the participants and each trust
is a conduit through which funds are raised to purchase assets through the issuance of senior and subordinated
short term and medium term asset backed notes. These trusts are unconsolidated structured entities.
Franchise Loans Receivable Franchise loans receivable are comprised of amounts due from non-consolidated
franchises for loans issued through a structure involving consolidated independent funding trusts. These trusts,
which are considered structured entities, were created to provide loans to franchises to facilitate their purchase
of inventory and fixed assets. Each franchise provides security to the independent funding trust for its obligations
by way of a general security agreement. In the event that a franchise defaults on its loan and the Company has
not, within a specified time period, assumed the loan or the default is not otherwise remedied, the independent
funding trust would assign the loan to the Company and draw upon a standby letter of credit. The Company has
agreed to reimburse the issuing bank for any amount drawn on the standby letter of credit. The carrying amount
of franchise loan receivables approximates fair value.
Inventories The Company values inventories at the lower of cost and net realizable value. Cost includes the costs
of purchases net of vendor allowances plus other costs, such as transportation, that are directly incurred to bring
inventories to their present location and condition. Loblaw’s retail store inventories, Loblaw’s inventories at
distribution centres and Weston Foods’ inventories are measured at weighted average cost. Shoppers Drug
Mart’s inventories are measured on a first-in first-out basis.
Loblaw estimates net realizable value as the amount that inventories are expected to be sold taking into
consideration fluctuations in retail prices due to seasonality less estimated costs necessary to make the sale.
Inventories are written down to net realizable value when the cost of inventories is estimated to be
unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously
caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase
in selling prices, the amount of the write-down previously recorded is reversed. Storage costs, indirect
administrative overhead and certain selling costs related to inventories are expensed in the period that these
costs are incurred.
Vendor Allowances The Company receives allowances from certain of its vendors whose products it purchases.
These allowances are received for a variety of buying and/or merchandising activities, including vendor programs
such as volume purchase allowances, purchase discounts, listing fees and exclusivity allowances. Allowances
received from a vendor are a reduction in the cost of the vendor’s products or services, and are recognized as a
reduction in the cost of inventories sold and the related inventory in the consolidated statements of earnings
and the consolidated balance sheets, respectively, when it is probable that they will be received and the amount
of the allowance can be reliably estimated. Amounts received but not yet earned are presented in other
liabilities as deferred vendor allowances. Certain exceptions apply if the consideration is a payment for goods or
services delivered to the vendor or for direct reimbursement of selling costs incurred to promote goods. The
consideration is then recognized as a reduction of the cost incurred in the consolidated statements of earnings.
Fixed Assets Fixed assets are recognized and subsequently measured at cost less accumulated depreciation and
any accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition
of the asset, including costs incurred to prepare the asset for its intended use and capitalized borrowing costs.
The commencement date for capitalization of costs occurs when the Company first incurs expenditures for the
qualifying assets and undertakes the required activities to prepare the assets for their intended use.
Borrowing costs directly attributable to the acquisition, construction or production of fixed assets, that
necessarily take a substantial period of time to prepare for their intended use and a proportionate share of
general borrowings, are capitalized to the cost of those fixed assets, based on a quarterly weighted average cost
of borrowing. All other borrowing costs are expensed as incurred and recognized in net interest expense and
other financing charges.
George Weston Limited 2018 Annual Report 93
Notes to the Consolidated Financial Statements
The cost of replacing a fixed asset component is recognized in the carrying amount if it is probable that the
future economic benefits embodied within the component will flow to the Company and the cost can be
measured reliably. The carrying amount of the replaced component is derecognized. The cost of repairs and
maintenance of fixed assets is expensed as incurred and recognized in operating income.
Gains and losses on disposal of fixed assets are determined by comparing the fair value of proceeds from
disposal with the net book value of the assets and are recognized net in operating income.
Fixed assets are depreciated on a straight-line basis over their estimated useful lives to their estimated residual
value when the assets are available for use. When significant parts of a fixed asset have different useful lives,
they are accounted for as separate components and depreciated separately. Depreciation methods, useful lives
and residual values are reviewed annually and are adjusted for prospectively, if appropriate. Estimated useful
lives are as follows:
Buildings
Equipment and fixtures
Building improvements
Leasehold improvements
Assets held under financing leases
10 to 40 years
2 to 16 years
up to 10 years
Lesser of term of the lease and useful life up to 25 years
Lesser of term of the lease(i) and useful life(ii)
(i)
If it is reasonably certain that the Company will obtain ownership by the end of the lease term, assets under finance leases would be
depreciated over the life of the asset.
(ii) Same basis as owned assets.
Non-current assets are classified as assets held for sale if their carrying amount will be recovered principally
through a sale transaction rather than through continuing use. To qualify as assets held for sale, the sale must be
highly probable, assets must be available for immediate sale in their present condition and management must be
committed to a plan to sell assets that should be expected to close within one year from the date of
classification. Assets held for sale are recognized at the lower of their carrying amount and fair value less costs to
sell and are not depreciated.
Fixed assets are reviewed at each balance sheet date to determine whether there is any indication of
impairment. Refer to the Impairment of Non-Financial Assets policy.
Leases At inception of an arrangement, the Company determines whether the arrangement is or contains a
lease. A contract contains a lease if the fulfillment of the arrangement depends upon a specific asset and if the
arrangement conveys a right to control the use of the underlying asset. The right to control the use of the
underlying asset was met when any of the following conditions are present:
•
the Company had the ability or right to operate the asset or direct others to operate the asset while
obtaining or controlling more than an insignificant amount of the output of the asset;
the Company had the ability or right to control physical access to the asset while obtaining or controlling
more than an insignificant amount of the output of the asset; and
facts and circumstances indicated that it is remote that one or more parties other than the purchaser will
take more than an insignificant amount of the output or other utility that will be produced or generated by
the asset during the term of the arrangement, and the price that the purchaser will pay for the output is
neither contractually fixed per unit of output nor equal to the current market price per unit of output as of
the time of delivery of the output.
•
•
As a lessee, the Company classified leases that substantially transferred all the risk and rewards as a finance
lease. Finance lease assets and liabilities are recognized at the lower of the fair value of the leased asset or the
present value of the minimum lease payments, discounted at the interest rate implicit in the lease, or if that rate
cannot be readily determined, the Company's incremental borrowing rate. Operating leases are not recognized
on the balance sheets. Operating lease payments are recognized in SG&A on a straight-line basis.
As a lessor, the Company recognizes rental income from operating leases on a straight-line basis over the lease
term.
94 George Weston Limited 2018 Annual Report
Investment Properties Investment properties are properties owned by the Company that are held to either earn
rental income, for capital appreciation, or both. The Company’s investment properties include single tenant
properties held to earn rental income and certain multiple tenant properties. Land and buildings leased to
franchisees are not accounted for as investment properties as these properties are related to the Company’s
operating activities.
Investment property assets are measured using the fair value model. Under the fair value model, investment
properties are initially measured at cost and subsequently measured at fair value. Fair value is determined based
on available market evidence. If market evidence is not readily available in less active markets, the Company uses
alternative valuation methods such as discounted cash flow projections or recent transaction prices. Under the
discounted cash flow methodology, discount rates are applied to the projected annual operating cash flows,
generally over a minimum term of ten years, including a terminal value of the investment properties based on a
capitalization rate applied to the estimated net operating income, a non-GAAP measure, in the terminal year.
Gains and losses on fair value are recognized in operating income in the period in which they are incurred. Gains
and losses from disposal of investment properties are determined by comparing the fair value of disposal
proceeds and the carrying amount and are recognized in operating income.
When a property changes from own use to investment property, the property is remeasured to fair value. Any
gain arising from the remeasurement is recognized in profit or loss to the extent that it reverses a previous
impairment loss on that property, with any remaining gain recognized in the Company’s other comprehensive
income. Any loss on remeasurement is recognized in profit or loss. However, to the extent a previous gain on
remeasurement is included in the revaluation surplus for that property, the loss is first recognized in the
Company’s other comprehensive income to reduce the revaluation surplus within equity. Upon sale of an
investment property that was previously classified as property, plant and equipment, amounts included in the
revaluation reserve is transferred to retained earnings.
Joint Arrangements The Company, through Choice Properties, owns investments under joint arrangements.
Joint arrangements are arrangements of which two or more parties have joint control. Joint control is the
contractual sharing of control of an arrangement, which exists only when decisions about the relevant activities
require unanimous consent of the parties sharing control. Joint arrangements are classified as either joint
operations or joint ventures depending on Choice Properties’ rights and obligations in the arrangement based on
factors such as the structure, legal form and contractual terms of the arrangement.
Joint Ventures A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the joint arrangement.
Choice Properties’ investment in a joint venture is recorded using the equity method and is initially recognized in
the consolidated balance sheet at cost and adjusted thereafter to recognize Choice Properties’ share of the profit
or loss and other comprehensive income of the joint venture. The Company’s share of the joint venture’s profit
or loss is recognized in the Company’s operating income and other comprehensive income.
The financial statements of the equity-accounted investment are prepared for the same reporting period as
Choice Properties. Where necessary, adjustments are made to bring the accounting policies in line with those of
the Company’s.
A joint venture is considered to be impaired if there is objective evidence of impairment, as a result of one or
more events that occurred after initial recognition of the joint venture, and that event has a negative impact on
the future cash flows of the joint venture that can be reliably estimated.
Joint Operations A joint operation is a joint arrangement whereby the parties that have joint control have rights
to the assets and obligations for the liabilities relating to the arrangement. The financial statements of the joint
operations are prepared for the same reporting period as Choice Properties. Where necessary, adjustments are
made to bring the accounting policies in line with those of the Company’s. The Company recognizes its
proportionate share of assets, liabilities, revenues and expenses of the joint operations.
George Weston Limited 2018 Annual Report 95
Notes to the Consolidated Financial Statements
Goodwill Goodwill arising in a business combination is recognized as an asset at the date that control is
acquired. Goodwill is subsequently measured at cost less accumulated impairment losses. Goodwill is not
amortized but is tested for impairment on an annual basis or more frequently if there are indicators that
goodwill may be impaired as described in the Impairment of Non-Financial Assets policy.
Intangible Assets Intangible assets with finite lives are measured at cost less accumulated amortization and any
accumulated impairment losses. These intangible assets are amortized on a straight-line basis over their
estimated useful lives, ranging from three to 30 years, and are tested for impairment as described in the
Impairment of Non-Financial Assets policy. Useful lives, residual values and amortization methods for intangible
assets with finite useful lives are reviewed at least annually. Amortization expense for intangible assets is
recognized in SG&A.
Indefinite life intangible assets are measured at cost less any accumulated impairment losses. These intangible
assets are tested for impairment on an annual basis or more frequently if there are indicators that intangible
assets may be impaired as described in the Impairment of Non-Financial Assets policy.
Impairment of Non-Financial Assets At each balance sheet date, the Company reviews the carrying amounts of
its non-financial assets, other than inventories and deferred tax assets, to determine whether there is any
indication of impairment. If any such indication exists, the asset is then tested for impairment by comparing its
recoverable amount to its carrying value. Goodwill and indefinite life intangible assets are tested for impairment
at least annually.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that
generate cash inflows from continuing use that are largely independent of cash inflows of other assets or groups
of assets. This grouping is referred to as a cash generating unit (“CGU”). Weston Foods’ manufacturing assets are
grouped together at the level of production categories which are capable of servicing their customers
independently of other production categories. Loblaw has determined that each location is a separate CGU for
purposes of impairment testing.
Corporate assets, which include head office facilities and distribution centers, do not generate separate cash
inflows. Corporate assets are tested for impairment at the minimum grouping of CGUs to which the corporate
assets can be reasonably and consistently allocated. Goodwill arising from a business combination is tested for
impairment at the minimum grouping of CGUs that are expected to benefit from the synergies of the
combination.
The recoverable amount of a CGU or CGU grouping is the higher of its value in use and its fair value less costs to
sell. Value in use is based on the estimated future cash flows from the CGU or CGU grouping, discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the CGU or CGU grouping. The fair value less costs to sell is based on the best
information available to reflect the amount that could be obtained from the disposal of the CGU or CGU
grouping in an arm’s length transaction between knowledgeable and willing parties, net of estimates of the costs
of disposal.
An impairment loss is recognized if the carrying amount of a CGU or CGU grouping exceeds its recoverable
amount. For asset impairments other than goodwill, the impairment loss reduces the carrying amounts of the
non-financial assets in the CGU on a pro-rata basis. Any loss identified from goodwill impairment testing is first
applied to reduce the carrying amount of goodwill allocated to the CGU grouping, and then to reduce the
carrying amounts of the other non-financial assets in the CGU or CGU grouping on a pro-rata basis. Impairment
losses and reversals are recognized in SG&A.
For assets other than goodwill, an impairment loss is reversed only to the extent that the asset’s carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. An impairment loss in respect of goodwill is not
reversed.
96 George Weston Limited 2018 Annual Report
Bank Indebtedness Bank indebtedness is comprised of balances outstanding on bank lines of credit drawn by
Loblaw’s Associates.
Provisions Provisions are recognized when there is a present legal or constructive obligation as a result of a past
event, it is probable that the Company will be required to settle the obligation and a reliable estimate of the
amount of the obligation can be made. The amount recognized as a provision is the present value of the best
estimate of the consideration required to settle the present obligation at the end of the reporting period, taking
into account the risks and uncertainties specific to the obligation. The unwinding of the discount rate for the
passage of time is recognized in net interest expense and other financing charges.
Financial Instruments and Derivative Financial Instruments Financial assets and liabilities are recognized when
the Company becomes party to the contractual provisions of the financial instrument. Upon initial recognition,
financial instruments, including derivatives and embedded derivatives in certain contracts, are measured at fair
value plus or minus transaction costs that are directly attributable to the acquisition or issue of financial
instruments that are not classified as fair value through profit or loss.
Classification and Measurement The classification and measurement approach for financial assets reflect the
business model in which assets are managed and their cash flow characteristics. Financial assets are classified
and measured based on these categories: amortized cost, fair value through other comprehensive income
(“FVOCI”), or fair value through profit and loss (“FVTPL”). Derivatives embedded in contracts where the host is a
financial asset in the scope of the standard are not separated, but the hybrid financial instrument as a whole is
assessed for classification.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated
as FVTPL:
• The financial asset is held within a business model whose objective is to hold assets in order to collect
contractual cash flows; and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
A financial asset is measured at FVOCI if it meets both of the following conditions and is not designated as at
FVTPL:
• The financial asset is held within a business model in which assets are managed to achieve a particular
objective by both collecting contractual cash flows and selling financial assets; and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
A financial asset shall be measured at FVTPL unless it is measured at amortized cost or at FVOCI.
Financial assets are not reclassified subsequent to their initial recognition unless the Company identifies changes
in its business model in managing financial assets.
Financial liabilities are classified and measured based on two categories: amortized cost or FVTPL.
Fair values are based on quoted market prices where available from active markets, otherwise fair values are
estimated using valuation methodologies, primarily discounted cash flows taking into account external market
inputs where possible. The amortized cost of a financial asset or liability is the amount at which the financial
asset or liability is measured at initial recognition, minus principal payments, plus or minus the cumulative
amortization using the effective interest method of any difference between the initial amount recognized and
the maturity amount, minus any reduction for impairment.
George Weston Limited 2018 Annual Report 97
Notes to the Consolidated Financial Statements
The following table summarizes the classification and measurement of the Company’s financial assets and
liabilities:
Asset/Liability
Cash and cash equivalents
Short term investments
Accounts receivable
Credit card receivables
Security deposits
Franchise loans receivable
Certain other assets
Certain long term investments
Bank indebtedness
Trade payables and other liabilities
Short term debt
Long term debt
Trust Unit liability
Certain other liabilities
Derivatives
Classification / Measurement
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss
Amortized cost
Amortized cost / fair value through profit and loss
Fair value through other comprehensive income
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit and loss
Amortized cost
Fair value through profit and loss / fair value through other
comprehensive income
Financial derivative instruments in the form of forwards and futures, as well as non-financial derivatives in the
form of futures contracts, options contracts and forward contracts, are recorded at fair value on the consolidated
balance sheet. The Company does not use derivative instruments for speculative purposes. Embedded
derivatives are separated from the host contract and accounting for separately on the consolidated balance
sheet at fair value if the host contract is not a financial asset. Derivative instruments are recorded in current or
non-current assets and liabilities based on their remaining terms to maturity. All changes in fair values of the
derivative instruments are recorded in net earnings unless the derivative qualifies and is effective as a hedging
item in a designated hedging relationship.
The Company has cash flow hedges which are used to manage exposure to fluctuations in foreign currency
exchange and interest rates. The effective portion of the change in fair value of the hedging item is recorded in
other comprehensive income. If the change in fair value of the hedging item is not completely offset by the
change in fair value of the hedged item, the ineffective portion of the hedging relationship is recorded in net
earnings. Amounts accumulated in other comprehensive income are reclassified to net earnings when the
hedged item is recognized in net earnings. The Company ensures that the hedge accounting relationships are
aligned with the Company’s risk management objectives and strategy and applies a more qualitative and
forward-looking approach to assessing hedge effectiveness. The Company’s risk management strategy and
hedging activities are disclosed in Note 33 “Financial Instruments” and Note 34 “Financial Risk Management”.
Fair Value The Company measures financial assets and liabilities under the following fair value hierarchy. The
different levels have been defined as follows:
• Fair Value Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Fair Value Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• Fair Value Level 3: inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
Determination of fair value and the resulting hierarchy requires the use of observable market data whenever
available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that
is significant to the measurement of fair value.
98 George Weston Limited 2018 Annual Report
Transaction costs other than those related to financial instruments classified as fair value through profit or loss,
which are expensed as incurred, are capitalized to the carrying amount of the instrument and amortized using
the effective interest method.
Gains and losses on fair value through profit or loss financial assets and financial liabilities are recognized in net
earnings in the period in which they are incurred. Settlement date accounting is used to account for the
purchase and sale of financial assets. Gains or losses between the trade date and settlement date on fair value
through profit or loss financial assets are recorded in net earnings.
Valuation Process The determination of the fair value of financial instruments is performed by the Company’s
treasury and financial reporting departments on a quarterly basis. There was no change in the valuation
techniques applied to financial instruments during the current year. The following table describes the valuation
techniques used in the determination of the fair values of financial instruments:
Type
Valuation Approach
Cash and Cash Equivalents, Short Term
Investments, Security Deposits, Accounts
Receivable, Credit Card Receivables, Bank
Indebtedness, Trade Payables and Other Liabilities
and Short Term Debt
Franchise Loans Receivable
Derivatives
Long Term Debt, Trust Unit Liability and certain
Other Financial Instruments
The carrying amount approximates fair value due to the short term
maturity of these instruments.
The carrying amount approximates fair value as fluctuations in the
forward interest rates would not have significant impacts on the
valuation and the provisions recorded for all impaired receivables.
Specific valuation techniques used to value derivative financial
instruments include:
Quoted market prices or dealer quotes for similar instruments;
Observable market information as well as valuations determined
by external valuators with experience in the financial markets.
The fair value is based on the present value of contractual cash flows,
discounted at the Company’s current incremental borrowing rate for
similar types of borrowing arrangements or, where applicable, quoted
market prices.
Derecognition of Financial Instruments Financial assets are derecognized when the contractual rights to receive
cash flows and benefits from the financial asset expire, or if the Company transfers the control or substantially all
the risks and rewards of ownership of the financial asset to another party. The difference between the carrying
amount of the financial asset and the sum of the consideration received and receivable is recognized in earnings
before income taxes.
Financial liabilities are derecognized when obligations under the contract expire, are discharged or cancelled.
The difference between the carrying amount of the financial liability derecognized and the consideration paid
and payable is recognized in earnings before income taxes.
Impairment of Financial Assets The Company implemented IFRS 9 replacing IAS 39 on January 1, 2018 by
applying the requirements for classification and measurement, including impairment, retrospectively with the
cumulative effects of initial application recorded in opening retained earnings as at January 1, 2018 with no
restatement of comparative periods. Therefore, the comparative information has not been restated and
continues to be reported under IAS 39.
Prior to January 1, 2018, under IAS 39, an assessment of whether there is objective evidence that a financial
asset or a group of financial assets is impaired is performed at each balance sheet date. A financial asset or
group of financial assets is considered to be impaired if one or more loss events that have an impact on the
estimated future cash flows occur after their initial recognition and the loss can be reliably measured. If such
objective evidence has occurred, the loss is based on the difference between the carrying amount of the
financial asset, or portfolio of financial assets, and the respective estimated future cash flows discounted at the
George Weston Limited 2018 Annual Report 99
Notes to the Consolidated Financial Statements
financial assets’ original effective interest rate. Impairment losses are recorded in the consolidated statement of
earnings with the carrying amount of the financial asset or group of financial assets reduced through the use of
impairment allowance accounts.
In periods subsequent to the impairment where the impairment loss has decreased, and such decrease can be
related objectively to an event occurring after the impairment was initially recognized, the previously recognized
impairment loss is reversed through the consolidated statement of earnings. The impairment reversal is limited
to the lesser of the decrease in impairment or the extent that the carrying amount of the financial asset at the
date the impairment is reversed does not exceed what the amortized cost would have been had the impairment
not been recognized, after the reversal.
As at January 1, 2018 and thereafter, under IFRS 9, a forward-looking ECL model is applied, at each balance sheet
date, to financial assets measured at amortized cost or those measured at fair value through other
comprehensive income, except for investments in equity instruments.
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the increase in credit risks
of a financial instrument:
• Stage 1 is comprised of all financial instruments that have not had a significant increase in credit risks since
initial recognition or that have low credit risk at the reporting date. The Company is required to recognize
impairment for Stage 1 financial instruments based on the expected losses over the expected life of the
instrument arising from loss events that could occur during the 12 months following the reporting date.
• Stage 2 is comprised of all financial instruments that have had a significant increase in credit risks since initial
recognition but that do not have objective evidence of a credit loss event. For Stage 2 financial instruments
the impairment is recognized based on the expected losses over the expected life of the instrument arising
from loss events that could occur over the expected life. The Company is required to recognize a lifetime ECL
for Stage 2 financial instruments.
• Stage 3 is comprised of all financial instruments that have objective evidence of impairment at the reporting
date. The Company is required to recognize impairment based on a lifetime ECL for Stage 3 financial
instruments.
The ECL models applied to financial assets require judgment, assumptions and estimations on changes in credit
risks, forecasts of future economic conditions and historical information on the credit quality of the financial
asset. Consideration of how changes in economic factors affect ECLs will be determined on a probability-
weighted basis.
Impairment losses are recorded in SG&A in the consolidated statement of earnings with the carrying amount of
the financial asset or group of financial assets reduced through the use of impairment allowance accounts. In
periods subsequent to the impairment where the impairment loss has decreased, and such decrease can be
related objectively to conditions and changes in factors occurring after the impairment was initially recognized,
the previously recognized impairment loss is reversed through the consolidated statement of earnings. The
impairment reversal is limited to the lesser of the decrease in impairment or the extent that the carrying amount
of the financial asset at the date the impairment is reversed does not exceed what the amortized cost would
have been had the impairment not been recognized, after the reversal.
100 George Weston Limited 2018 Annual Report
Foreign Currency Translation The functional currency of the Company is the Canadian dollar.
The assets and liabilities of foreign operations that have a functional currency different from that of the
Company, including goodwill and fair value adjustments arising on acquisition, are translated into Canadian
dollars at the foreign currency exchange rate in effect at the balance sheet date. The resulting foreign currency
exchange gains or losses are recognized in the foreign currency translation adjustment as part of other
comprehensive income. When such foreign operation is disposed of, the related foreign currency translation
reserve is recognized in net earnings as part of the gain or loss on disposal. On the partial disposal of such
foreign operation, the relevant proportion is reclassified to net earnings.
Assets and liabilities denominated in U.S. dollars but held in foreign operations that have the same functional
currency as the Company are translated into Canadian dollars at the foreign currency exchange rate in effect at
the balance sheet date. The resulting foreign currency exchange gains or losses are recognized in operating
income.
Revenues and expenses of foreign operations are translated into Canadian dollars at the foreign currency
exchange rates that approximate the rates in effect at the dates when such items are transacted.
Short Term Employee Benefits Short term employee benefits include wages, salaries, compensated absences,
profit-sharing and bonuses. Short term employee benefit obligations are measured on an undiscounted basis
and are recognized in operating income as the related service is provided or capitalized if the service rendered is
in connection with the creation of a tangible or intangible asset. A liability is recognized for the amount expected
to be paid under short term cash bonus or profit-sharing plans if the Company has a present legal or constructive
obligation to pay this amount as a result of past service provided by the employee, and the obligation can be
estimated reliably.
Defined Benefit Post-Employment Plans The Company has a number of contributory and non-contributory
defined benefit post-employment plans providing pension and other benefits to eligible employees. The defined
benefit pension plans provide a pension based on length of service and eligible pay. The other defined benefits
include health care, life insurance and dental benefits provided to eligible employees who retire at certain ages
having met certain service requirements. The Company’s net defined benefit plan obligations (assets) for each
plan are actuarially calculated by a qualified actuary at the end of each annual reporting period using the
projected unit credit method pro-rated based on service and management’s best estimate of the discount rate,
the rate of compensation increase, retirement rates, termination rates, mortality rates and expected growth rate
of health care costs. The discount rate used to value the defined benefit plan obligation for accounting purposes
is based on high quality corporate bonds denominated in the same currency with cash flows that match the
terms of the defined benefit plan obligations. Past service costs (credits) arising from plan amendments are
recognized in operating income in the year that they arise. The actuarially determined net interest costs on the
net defined benefit plan obligation are recognized in net interest expense and other financing charges.
The fair values of plan assets are deducted from the defined benefit plan obligations to arrive at the net defined
benefit plan obligations (assets). For plans that result in a net defined benefit asset, the recognized asset is
limited to the present value of economic benefits available in the form of future refunds from the plan or
reductions in future contributions to the plan (the “asset ceiling”). If it is anticipated that the Company will not
be able to recover the value of the net defined benefit asset, after considering minimum funding requirements
for future service, the net defined benefit asset is reduced to the amount of the asset ceiling. When the payment
in the future of minimum funding requirements related to past service would result in a net defined benefit
surplus or an increase in a surplus, the minimum funding requirements are recognized as a liability to the extent
that the surplus would not be fully available as a refund or a reduction in future contributions.
George Weston Limited 2018 Annual Report 101
Notes to the Consolidated Financial Statements
Remeasurements including actuarial gains and losses, the effect of the asset ceiling (if applicable) and the impact
of any minimum funding requirements are recognized through other comprehensive income and subsequently
reclassified from accumulated other comprehensive income to retained earnings.
Other Long Term Employee Benefit Plans The Company offers other long term employee benefits including
contributory long term disability benefits and non-contributory continuation of health care and dental benefits
to employees who are on long term disability leave. As the amount of the long term disability benefit does not
depend on length of service, the obligation is recognized when an event occurs that gives rise to an obligation to
make payments. The accounting for other long term employee benefit plans is similar to the method used for
defined benefit plans except that all actuarial gains and losses are recognized in operating income.
Defined Contribution Plans The Company maintains a number of defined contribution pension plans for
employees in which the Company pays fixed contributions for eligible employees into a registered plan and has
no further significant obligation to pay any further amounts. The costs of benefits for defined contribution plans
are expensed as employees have rendered service.
Multi-Employer Pension Plans The Company participates in multi-employer pension plans (“MEPP”) which are
accounted for as defined contribution plans. The Company’s responsibility to make contributions to these plans
is limited to amounts established pursuant to its collective agreements. Defined benefit MEPPs are accounted for
as defined contribution plans as adequate information to account for the Company’s participation in the plans is
not available due to the size and number of contributing employers in the plans. The contributions made by the
Company to MEPPs are expensed as contributions are due.
Termination Benefits Termination benefits are recognized as an expense at the earlier of when the Company
can no longer withdraw the offer of those benefits and when the Company recognizes costs for a restructuring.
Benefits payable are discounted to their present value when the effect of the time value of money is material.
Equity-Settled Share-Based Compensation Plans Stock options, Restricted Share Units (“RSUs”), Performance
Share Units (“PSUs”), Director Deferred Share Units (“DSUs”) and Executive Deferred Share Units (“EDSUs”)
issued by the Company are settled in common shares and are accounted for as equity-settled awards.
The Company and Loblaw’s stock options outstanding have a seven year term to expiry, vest 20% cumulatively on
each anniversary date of the grant and are exercisable at the designated common share price, which is based on
the greater of the volume weighted average trading prices of the GWL or Loblaw common shares for either the
five trading days prior to the date of grant or the trading day immediately preceding the grant date. The fair
value of each tranche of options granted is measured separately at the grant date using a Black-Scholes option
pricing model, and includes the following assumptions:
• The expected dividend yield is estimated based on the expected annual dividend prior to the option grant
date and the closing share price as at the option grant date;
• The expected share price volatility is estimated based on the Company’s historical volatility over a period
consistent with the expected life of the options;
• The risk-free interest rate is estimated based on the Government of Canada bond yield in effect at the grant
date for a term to maturity equal to the expected life of the options; and
• The effect of expected exercise of options prior to expiry is incorporated into the weighted average expected
life of the options, which is based on historical experience and general option holder behaviour.
RSUs and PSUs vest after the end of a three year performance period. The number of PSUs that vest is based on
the achievement of specified performance measures. The fair value of each RSU and PSU granted is measured
separately at the grant date based on the market value of a GWL or Loblaw common share. Dividends paid may
be reinvested in RSUs and PSUs and are treated as capital transactions.
102 George Weston Limited 2018 Annual Report
GWL and Loblaw established trusts for each of their RSU and PSU plans to facilitate the purchase of shares for
future settlement upon vesting. Each company is the sponsor of their respective trusts and has assigned
Computershare Trust Company of Canada as the trustee. GWL and Loblaw fund the purchase of shares for
settlement and earn management fees from the trusts. The trusts are considered structured entities and are
consolidated in the Company’s financial statements with the cost of the acquired shares recorded at book value
as a reduction to share capital. Any premium on the acquisition of the shares above book value is applied to
retained earnings until the shares are issued to settle RSU and PSU obligations.
Members of GWL’s, Loblaw’s and Choice Properties’ Board, who are not management, may elect to receive a
portion of their annual retainers and fees in the form of DSUs. Eligible executives of the Company may elect to
defer up to 100% of the Short Term Incentive Plan earned in any year into the EDSU plan. Dividends paid earn
fractional DSUs and EDSUs, respectively and are treated as capital transactions. DSUs and EDSUs vest upon grant.
The compensation expense for equity-settled plans is prorated over the vesting or performance period, with a
corresponding increase to contributed surplus. Forfeitures are estimated at the grant date and are revised to
reflect changes in expected or actual forfeitures.
Upon exercise of options, the amount accumulated in contributed surplus for the award plus the cash received
upon exercise is recognized as an increase in share capital. Upon settlement of RSUs and PSUs, the amount
accumulated in contributed surplus for the award is reclassified to share capital, with any premium or discount
applied to retained earnings.
Cash-Settled Share-Based Compensation Plans Unit Options, Restricted Units (“RUs”), Performance Units
(“PUs”), and Trustee Deferred Units (“DUs”) issued by Choice Properties, and certain DSUs are accounted for as
cash-settled awards.
Choice Properties’ Unit Options have a five to ten year term, vest 25% cumulatively on each anniversary date of
the grant and are exercisable at the designated Unit price, which is based on the greater of the volume weighted
average trading price of a Unit for the five trading days prior to the date of grant or the trading day immediately
preceding the grant date. The fair value of each tranche is valued separately using a Black-Scholes option pricing
model, and includes the following assumptions:
• The expected distribution yield is estimated based on the expected annual distribution prior to the balance
sheet date and the closing Unit price as at the balance sheet date;
• The expected Unit price volatility is estimated based on the average volatility of investment grade entities in
the Standard & Poor’s/Toronto Stock Exchange (“TSX”) REIT Index over a period consistent with the expected
life of the options;
• The risk-free interest rate is estimated based on the Government of Canada bond yield in effect at the
balance sheet date for a term to maturity equal to the expected life of the options; and
• The effect of expected exercise of options prior to expiry is incorporated into the weighted average expected
life of the options, which is based on expectations of option holder behaviour.
George Weston Limited 2018 Annual Report 103
Notes to the Consolidated Financial Statements
RUs entitle certain employees to receive the value of the RU award in cash or Units at the end of the applicable
vesting period, which is usually three years in length. The RU plan provides for the crediting of additional RUs in
respect of distributions paid on Units for the period when an RU is outstanding. The fair value of each RU
granted is measured based on the market value of a Unit at the balance sheet date.
PUs entitle certain employees to receive the value of the PU award in cash or Units at the end of the applicable
performance period, which is usually three years in length, based on Choice Properties achieving certain
performance conditions. The PU plan provides for the crediting of additional PUs in respect of distributions paid
on Units for the period when a PU is outstanding. The fair value of each PU granted is measured based on the
market value of a Unit at the balance sheet date.
Members of the Choice Properties’ Board of Trustees, who are not management of Choice Properties, are
required to receive a portion of their annual retainer in the form of DUs and may also elect to receive up to 100%
of their remaining fees in DUs. Distributions paid earn fractional DUs, which are treated as additional awards.
DUs vest upon grant. The fair value of each DU granted is measured based on the market value of a Unit at the
balance sheet date.
The fair value of the amount payable to award recipients in respect of these cash settled awards plan is re-
measured at each balance sheet date, and a compensation expense is recognized in SG&A over the vesting
period for each tranche with a corresponding change in the liability.
Unit-Based Compensation Unit-Settled Restricted Units (“URUs”) are accounted for as cash-settled awards.
Typically, full vesting of the URUs would not occur until the employee had remained with Choice for three or five
years from the grant date. Depending on the nature of the grant, the URUs are subject to a six- or seven-year
holding period during which the Units cannot be disposed. The fair value of each URU granted is measured
based on the market value of a Trust Unit at the balance sheet date, less a discount to account for the vesting
and holding period restriction placed on the URUs.
Employee Share Ownership Plan (“ESOP”) GWL’s and Loblaw’s contributions to the ESOPs are measured at cost
and recorded as compensation expense in operating income when the contribution is made. The ESOPs are
administered through a trust which purchases GWL’s and Loblaw’s common shares on the open market on behalf
of its employees.
Accounting Standards Implemented in 2018
On January 1, 2018, the Company implemented IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”)
and IFRS 9, “Financial Instruments” (“IFRS 9”), in accordance with IAS 8, “Accounting Policies, Changes in
Accounting Estimates and Errors”. The impacts on implementation of IFRS 15 and IFRS 9 on the Company’s
consolidated financial statements are described below.
IFRS 15 In 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”, replacing IAS 18,
“Revenue” (“IAS 18”), IAS 11, “Construction Contracts”, and related interpretations. IFRS 15 provides a
comprehensive framework for the recognition, measurement and disclosure of revenue from contracts with
customers, excluding contracts within the scope of the accounting standards on leases, insurance contracts and
financial instruments. IFRS 15 is effective for annual periods beginning on or after January 1, 2018.
The Company adopted the standard on January 1, 2018 and applied the requirements of the standard
retrospectively with the cumulative effects of initial application recorded in opening retained earnings on
January 1, 2017 and with the restatement of comparative periods. IFRS 15 permits the use of exemptions and
practical expedients. The Company applied the practical expedient in which contracts that began and were
completed within the same annual reporting period before December 31, 2017 or were completed on or before
January 1, 2017 do not require restatement. Refer to the Revenue Recognition policy for significant accounting
policies under IFRS 15.
104 George Weston Limited 2018 Annual Report
The implementation of IFRS 15 did not have a significant impact on Weston Foods’, Loblaw’s or Choice
Properties’ segment revenue streams, including Loblaw’s franchise arrangements with non-consolidated stores.
IFRS 15 impacted the allocation of revenue that is deferred in relation to the Loblaw’s customer loyalty award
programs. Under IAS 18 and related interpretations, revenue was allocated to the customer loyalty awards using
the residual fair value method. Under this method, a portion of the consideration equaling the fair value of the
points was allocated to the loyalty awards and deferred until the points were ultimately redeemed. The residual
consideration was allocated to the goods and services sold and recognized as revenue. Under IFRS 15,
consideration is allocated between the loyalty awards and the goods and services on which the awards were
earned, based on their relative stand-alone selling prices. Using this relative fair value approach, the amount
allocated to the loyalty points and recorded as deferred revenue will be, on average, lower than the amounts
allocated under the residual value method. The majority of Loblaw’s loyalty liability, which is a contract liability,
is expected to be redeemed and recognized as revenue within one year of issuance.
In addition, in the fourth quarter of 2017, Loblaw recorded a charge before income taxes of $189 million under
IAS 18 and related interpretations, related to the revaluation of the existing loyalty liability for outstanding points
to reflect a higher anticipated redemption rate under the new PC Optimum program. Under IFRS 15, using the
relative fair value approach, this revaluation of the loyalty liability decreased by $24 million resulting in a charge
before income taxes of $165 million.
The impact of the above changes on equity as at January 1, 2017 and December 31, 2017 is as follows:
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Loyalty liability
Income taxes payable
Deferred income tax liabilities
Equity
$
As at
As at
January 1, 2017 December 31, 2017
(64)
11
7
46
(43)
12
—
31
$
The impact of this change on the comparative periods for 52 weeks ended December 31, 2017 is as follows:
Consolidated Statements of Earnings
Increase (Decrease)
($ millions)
Revenue
SG&A
Income taxes
$
52 Weeks Ended
December 31, 2017
(3)
(24)
6
The implementation of IFRS 15 had an impact on basic and diluted net earnings per share of $0.05 for 52 weeks
ended December 31, 2017.
IFRS 9 In 2014, the IASB issued IFRS 9, “Financial Instruments”, replacing IAS 39, “Financial Instruments:
Recognition and Measurement” (“IAS 39”), and related interpretations. IFRS 9 includes revised guidance on
the classification and measurement of financial assets, including impairment and a new general hedge
accounting model. IFRS 9 is effective for annual periods beginning on or after January 1, 2018. The Company
implemented the new requirements for classification and measurement, impairment and general hedging on
December 31, 2017 by applying the requirements for classification and measurement, including impairment,
retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at
December 31, 2017 with no restatement of comparative periods. The Company also applied related
amendments to IFRS 7, “Financial Instruments: Disclosures”. Refer to the Financial Instruments and Derivative
Instruments policy for significant accounting policies under IFRS 9.
George Weston Limited 2018 Annual Report 105
Notes to the Consolidated Financial Statements
Classification and measurement IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and their cash flow characteristics. Financial
assets are not reclassified subsequent to their initial recognition unless the Company identifies changes in its
business model in managing financial assets. The adoption of the new classification requirements under IFRS 9
did not result in significant changes in measurement or the carrying amount of financial assets and liabilities,
with the exception of credit card receivables discussed below.
The following table summarizes the classification impacts upon adoption of IFRS 9:
Asset/Liability
Classification under IFRS 9
Classification under IAS 39
Fair value through profit and loss(i) Amortized cost
Cash and cash equivalents
Fair value through profit and loss(i) Amortized cost
Short term investments
Amortized cost
Loans and receivables
Accounts receivable
Amortized cost
Loans and receivables
Credit card receivables
Fair value through profit and loss(i)
Fair value through profit and loss
Security deposits
Amortized cost
Loans and receivables
Franchise loans receivable
Certain other assets(ii)
Amortized cost/fair value through profit and loss
Loans and receivables
Fair value through other comprehensive income
Available-for-sale
Certain long term investments
Amortized cost
Bank indebtedness
Other liabilities
Amortized cost
Trade payables and other liabilities Other liabilities
Amortized cost
Other liabilities
Short term debt
Amortized cost
Other liabilities
Long term debt
Fair value through profit and loss(iii) Fair value through profit and loss
Trust Unit liability
Other liabilities
Certain other liabilities
Fair value through profit and loss(iii) Fair value through profit and loss/fair value
Derivatives
Amortized cost
through other comprehensive income
Financial instruments designated at fair value through profit and loss.
(i)
(ii) Certain other assets Include mortgages, loans and notes receivable which are classified as either amortized cost or fair value through
profit and loss.
(iii) Financial instruments required to be classified at fair value through profit and loss.
Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit
loss’ (“ECL”) model. The new impairment model is applied, at each balance sheet date, to financial assets
measured at amortized cost or those measured at fair value through other comprehensive income, except for
investments in equity instruments.
IFRS 9 outlines a three-stage approach to recognizing ECL which is intended to reflect the increase in credit risks
of a financial instrument. Refer to the Impairment of Financial Assets policy for details of each stage.
The ECL model had a significant impact on PC Bank’s impairment of credit card receivables. The Company revised
certain inputs of the ECL model since the implementation of IFRS 9 in the first quarter of 2018 and has
retrospectively applied the impact of these revisions with no impact to earnings. As a result of the refinements,
the cumulative impact arising from the ECL model on the impairment of credit card receivables as at
January 1, 2018 was as follows:
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Credit card receivables
Deferred income tax assets
Income taxes payable
Deferred income tax liabilities
Equity
106 George Weston Limited 2018 Annual Report
$
As at
January 1, 2018
(98)
26
4
(4)
(72)
The Company also applied ECL models to the assessment of impairment on trade receivables and other financial
assets of the Company. The Company adopted the practical expedient to determine ECL on trade receivables
using a provision matrix based on historical credit loss experiences to estimate lifetime ECL. The ECL models
applied to other financial assets also required judgment, assumptions and estimations on changes in credit risks,
forecasts of future economic conditions and historical information on the credit quality of the financial asset. The
provision matrix and ECL models applied do not have a material impact on trade receivables and other financial
assets of the Company.
General hedging IFRS 9 requires the Company to ensure that hedge accounting relationships are aligned with
the Company’s risk management objectives and strategy and to apply a more qualitative and forward-looking
approach to assessing hedge effectiveness. The Company’s risk management strategy and hedging activities are
disclosed in Note 33 “Financial Instruments” and Note 34 “Financial Risk Management”.
Changes to Significant Accounting Policies
The following significant accounting policies reflect certain impacts to the presentation of the Company’s annual
consolidated financial statements.
Investment Properties Investment properties are properties owned by the Company that are held to either earn
rental income, for capital appreciation, or both. The Company’s investment properties include single tenant
properties held to earn rental income and certain multi-tenant properties.
The Company elected to change the measurement of investment properties from the cost model to the fair
value model retrospectively with restatement. Refer to the Investment Properties policy for the fair value policy.
Prior to the second quarter of 2018, the Company recognized investment property assets at cost less
accumulated depreciation and any accumulated impairment losses.
The Company applied this change in accounting policy retrospectively in the second quarter of 2018. The
impacts to the Company’s comparative consolidated balance sheets are as follow:
Consolidated Balance Sheets
Increase (Decrease)
($ millions)
Investment Properties
Deferred income tax liabilities
Equity
$
As at
December 31, 2017
41
5
36
$
As at
January 1, 2017
41
5
36
George Weston Limited 2018 Annual Report 107
Notes to the Consolidated Financial Statements
Note 3. Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements requires management to make estimates and
judgments in applying the Company’s accounting policies that affect the reported amounts and disclosures made
in the consolidated financial statements and accompanying notes.
Within the context of these consolidated financial statements, a judgment is a decision made by management
in respect of the application of an accounting policy, a recognized or unrecognized financial statement amount
and/or note disclosure, following an analysis of relevant information that may include estimates and
assumptions. Estimates and assumptions are used mainly in determining the measurement of balances
recognized or disclosed in the consolidated financial statements and are based on a set of underlying data that
may include management’s historical experience, knowledge of current events and conditions and other factors
that are believed to be reasonable under the circumstances. Management continually evaluates the estimates
and judgments it uses.
The following are the accounting policies subject to judgments and key sources of estimation uncertainty that
the Company believes could have the most significant impact on the amounts recognized in the consolidated
financial statements. The Company’s significant accounting policies are disclosed in note 2.
Basis of Consolidation
Judgments Made in Relation to Accounting Policies Applied The Company uses judgment in determining the
entities that it controls and therefore consolidates. The Company controls an entity when the Company has the
existing rights that give it the current ability to direct the activities that significantly affect the entity’s returns.
The Company consolidates all of its wholly owned subsidiaries. Judgment is applied in determining whether the
Company controls the entities in which it does not have ownership rights or does not have full ownership rights.
Most often, judgment involves reviewing contractual rights to determine if rights are participating (giving power
over the entity) or protective rights (protecting the Company’s interest without giving it power).
Inventories
Key Sources of Estimation Inventories are carried at the lower of cost and net realizable value which requires the
Company to utilize estimates related to fluctuations in shrink, future retail prices, the impact of vendor rebates
on cost, seasonality and costs necessary to sell the inventory.
Impairment of non-financial assets (goodwill, intangible assets and fixed assets)
Judgments Made in Relation to Accounting Policies Applied Management is required to use judgment in
determining the grouping of assets to identify their CGUs for the purposes of testing fixed assets for impairment.
Judgment is further required to determine appropriate groupings of CGUs for the level at which goodwill and
intangible assets are tested for impairment. The Company has determined that each retail location is a separate
CGU for purposes of fixed asset impairment testing. For the purpose of goodwill and indefinite life intangible
assets impairment testing, CGUs are grouped at the lowest level at which goodwill and indefinite life intangible
assets are monitored for internal management purposes. In addition, judgment is used to determine whether a
triggering event has occurred requiring an impairment test to be completed.
Key Sources of Estimation In determining the recoverable amount of a CGU or a group of CGUs, various
estimates are employed. The Company determines fair value less costs to sell using such estimates as market
rental rates for comparable properties, recoverable operating costs for leases with tenants, non-recoverable
operating costs, discount rates, capitalization rates and terminal capitalization rates. The Company determines
value in use by using estimates including projected future revenues, earnings and capital investment consistent
with strategic plans presented to the Boards at GWL and Loblaw. Discount rates are consistent with external
industry information reflecting the risk associated with the specific cash flows.
108 George Weston Limited 2018 Annual Report
Impairment of Franchise loans receivable and certain other financial assets
Judgments Made in Relation to Accounting Policies Applied Management reviews franchise loans receivable,
trade receivables and certain other financial assets relating to Loblaw’s franchise business at each balance sheet
date utilizing judgment to determine whether a triggering event has occurred requiring an impairment test to
be completed.
Key Sources of Estimation Management determines the initial fair value of Loblaw’s franchise loans and certain
other financial assets using discounted cash flow models. The process of assessing the recoverability of these
loans and certain other financial assets requires management to make estimates of a long term nature regarding
discount rates, projected revenues and margins, as applicable. These estimates are derived from past
experience, actual operating results and budgets.
Customer Loyalty Awards Programs
Key Sources of Estimation Loblaw defers revenue at the time the award is earned by members based on the
relative fair value of the award. The relative fair value is determined by allocating consideration between the fair
value of the loyalty awards earned by loyalty program members, net of breakage, and the goods and services on
which the awards were earned, based on their relative stand-alone selling price. The estimated fair value per
point for the PC Optimum program is determined based on the program reward schedule and is $1 for every
1,000 points earned. The breakage rate of the program is an estimate of the amount of points that will never be
redeemed. The rate is reviewed on an ongoing basis and is estimated utilizing historical redemption activity and
anticipated earn and redeem behaviour of members.
Impairment of Credit card receivables
Judgments Made in Relation to Accounting Policies Applied In each stage of the impairment model, impairment is
determined based on the probability of default, loss given default, and expected exposures at default on drawn
and undrawn exposures on credit card receivables, discounted using an average portfolio yield rate. The
application of the ECL model requires management to apply the following significant judgments, assumptions
and estimations:
• Movement of impairment measurement between the three stages of the ECL model, based on the
assessment of increase in credit risks on credit card receivables. The assessment of changes in credit risks
includes qualitative and quantitative factors of the accounts, such as historical credit loss experience and
external credit scores;
• Thresholds for significant increase in credit risks based on changes in probability of default over the expected
life of the instrument relative to initial recognition; and
• Forecasts of future economic conditions.
Fair Value of Investment Properties
Key Sources of Estimation The fair value of investment properties is dependent on available comparable
transactions, future cash flows over the holding period, and discount rates and capitalization rates applicable to
those assets. The review of anticipated cash flow involves assumptions relating to occupancy, market rental
rates, net operating expenses, and residual value. In addition to reviewing anticipated cash flows, management
assesses changes in the business climate and other factors, which may affect the ultimate value of the property.
These assumptions may not ultimately be achieved.
Income and other taxes
Judgments Made in Relation to Accounting Policies Applied The calculation of current and deferred income taxes
requires management to make certain judgments regarding the tax rules in jurisdictions where the Company
performs activities. Application of judgments is required regarding the classification of transactions and in
assessing probable outcomes of claimed deductions including expectations about future operating results and
the timing and reversal of temporary differences.
George Weston Limited 2018 Annual Report 109
Notes to the Consolidated Financial Statements
Provisions
Judgments made in Relation to Accounting Policies Applied and Key Sources of Estimation The recording of
provisions requires management to make certain judgments regarding whether there is a present legal or
constructive obligation as a result of a past event, it is probable that the Company will be required to settle the
obligation and if a reliable estimate of the amount of the obligation can be made. The Company has recorded
provisions primarily in respect of restructuring, environmental and decommissioning liabilities, onerous lease
arrangements and legal claims. The Company reviews the merits, risks and uncertainties of each provision, based
on current information, and the amount expected to be required to settle the obligation. Provisions are reviewed
on an ongoing basis and are adjusted accordingly when new facts and events become known to the Company.
Note 4. Future Accounting Standards
The future accounting standard noted below will impact the Company’s business processes, internal controls
over financial reporting, data systems, and information technology (“IT”), as well as financing and compensation
arrangements. As a result, the Company has developed a comprehensive project plan to guide the
implementation.
IFRS 16 In 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”), replacing IAS 17, “Leases” (“IAS 17”) and related
interpretations. The standard introduces a single, on-balance sheet recognition and measurement model for
lessees, eliminating the distinction between operating and finance leases. Lessees recognize a right-of-use asset
representing its control of and right to use the underlying asset and a lease liability representing its obligation to
make future lease payments. Lessor accounting remains similar to IAS 17.
Substantially all of the Company's operating leases are real estate leases for retail stores, production plants,
distribution centers and corporate offices. Other leased assets include passenger vehicles, trucks and IT
equipment. The Company also has owned and leased properties which are leased and subleased to third parties,
respectively. The subleases are mainly related to non-consolidated franchisees, ancillary tenants and gas bar
land.
As a lessee, the Company will recognize right-of-use assets and lease liabilities primarily for its operating leases
of real estate properties, vehicles and equipment. The depreciation expense on right-of-use assets and interest
expense on lease liabilities will replace rent expense, previously recognized on a straight-line basis under IAS 17
over the term of a lease. No significant impacts are expected for the Company’s existing finance leases.
As a lessor, the Company will continue to classify leases as finance and operating leases. The Company will also
reassess the classification of its subleases by reference to the right-of-use assets arising from the head lease and
will recognize a corresponding finance lease receivable if the reassessment concludes that the sublease is a
finance lease. No significant impacts are expected for leases where the Company is the lessor.
IFRS 16 becomes effective for annual periods beginning on or after January 1, 2019. For leases where the
Company is the lessee, it has the option of adopting a fully retrospective approach or a modified retrospective
approach on transition to IFRS 16. The Company has adopted the standard on January 1, 2019 using the
modified retrospective approach. The modified retrospective approach applies the requirements of the standard
retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at
January 1, 2019, and no restatement of the comparative period. Under the modified retrospective approach, the
Company chose to measure all right-of-use assets retrospectively as if the standard had been applied since lease
commencement dates.
IFRS 16 permits the use of exemptions and practical expedients. The Company has applied the following
recognition exemptions and practical expedients:
• grandfather lease definition for existing contracts at the date of initial application;
• exclude low-value and short term leases from IFRS 16 lease accounting;
• use portfolio application for leases with similar characteristics, such as vehicle and equipment leases;
• apply a single discount rate to a portfolio of leases with reasonably similar characteristics at the date of
initial application;
110 George Weston Limited 2018 Annual Report
• exclude initial direct costs from the measurement of the right-of-use assets at the date of initial application;
and
• use hindsight in determining lease term at the date of initial application.
While the standard was adopted on January 1, 2019, the Company continues to assess the impact of the
standard on the Company’s business processes, internal controls over financial reporting, data systems, IT, and
financing and compensation arrangements. The Company has implemented a lease management system and is
in the final stages of refining and validating the inputs and key assumptions used in its calculation of the
cumulative effects of initial application to be recorded in opening retained earnings as at January 1, 2019.
Based on the information currently available, as a result of the initial application of IFRS 16 as at January 1, 2019,
Management anticipates recognizing approximately $4 billion of right-of-use assets and approximately $5 billion
of lease liabilities, inclusive of current finance leases, on its consolidated balance sheet, and derecognizing
approximately $130 million of deferred rent obligation from its consolidated balance sheet, with the difference,
net of the deferred tax impact, recorded in opening retained earnings. Certain other balance sheet accounts are
impacted through reclassification to applicable IFRS 16 balance sheet line items.
The final impacts of the initial application of IFRS 16 may vary from the estimates provided for the following
reasons:
•
the Company has not finalized the assessment and testing of applicable internal controls over financial
reporting; and
the new accounting policies and critical accounting estimates and judgments are subject to change until the
Company issues its first quarter report to shareholders for the 12 weeks ending March 23, 2019.
•
Note 5. Loblaw's Spin-out of Choice Properties Real Estate Investment Trust
On November 1, 2018, the Company and Loblaw completed a reorganization under which Loblaw distributed its
approximate 61.6% effective interest in Choice Properties to the Company on a tax-free basis to Loblaw and its
Canadian shareholders. In connection with the reorganization, Loblaw minority shareholders received 0.135 of a
common share of the Company for each common share of Loblaw held, which was equivalent to the market
value of their pro rata interest in Choice Properties as at the announcement date of the reorganization, and the
Company received Loblaw’s approximate 61.6% effective interest in Choice Properties. Following the
reorganization, Loblaw no longer had an interest in Choice Properties and the Company owned an approximate
65.4% effective interest in Choice Properties directly (which includes the approximate 3.8% interest in Choice
Properties directly owned by the Company prior to the completion of the reorganization).
As a result of the reorganization, Loblaw ceased to consolidate its equity interest in Choice Properties and Choice
Properties became a separate reportable operating segment of the Company. The Loblaw segment results
include transactions between Loblaw and Choice Properties in the current and comparative period, including,
but not limited to, rent payments made by Loblaw to Choice Properties. Following the reorganization, the Loblaw
segment results also include impairment and depreciation of certain assets associated with the retail locations
that are leased from Choice Properties. These transactions are eliminated and the impairment and depreciation
is reversed, as applicable, in Other and Intersegment Eliminations as they are consolidated by the Company.
In connection with the reorganization, the Company issued approximately 26.6 million common shares to Loblaw
minority shareholders. The Company continues to be controlled by Mr. W. Galen Weston who, directly and
indirectly through entities which he controls, owns approximately 53.1% of the outstanding common shares of
the Company.
The Company recorded $20 million in transaction costs and other related costs in 2018.
George Weston Limited 2018 Annual Report 111
Notes to the Consolidated Financial Statements
Note 6. Business Acquisitions
Consolidation of Franchises Loblaw accounts for the consolidation of existing franchises as business
acquisitions. During the year, Loblaw consolidated its franchises as of the date the franchisee entered into a new
simplified franchise agreement with Loblaw. The assets acquired and liabilities assumed through the
consolidation were valued at the acquisition date using fair values, which approximate the franchise carrying
values at the date of acquisition. The results of operations of the acquired franchises were included in Loblaw’s
results of operations from the date of acquisition.
The following table summarizes the amounts recognized for the assets acquired, the liabilities assumed and
the non-controlling interests at the acquisition dates:
($ millions)
Net assets acquired:
Cash and cash equivalents
Inventories
Fixed assets
Trade payables and other liabilities(i)
Other liabilities(i)
Non-controlling interests
Total net assets acquired
2018
$
18
66
78
(36)
(114)
(12)
— $
2017
26
73
81
(43)
(132)
(5)
—
$
$
(i) On consolidation, trade payables and other liabilities and other liabilities eliminate against existing accounts receivable, franchise
loans receivable and franchise investments held by Loblaw.
Choice Properties’ Acquisition of Canadian Real Estate Investment Trust On May 4, 2018, Choice Properties
acquired all the assets and assumed all the liabilities, including outstanding debt, of Canadian Real Estate
Investment Trust (“CREIT”) for total consideration of $3,708 million. The consideration was comprised of
$1,652 million of cash and the issuance of 182,836,481 new Trust Units.
In connection with the acquisition, Choice Properties arranged a new $1,500 million committed revolving credit
facility. Concurrent with the closing of the acquisition, Choice Properties repaid and cancelled its existing credit
facilities and those acquired from CREIT (note 24).
Also, concurrent with the closing of the acquisition, Loblaw, Choice Properties’ controlling unitholder, converted
all of its outstanding Class C LP Units with the face value of $925 million into Class B LP Units of Choice Properties
Limited Partnership. Choice Properties issued to Loblaw 70,881,226 Class B LP Units upon the conversion and the
shortfall in value of $99 million was paid in cash. In connection with this conversion, the Company recognized
capital gains income tax expense of $8 million in contributed surplus.
The cash portion of the acquisition and other transactions in relation to CREIT was financed as follows:
• $1,300 million of proceeds from the issuance of senior unsecured debentures Series K and L (note 24); and
• $800 million unsecured term loan facilities (note 24).
112 George Weston Limited 2018 Annual Report
The purchase equation is based on management’s best estimate of fair value. The actual amount allocated to
certain identifiable net assets could vary as the purchase equation is finalized. Choice Properties has one year
from the acquisition date to finalize the fair value of the assets acquired and the liabilities assumed and does not
expect significant changes from the amounts presented below:
($ millions)
Net Assets Acquired:
Cash and cash equivalents
Accounts receivable and other assets
Mortgages, loans and notes receivable(i)
Equity accounted joint ventures
Investment properties
Intangible assets
Goodwill
Trade payables and other liabilities
Long term debt
Deferred income tax liabilities
Total Net Assets Acquired
As at
May 4, 2018
$
$
32
50
196
683
4,730
30
367
(172)
(1,841)
(367)
3,708
(i)
Included in other assets in the audited consolidated balance sheets.
The goodwill is generated on consolidation of Choice Properties and is attributable to deferred income tax
recorded on temporary differences arising between the fair value of the investment properties acquired and
their respective income tax bases for the Company’s effective ownership interest in Choice Properties. The
goodwill arising from this acquisition is not deductible for tax purposes. Management has allocated this goodwill
to Loblaw segment for impairment testing.
As at December 31, 2018, on a year-to-date basis, Choice Properties incurred costs totaling $141 million related
to the acquisition of CREIT, which were recorded in SG&A.
Included in the consolidated financial statements, on a year-to-date basis, is $274 million in revenue and
$192 million of operating income related to CREIT since the date of acquisition, excluding the impact of
acquisition transaction costs and any adjustment to the fair value of the investment properties acquired.
On a year-to-date pro forma basis, the impact of the CREIT acquisition on the Company’s revenue and net
income attributable to shareholders of the Company in 2018 would have amounted to approximately
$409 million and $5 million, respectively, excluding the impact of acquisition transaction costs and other related
expenses and any adjustment to the fair value of the investment properties acquired. This pro forma information
incorporates the effect of the preliminary purchase equation as if the acquisition had been effective
January 1, 2018.
Investment Properties As part of the acquisition of CREIT, Choice Properties acquired investment properties of
$4.7 billion, of which a sample of 78 investment properties and equity accounted investments, representing
$2.7 billion of the value, were independently appraised. In addition, Choice Properties has engaged independent
nationally-recognized valuation firms to appraise the investment properties such that substantially all of the
portfolio will be independently appraised at least once over a five-year period.
Joint Ventures Choice Properties accounts for its investments in joint ventures using the equity method. These
investments hold development properties and some income-producing properties. As part of the acquisition of
CREIT, Choice Properties acquired 23 equity accounted joint ventures.
Co-Ownership Property Interests Choice Properties acquired 45 co-owned property interests, joint operations,
as part of the acquisition of CREIT. Choice Properties’ proportionate share of the related assets, liabilities,
revenue and expenses of these properties are included in the consolidated financial statements.
George Weston Limited 2018 Annual Report 113
Notes to the Consolidated Financial Statements
Note 7. Net Interest Expense and Other Financing Charges
The components of net interest expense and other financing charges were as follows:
($ millions)
Interest expense:
Long term debt(i)
Borrowings related to credit card receivables
Trust Unit distributions(ii)
Independent funding trusts
Post-employment and other long term employee benefits (note 29)
Bank indebtedness
Capitalized interest (capitalization rate 4.0% (2017 - 3.5%)) (note 15 & 18)
Interest income:
Accretion income
Short term interest income
Forward sale agreement(iii)
Fair value adjustment of the Trust Unit liability (note 33)
Charge related to Glenhuron Bank Limited (note 8)
Net interest expense and other financing charges
2018
2017
$
$
$
$
$
636
41
126
19
12
8
(6)
836
(5)
(43)
(48)
25
(41)
176
948
$
$
$
$
$
518
30
35
16
11
6
(2)
614
(10)
(25)
(35)
(49)
(7)
—
523
Includes interest on debt assumed from the acquisition of CREIT.
(i)
(ii) Choice Properties issued 182,836,481 new trust units to trust unitholders other than the Company and Loblaw in connection with
the acquisition of CREIT (note 6).
(iii) Included a charge of $50 million (2017 – income of $25 million) related to the fair value adjustment of the forward sale agreement
for 9.6 million Loblaw common shares (see note 33). The fair value adjustment of the forward sale agreement is non-cash and
results from changes in the value of the underlying Loblaw common shares. At maturity, any cash paid under the forward sale
agreement could be offset by the sale of the underlying Loblaw common shares. Also included is forward accretion income
of $47 million (2017 – $42 million), and the forward fee of $22 million (2017 – $18 million), associated with the forward sale
agreement.
114 George Weston Limited 2018 Annual Report
Note 8.
Income Taxes
The components of income taxes recognized in the consolidated statements of earnings were as follows:
($ millions)
Current income taxes
Current period
Charges related to Glenhuron
Adjustment in respect of prior periods
Deferred income taxes
Origination and reversal of temporary differences
Effect of change in income tax rates
Adjustment in respect of prior periods
Income taxes
Income tax expense recognized in other comprehensive income was as follows:
($ millions)
Net defined benefit plan actuarial losses (gains) (note 29)
Adjustment to fair value on transfer of investment properties
Total income tax (recoveries) recognized in Other
comprehensive income
2018
584
191
(70)
(89)
(62)
85
639
2018
34
5
39
$
$
$
$
2017
679
—
8
(205)
(36)
3
449
2017
(8)
—
(8)
$
$
$
$
The effective income tax rates in the consolidated statements of earnings were reported at rates different than
the weighted average basic Canadian federal and provincial statutory income tax rates for the following reasons:
Weighted average basic Canadian federal and provincial statutory
income tax rate
Net (decrease) increase resulting from:
Effect of tax rate in foreign jurisdictions
Charges related to Glenhuron
Impact of foreign currency translation
Non-taxable and non-deductible amounts
Impact of fair value adjustment of Trust Unit liability
Impact of income tax rate changes on deferred income tax balances
Adjustments in respect of prior periods
Other
Effective income tax rate applicable to earnings before income taxes
2018
26.6%
(1.0)
11.7
(0.2)
4.9
(0.7)
(3.8)
1.4
0.1
39.0%
2017
26.7%
(0.3)
—
0.2
(3.5)
(0.1)
(1.8)
0.7
0.1
22.0%
On September 7, 2018, the Tax Court of Canada (“Tax Court”) released its decision relating to Glenhuron Bank
Limited (“Glenhuron”), a wholly-owned Barbadian subsidiary of Loblaw that was wound up in 2013. The Tax
Court ruled that certain income earned by Glenhuron should be taxed in Canada based on a technical
interpretation of the applicable legislation.
On October 4, 2018, Loblaw filed a Notice of Appeal with the Federal Court of Appeal. Although Loblaw believes
in the merits of its position, it has recorded a charge during the third quarter of $367 million, of which
$176 million was recorded in interest and $191 million was recorded in income taxes. Loblaw believes that this
provision will be sufficient to cover its ultimate liability if the appeal is unsuccessful.
George Weston Limited 2018 Annual Report 115
Notes to the Consolidated Financial Statements
In the third quarter of 2018, Loblaw made a cash payment of $235 million to fund the tax and interest owing in
light of the decision of the Tax Court.
In 2018, voting control of Loblaw was acquired by a related group, which included Weston and Wittington, which
resulted in certain adjustments for tax purposes during the first quarter of 2018.
Deferred income tax assets which were not recognized on the consolidated balance sheets were as follows:
($ millions)
Deductible temporary differences
Income tax losses and credits
Unrecognized deferred income tax assets
As at
Dec. 31, 2018
26
$
164
190
$
Dec. 31, 2017
28
$
160
188
$
The income tax losses and credits expire in the years 2026 to 2038. The deductible temporary differences do not
expire under current income tax legislation. Deferred income tax assets were not recognized in respect of these
items because it is not probable that future taxable income will be available to the Company to utilize the
benefits.
Deferred income tax assets and liabilities recognized on the consolidated balance sheets were attributable to the
following:
($ millions)
Trade payables and other liabilities
Other liabilities
Fixed assets
Goodwill and intangible assets
Other assets
Non-capital losses carried forward (expiring 2026 to 2038)
Capital losses carried forward
Other
Net deferred income tax liabilities
Recorded on the consolidated balance sheets as follows:
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liabilities
As at
Dec. 31, 2018
69
$
352
(1,062)
(1,820)
49
174
8
1
(2,229)
$
Dec. 31, 2017
69
$
404
(591)
(1,936)
53
133
21
(69)
(1,916)
$
$
$
286
(2,515)
(2,229)
$
$
247
(2,163)
(1,916)
116 George Weston Limited 2018 Annual Report
Note 9. Basic and Diluted Net Earnings per Common Share
($ millions except where otherwise indicated)
Net earnings attributable to shareholders of the Company
Prescribed dividends on preferred shares in share capital
Net earnings available to common shareholders of the Company
Reduction in net earnings due to dilution at Loblaw
Net earnings available to common shareholders for diluted earnings per share
Weighted average common shares outstanding (in millions) (note 26)
Dilutive effect of share-based compensation(ii)
Weighted average common shares outstanding(iii) (in millions)
Basic net earnings per common share ($)
Diluted net earnings per common share ($)
(in millions)
$
$
$
$
$
2018
574
(44)
530
(2)
528
131.8
0.4
132.2
4.02
3.99
$
$
$
$
$
2017(i)
766
(44)
722
(6)
716
127.7
0.6
128.3
5.65
5.58
(i) Certain comparative figures have been restated (note 2).
(ii) Excluded from the computation of diluted net earnings per common share were 674,981 (2017 – 450,042) potentially dilutive
instruments, as they were anti-dilutive.
(iii) Includes impact of dilutive instruments for purposes of calculating diluted net earnings per common share.
Note 10. Cash and Cash Equivalents, Short Term Investments and Security Deposits
The components of cash and cash equivalents, short term investments and security deposits were as follows:
Cash and Cash Equivalents
($ millions)
Cash
Cash equivalents:
Bankers’ acceptances
Government treasury bills
Corporate commercial paper
Cash and cash equivalents
Short Term Investments
($ millions)
Bankers’ acceptances
Government treasury bills
Corporate commercial paper
Government agency securities
Other
Short term investments
As at
Dec. 31, 2018
661
$
Dec. 31, 2017
655
$
258
405
197
1,521
$
685
237
457
2,034
$
As at
Dec. 31, 2018
85
$
143
52
—
1
281
$
Dec. 31, 2017
341
$
297
442
31
2
1,113
$
George Weston Limited 2018 Annual Report 117
Notes to the Consolidated Financial Statements
Security Deposits
($ millions)
Cash
Government treasury bills
Security deposits
As at
Dec. 31, 2018
48
$
39
87
$
Dec. 31, 2017
48
$
38
86
$
As at year end 2018, GWL and Loblaw had agreements to cash collateralize certain uncommitted credit facilities
up to amounts of $45 million (2017 – $45 million) and $103 million (2017 – $102 million), respectively. As at year
end 2018, GWL and Loblaw had $45 million (2017 – $45 million) and $2 million (2017 – $3 million) deposited
with major financial institutions, respectively, and classified as security deposits on the consolidated balance
sheets.
Note 11. Accounts Receivable
The following is an aging of the Company’s accounts receivable:
As at
($ millions)
Accounts receivable
0 - 90 days
$
1,188 $
53 $
> 90 days
> 180 days
0 - 90 days
> 90 days
> 180 days
$
1,224 $
45 $
Dec. 31, 2018
Total
1,309
68 $
Dec. 31, 2017
Total
1,324
55 $
The following are continuities of the Company’s allowances for uncollectable accounts receivable:
($ millions)
Allowance, beginning of year
Net write-offs
Allowance, end of year
2018
(57)
23
(34)
$
$
2017
(75)
18
(57)
$
$
Credit risk associated with accounts receivable is discussed in note 34.
118 George Weston Limited 2018 Annual Report
Note 12. Credit Card Receivables
The components of credit card receivables were as follows:
($ millions)
Gross credit card receivables
Allowance for credit card receivables(i)
Credit card receivables
Securitized to independent securitization trusts:
(note 24)
Securitized to Eagle Credit Card Trust®
Securitized to Other Independent Securitization Trusts (note 23)
Total securitized to independent securitization trusts
As at
Dec. 31, 2018
3,496
$
(167)
3,329
$
Dec. 31, 2017
3,147
$
(47)
3,100
$
$
$
750
915
1,665
$
$
900
640
1,540
(i) Allowance on credit card receivables as at December 31, 2018 includes the impact of the implementation of IFRS 9 (note 2).
Loblaw, through PC Bank, participates in various securitization programs that provide a source of funds for the
operation of its credit card business. PC Bank maintains and monitors the co-ownership interest in credit card
receivables with independent securitization trusts, including Eagle and the Other Independent Securitization
Trusts, in accordance with its financing requirements.
Loblaw has arranged letters of credit on behalf of PC Bank for the benefit of the Independent Securitization
Trusts (see note 36).
Under its securitization programs, PC Bank is required to maintain, at all times, a credit card receivable pool
balance equal to a minimum of 107% of the outstanding securitized liability. PC Bank was in compliance with
this requirement as at year end 2018 and throughout the year.
The following is an aging of gross credit card receivables:
As at
Dec. 31, 2018
Dec. 31, 2017
($ millions)
Gross credit card receivables
Current
$ 3,280 $
187 $
Total
29 $ 3,496
Current
$ 2,951 $
169 $
Total
27 $ 3,147
1-90 days > 90 days
past due
past due
1-90 days
past due
> 90 days
past due
George Weston Limited 2018 Annual Report 119
Notes to the Consolidated Financial Statements
The following is a continuity of Loblaw’s allowance for credit card receivables:
($ millions)
Balance, beginning of the year per IAS 39
IFRS 9 Adjustment(i)
Balance, beginning of the year per IFRS 9
Increase/ (Decrease) during the period:
Transfers(ii)
To Stage 1
To Stage 2
To Stage 3
New loans originated(iii)
New remeasurements(iv)
Write-offs
Recoveries
Balance, end of year
As at December 31, 2018
Stage 1
Stage 2
Stage 3
— $
—
51
$
— $
—
71
$
— $
—
23
$
26
(4)
(1)
9
(19)
—
—
62
$
(26)
6
(14)
14
29
—
—
80
$
—
(2)
15
3
80
(120)
26
25
$
$
$
$
Total
47
98
145
—
—
—
26
90
(120)
26
167
(i) Allowance at the beginning of 2018 includes the impact of the implementation of IFRS 9 (note 2).
(ii) Transfers reflect allowance movements between stages for loans that were recognized as of the beginning of the year.
(iii) New loans originated reflect the stage of loan, and the related loan balance, as of the end of the year.
(iv) New remeasurement of loss allowance includes impact from changes in loan balances and credit quality during the year.
Credit card receivables are assessed collectively for impairment by applying the three-stage approach (note 2).
The allowances for credit card receivables recorded in credit card receivables on the consolidated balance sheets
are maintained at a level which is considered adequate to absorb credit related losses on credit card receivables.
Note 13. Inventories
The components of inventories were as follows:
($ millions)
Raw materials and supplies
Finished goods
Inventories
As at
Dec. 31, 2018
68
$
4,933
5,001
$
Dec. 31, 2017
72
$
4,551
4,623
$
As at year end 2018, inventories included a charge of $37 million (2017 – $39 million) recorded by Loblaw for the
write-down of inventories below cost to net realizable value. The write-down was included in cost of inventories
sold in the consolidated statements of earnings. There were no reversals of previously recorded write-downs of
inventories during 2018 and 2017.
120 George Weston Limited 2018 Annual Report
Note 14. Assets Held for Sale and Disposition
Loblaw classifies certain assets, primarily land and buildings, that it intends to dispose of in the next 12 months,
as assets held for sale. These assets were previously used in Loblaw’s retail business segment. In 2018, Loblaw
recorded a nominal loss (2017 – $1 million gain) from the sale of these assets. Impairment charges of $3 million
were recognized on these properties during 2018 (2017 – $2 million).
In 2017, Loblaw sold its gas bar operations, for proceeds of approximately $540 million, to Brookfield Business
Partners L.P. (“Brookfield”). Loblaw recorded a pre-tax gain on sale of $501 million (post-tax gain of $432 million),
net of related costs, in SG&A. As a result of the transaction, Brookfield has become a strategic partner to Loblaw
and will offer Loblaw’s PC Optimum program at the gas bars. In addition, the gas bars operate at certain
properties that are either owned by Loblaw or leased by Loblaw from Choice Properties or third-party landlords.
As a result of the transaction, Brookfield leases or sub-leases these properties from Loblaw.
Note 15. Fixed Assets
The following is a continuity of the cost and accumulated depreciation and impairment losses of fixed assets for
the year ended December 31, 2018:
($ millions)
Cost, beginning of year
Additions
Disposals
Transfer to assets held for sale
Net transfer from investment properties
(note 16)
Transfer from assets under construction
Business acquisitions (note 6)
Impact of foreign currency translation
Cost, end of year
Accumulated depreciation and
impairment losses, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer to assets held for sale
Transfer to investment properties (note 16)
Impact of foreign currency translation
Accumulated depreciation and
impairment losses, end of year
Carrying amount as at:
December 31, 2018
$
$
$
$
$
Buildings
and
Building
Improvements
Land
Equipment
and
fixtures
Leasehold
improvements
2,016 $
59
(34)
(15)
45
52
—
1
2,124 $
8,560 $
38
(10)
(15)
8,452 $
301
(100)
—
22
—
261
—
19
8,875 $
382
78
51
9,164 $
2,089 $
121
(21)
—
(3)
17
—
—
2,203 $
Finance
leases -
land,
buildings,
equipment
and fixtures
Assets
under
construction
Total
937 $
20
(6)
—
—
—
—
—
951 $
705 $ 22,759
1,249
710
(175)
(4)
(30)
—
—
64
(712)
—
8
—
78
79
707 $ 24,024
2 $
3,314 $
6,177 $
1,077 $
492 $
8 $ 11,070
—
—
(1)
1
—
—
—
237
20
(35)
(30)
(1)
(6)
6
516
19
(1)
(80)
—
—
28
156
20
(11)
(23)
—
(3)
—
45
3
—
—
—
—
—
(1)
(5)
—
(1)
—
—
—
953
57
(48)
(133)
(1)
(9)
34
2 $
3,505 $
6,659 $
1,216 $
540 $
1 $ 11,923
2,122 $
5,370 $
2,505 $
987 $
411 $
706 $ 12,101
George Weston Limited 2018 Annual Report 121
Notes to the Consolidated Financial Statements
The following is a continuity of the cost and accumulated depreciation and impairment losses of fixed assets for
the year ended December 31, 2017:
($ millions)
Cost, beginning of year
Additions
Disposals
Transfer to assets held for sale
Net transfer to investment properties
(note 16)
Transfer from assets under construction
Business acquisitions
Impact of foreign currency translation
Cost, end of year
Accumulated depreciation and
impairment losses, beginning of year
Depreciation
Impairment losses
Reversal of impairment losses
Disposals
Transfer to assets held for sale
Net transfer to investment properties
(note 16)
Impact of foreign currency translation
Accumulated depreciation and
impairment losses, end of year
Carrying amount as at:
December 31, 2017
Buildings
and
Building
Improvements
Land
Equipment
and
fixtures
Leasehold
improvements
1,954 $
21
(2)
—
1
43
—
(1)
2,016 $
8,327 $
54
(10)
(93)
7,856 $
238
(50)
(49)
5
—
292
—
(15)
8,560 $
413
81
(37)
8,452 $
1,977 $
98
(17)
(3)
—
33
1
—
2,089 $
Finance
leases -
land,
buildings,
equipment
and fixtures
Assets
under
construction
Total
920 $
15
—
—
2
—
—
—
937 $
755 $ 21,789
1,163
737
(79)
—
(145)
—
—
8
(781)
—
(6)
—
82
(59)
705 $ 22,759
— $
3,121 $
5,806 $
910 $
410 $
8 $ 10,255
—
1
—
—
—
1
—
220
17
(8)
(9)
(25)
2
(4)
463
18
(2)
(41)
(46)
—
(21)
165
21
(2)
(16)
(1)
—
—
64
18
—
—
—
—
—
—
—
—
—
—
—
—
912
75
(12)
(66)
(72)
3
(25)
2 $
3,314 $
6,177 $
1,077 $
492 $
8 $ 11,070
2,014 $
5,246 $
2,275 $
1,012 $
445 $
697 $ 11,689
$
$
$
$
$
Assets Held under Finance Leases The Company leases various land and buildings and equipment and fixtures
under a number of finance lease arrangements. As at year end 2018, the net carrying amount of leased land
and buildings was $385 million (2017 – $424 million) and the net carrying amount of leased equipment and
fixtures was $17 million (2017 – $21 million).
Assets under Construction The cost of additions to properties under construction for 2018 was $710 million
(2017 – $737 million). Included in this amount were capitalized borrowing costs of $6 million (2017 – $2 million)
with a weighted average capitalization rate of 4.0% (2017 – 3.5%) (see note 7).
Security and Assets Pledged As at year end 2018, no fixed assets were encumbered by mortgages. As at
December 31, 2017, fixed assets with a carrying amount of $187 million were encumbered by mortgages of $81
million (see note 24).
Fixed Asset Commitments As at year end 2018, the Company had entered into commitments of $310 million
(2017 – $201 million) for the construction, expansion and renovation of buildings and the purchase of real
property.
122 George Weston Limited 2018 Annual Report
Impairment Losses and Reversals In 2018, the Company recorded $50 million (2017 – $60 million) of
impairment losses on fixed assets in respect of 23 CGUs (2017 – 21 CGUs). The recoverable amount was based
on the greater of the CGU’s fair value less costs to sell and its value in use. Approximately 26% (2017 – 29%) of
impaired CGUs had carrying values which were $16 million (2017 – $11 million) greater than their fair value less
costs to sell. The remaining 74% (2017 – 71%) of impaired CGUs had carrying values which were $34 million
(2017 – $48 million) greater than their value in use.
In 2018, the Company recorded $48 million (2017 – $12 million) of impairment reversals on fixed assets in
respect of 38 CGUs (2017 – seven CGUs). Impairment reversals are recorded where the recoverable amount of
the retail location exceeds its carrying amount. Approximately 34% (2017 – 57%) of CGUs with impairment
reversals had fair value less costs to sell greater than than their carrying values which were $13 million (2017 –
$6 million). The remaining 66% (2017 – 43%) of CGUs with impairment reversals had value in use which were
$35 million (2017 – $5 million) greater than their carrying values.
When determining the value in use of a retail location, the Company develops a discounted cash flow model for
each CGU. The duration of the cash flow projections for individual CGUs varies based on the remaining useful life
of the significant assets within the CGU. Sales forecasts for cash flows are based on actual operating results,
operating budgets, and long term growth rates that were consistent with industry averages, all of which are
consistent with strategic plans presented to GWL’s and Loblaw’s Board. The estimate of the value in use of the
relevant CGUs was determined using a pre-tax discount rate of 8.0% to 8.5% at the end of 2018 (2017 – 8.0% to
8.5%).
Additional impairment losses of $7 million (2017 – $5 million) were incurred related to Loblaw’s store closures,
renovations and conversions of retail locations. Impairment losses are recorded where the carrying amount of
the retail location exceeds its recoverable amount.
In 2017, Loblaw recorded $7 million of impairment losses on its fixed assets relating to the announced closures
of approximately 22 unprofitable retail locations across a range of banners and formats and $3 million related to
other restructuring plans.
Note 16. Investment Properties
The following are continuities of investment properties for the years ended December 31, 2018 and
December 31, 2017:
($ millions)
Balance, beginning of the year
Adjustment to fair value on transfer of investment properties
Additions
Business acquisitions (note 6)
Disposals
Impairment losses
Net transfer to fixed assets(i) (note 15)
Net transfer (to) from assets held for sale
Other
Balance, end of the year
2018
276
(48)
78
4,730
(127)
(4)
(62)
(2)
6
4,847
$
$
2017(5)
261
(2)
32
—
(7)
(1)
(5)
1
(3)
276
$
$
(i)
Includes the fair value gain of $21 million related to transfer of fixed assets to investment properties.
George Weston Limited 2018 Annual Report 123
Notes to the Consolidated Financial Statements
During 2018, the Company recognized in operating income $329 million (2017 – $11 million) of rental revenue
and incurred direct operating costs of $108 million (2017 – $10 million) related to its investment properties. In
addition, the Company recognized direct operating costs of $3 million (2017 – $2 million) related to its
investment properties for which no rental revenue was earned.
Independent Appraisals
Properties are typically independently appraised at the time of acquisition. As part of the Choice Properties’
acquisition of the CREIT’s portfolio, a sample of investment properties were independently appraised. In
addition, Choice Properties has engaged independent nationally-recognized valuation firms to appraise its
investment properties such that substantially all of the portfolio will be independently appraised at least once
over a four-year period. When an independent appraisal is obtained, the internal valuation team assesses all
major inputs used by the independent valuators in preparing their reports and holds discussions with them on
the reasonableness of their assumptions. The reports are then used by the internal valuation team for
consideration in preparing the valuations as reported in these consolidated financial statements.
Internal Appraisals
The investment properties were measured at fair value, which was primarily determined by using the discounted
cash flow method. Under the discounted cash flow methodology, discount rates were applied to the projected
annual operating cash flows, generally over a minimum term of ten years, including a terminal value of the
investment properties based on a capitalization rate applied to the estimated net operating income, a non-GAAP
measure, in the terminal year.
Choice Properties’ management reviews the valuation processes and results prepared by the internal valuation
team at least once per quarter. On a quarterly basis, the valuation team reviews and updates, as deemed
necessary, the valuation models to reflect current market data. Updates may be made to capitalization rates,
discount rates, market rents, as well as current leasing and/or development activity, renewal probability,
downtime on lease expiry, vacancy allowances, and expected maintenance costs.
124 George Weston Limited 2018 Annual Report
Note 17. Equity Accounted Joint Ventures
Choice Properties accounts for its investments in joint ventures using the equity method. These investments hold
primarily development properties and some income-producing properties. The table below summarize Choice
Properties’ investment in joint ventures.
2018
Ownership
interest
25% - 75%
50% - 85%
47% - 50%
40%
Number of
joint
ventures
16
4
3
1
24
Number of
joint
ventures
—
—
—
1
1
2017
Ownership
interest
—
—
—
40%
$
734
$
19
Retail
Industrial
Residential
Mixed-use
Total equity accounted joint ventures
The Company’s investment in equity
accounted joint ventures ($ million)
Note 18. Intangible Assets
The following is a continuity of the cost and accumulated amortization and impairment losses of intangible
assets for the year ended December 31, 2018:
Indefinite
life
intangible
assets
Definite life
internally
generated
intangible
assets
Definite
life
trademarks
and brand
names
($ millions)
Cost, beginning of year
Additions
Business acquisitions
Disposal
Write-off cost of fully amortized assets
Impact of foreign currency translation
Cost, end of year
Accumulated amortization and impairment
losses, beginning of year
Amortization
Impairment losses
Disposal
Write-off amortization of fully
amortized assets
Impact of foreign currency translation
Accumulated amortization and impairment
losses, end of year
Carrying amount as at:
December 31, 2018
$
$
$
$
$
3,485 $
4
30
—
—
—
3,519 $
— $
—
—
—
—
—
20 $
—
—
—
—
—
20 $
20 $
—
—
—
—
—
Other
definite
life
intangible
assets
6,147 $
8
25
(2)
(11)
7
6,174 $
Software
2,458 $
331
—
(5)
—
5
2,789 $
Total
12,130
343
55
(7)
(11)
12
12,522
20 $
—
—
—
—
—
20 $
9 $
1,576 $
2,157 $
3,762
1
—
—
—
—
269
11
(4)
—
—
534
1
(1)
(11)
2
804
12
(5)
(11)
2
— $
20 $
10 $
1,852 $
2,682 $
4,564
3,519 $
— $
10 $
937 $
3,492 $
7,958
George Weston Limited 2018 Annual Report 125
Notes to the Consolidated Financial Statements
The following is a continuity of the cost and accumulated amortization and impairment losses of intangible
assets for the year ended December 31, 2017:
($ millions)
Cost, beginning of year
Additions
Business acquisitions
Disposal
Write-off cost of fully amortized assets
Impact of foreign currency translation
Cost, end of year
Accumulated amortization and impairment
losses, beginning of year
Amortization
Impairment losses
Disposals
Write-off amortization of fully
amortized assets
Impact of foreign currency translation
Accumulated amortization and impairment
losses, end of year
Carrying amount as at:
December 31, 2017
$
$
$
$
$
Indefinite
life
intangible
assets
Definite life
internally
generated
intangible
assets
Definite
life
trademarks
and brand
names
3,475 $
10
—
—
—
—
3,485 $
20 $
—
—
—
—
—
20 $
25 $
—
—
(5)
—
—
20 $
Other
definite
life
intangible
assets
6,125 $
8
27
—
(6)
(7)
6,147 $
Software
2,180 $
279
—
—
—
(1)
2,458 $
Total
11,825
297
27
(5)
(6)
(8)
12,130
— $
20 $
8 $
1,300 $
1,622 $
2,950
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
247
29
—
—
—
532
11
—
(6)
(2)
780
40
—
(6)
(2)
— $
20 $
9 $
1,576 $
2,157 $
3,762
3,485 $
— $
11 $
882 $
3,990 $
8,368
Indefinite Life Intangible Assets Indefinite life intangible assets recorded by Loblaw are comprised of brand
names, trademarks, import purchase quotas and certain liquor licenses. The brand names and trademarks are a
result of Loblaw’s acquisition of Shoppers Drug Mart and T&T Supermarket Inc. Loblaw expects to renew the
registration of the brand names, trademarks, import purchase quotas and liquor licenses at each expiry date
indefinitely, and expects these assets to generate economic benefit in perpetuity. As such, Loblaw assessed these
intangibles to have indefinite useful lives.
The Company completed its annual impairment tests for indefinite life intangible assets and concluded there was
no impairment.
Key Assumptions The key assumptions used to calculate the fair value less costs to sell are those regarding
discount rates, growth rates and expected changes in margins. These assumptions are consistent with the
assumptions used to calculate fair value less costs to sell for goodwill (see note 19).
Software Software is comprised of software purchases and development costs. There were no capitalized
borrowing costs included in 2018 (2017 – nil). In 2017, Loblaw recorded impairment losses of $29 million, which
included $22 million related to the impairment of certain IT assets that support the existing loyalty programs as a
result of the customer loyalty awards program.
Other Definite Life Intangible Assets Other definite life intangible assets recorded by Loblaw primarily consist of
prescription files, the customer loyalty awards program and customer relationships.
126 George Weston Limited 2018 Annual Report
Note 19. Goodwill
The following are continuities of the cost and accumulated amortization and impairment losses of goodwill:
($ millions)
Cost, beginning of year
Business acquisitions (note 6)
Impact of foreign currency translation
Cost, end of year
Accumulated amortization and impairment losses, beginning of year
Impairment loss
Accumulated amortization and impairment losses, end of year
Carrying amount as at:
December 31
The carrying amount of goodwill attributed to each CGU grouping was as follows:
($ millions)
Weston Foods
Shoppers Drug Mart
Market
Discount
T&T Supermarket Inc.
Other
Carrying amount of goodwill
2018
5,444
387
17
5,848
1,067
—
1,067
4,781
$
$
$
$
$
$
$
$
$
$
2017
5,431
27
(14)
5,444
1,067
—
1,067
4,377
As at
Dec. 31, 2018
312
$
2,972
375
459
129
534
4,781
$
Dec. 31, 2017
295
$
2,952
375
459
129
167
4,377
$
The Company completed its annual impairment tests for goodwill and concluded that there was no impairment.
Key Assumptions The key assumptions used to calculate the fair value less costs to sell are those regarding
discount rates, growth rates and expected changes in margins. These assumptions are considered to be Level 3
in the fair value hierarchy.
The weighted average cost of capital was determined to be 7.0% to 9.3% (2017 – 7.0%) and was based on a risk-
free rate, an equity risk premium adjusted for betas of comparable publicly traded companies, an unsystematic
risk premium, an after-tax cost of debt based on corporate bond yields and the capital structure of comparable
public traded companies.
Cash flow projections were discounted using a rate derived from the Company’s after-tax weighted average
cost of capital. As at year end 2018, the after-tax discount rate used in the recoverable amount calculations was
7.0% to 9.3% (2017 – 7.1%). The pre-tax discount rate was 9.5% to 12.7% (2017 – 9.7%).
The Company included a minimum of three years of cash flows in its discounted cash flow model. The cash
flow forecasts were extrapolated beyond the three year period using an estimated long term growth rate of 2.0%
(2017 – 2.0%). The budgeted adjusted EBITDA(i) growth was based on the strategic plans approved by GWL’s and
Loblaw’s Boards.
(i) Excludes certain items and is used internally by management when analyzing segment underlying operating performance.
George Weston Limited 2018 Annual Report 127
Notes to the Consolidated Financial Statements
Note 20. Other Assets
The components of other assets were as follows:
($ millions)
Fair value of equity forward (note 33)
Sundry investments and other receivables
Net accrued benefit plan asset (note 29)
Mortgages, loans and notes receivable(i)
Other
Total Other Assets
Current portion of mortgages, loans and receivables(ii)
Other assets
As at
Dec. 31, 2018
556
$
31
233
187
179
1,186
99
1,087
$
$
Dec. 31, 2017
435
$
56
154
29
201
875
26
849
$
$
In connection with the acquisition of CREIT, the Company assumed mortgages, loans and notes receivable of $196 million (note 6).
(i)
(ii) Current portion of mortgages, loans and notes receivable are included in prepaid expenses and other assets in the consolidated
balance sheets.
Note 21. Customer Loyalty Awards Program Liability
The liability associated with Loblaw’s customer loyalty awards programs (“loyalty liability”) is included in trade
payables and other liabilities. The carrying amount of the loyalty liability was as follows:
($ millions)
Loyalty liability
Dec. 31, 2018
228
$
Dec. 31, 2017
349
$
The majority of the Company’s loyalty liability, which is a contract liability, is expected to be redeemed and
recognized as revenue within one year of issuance.
In 2018, Loblaw launched the PC Optimum program, which combined the Shoppers Optimum and PC Plus
rewards programs into one program. As a result, Loblaw recorded a charge of $165 million in 2017, related to the
revaluation of the existing Shoppers Optimum liability for outstanding points to reflect a higher anticipated
redemption rate under the new program.
Note 22. Provisions
Provisions consist primarily of amounts recorded in respect of restructuring, self-insurance, environmental and
decommissioning liabilities, onerous lease arrangements, legal claims, the Loblaw Card Program and a MEPP
withdrawal liability.
The following are continuities of provisions for the years ended December 31, 2018 and December 31, 2017:
($ millions)
Provisions, beginning of year
Additions
Payments
Reversals
Impact of foreign currency translation
Provisions, end of year
128 George Weston Limited 2018 Annual Report
2018
515
151
(257)
(41)
4
372
$
$
2017
281
379
(112)
(29)
(4)
515
$
$
($ millions)
Carrying amount of provisions recorded in:
Current provisions
Non-current provisions
Provisions
As at
Dec. 31, 2018
Dec. 31, 2017
$
$
205
167
372
$
$
325
190
515
The Company’s accrued insurance liabilities were $83 million (2017 – $84 million), of which $48 million
(2017 – $48 million) was included in non-current provisions and $35 million (2017 – $36 million) in current
provisions. Included in total accrued insurance liabilities were $23 million (2017 – $22 million) of U.S. workers’
compensation liabilities. The related cost and accrued workers’ compensation liabilities are based on actuarial
valuations which are dependent on assumptions determined by management. The discount rate used in
determining the 2018 U.S. workers’ compensation cost and liability was 2.0% (2017 – 2.0%). The total workers’
compensation liability is equal to the ultimate actuarial loss estimate less any actual losses paid to date. Any
change in the workers’ compensation liability is recognized immediately in operating income.
In 2018, the U.S. workers’ compensation cost associated with the worker’s compensation liabilities was
$4 million (2017 – $6 million).
Competition Bureau Investigation In 2017, the Company and Loblaw announced actions taken to address their
role in an industry-wide price-fixing arrangement involving certain packaged bread products. In connection with
the arrangements, Loblaw offered customers a $25 Loblaw Card, which can be used to purchase items sold in
Loblaw grocery stores across Canada. Loblaw recorded a charge of $107 million in relation to the Loblaw Card
Program in 2017 and in 2018, Loblaw recorded an additional charge of $4 million. Loblaw expects that Loblaw
Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card
Program should not be viewed as an estimate of damages (see note 35).
Restructuring and other charges In 2018, Weston Foods recorded restructuring and other charges of $38 million
(2017 – $48 million). In 2018, which were primarily related to the reorganization costs from the transformation
program, which year-to-date included the previously announced closures of an unprofitable facility in Canada in
the third quarter of 2018, and in the U.S. that was completed in the first quarter of 2018. Restructuring and
other related costs recorded in 2018 included $29 million (2017 - $29 million) of severance and exit costs, $9
million (2017 - 10 million) of accelerated depreciation and $9 million recorded in 2017 of impairment of a
definite life intangible asset.
In 2017, Loblaw eliminated approximately 500 corporate and store-support positions and finalized a plan that
will result in the closure of 22 unprofitable retail locations across a range of banners and formats. Loblaw
recorded a charge of $123 million associated with this restructuring in the fourth quarter of 2017, which
included $109 million for severance and lease related costs, $7 million for asset impairments and $7 million
related to other costs.
In addition, in 2017 Loblaw recorded $20 million in severance and other related charges and $3 million for asset
impairments as a result of other restructuring plans approved in the fourth quarter of 2017 and a charge of
$19 million related to an adjustment of onerous contract provisions related to previously announced
restructuring plans.
George Weston Limited 2018 Annual Report 129
Notes to the Consolidated Financial Statements
Note 23. Short Term Debt
The components of short term debt were as follows:
($ millions)
Other Independent Securitization Trusts
Series B Debentures(i)
Short term debt
(note 12)
As at
Dec. 31, 2018
915
$
664
1,579
$
Dec. 31, 2017
640
$
618
1,258
$
(i)
Series B Debentures issued by GWL are due on demand, and pay a current weighted average interest rate of 2.31% (2017 – 1.59%).
The Series A, 7.00% (see note 24) and Series B Debentures are secured by a pledge of 9.6 million Loblaw common shares.
Other Independent Securitization Trusts The outstanding short term debt balances relate to credit card
receivables securitized to the Other Independent Securitization Trusts with recourse (see note 12).
The securitization agreements between PC Bank and the Other Independent Securitization Trusts are renewed
and extended on an annual basis. The existing agreements were renewed in 2018, with their respective maturity
dates extended to 2020 and with all other terms and conditions remaining substantially the same.
The undrawn commitments on facilities available from the Other Independent Securitization Trusts as at year
end 2018 were $110 million (2017 – $160 million).
130 George Weston Limited 2018 Annual Report
Note 24. Long Term Debt
The components of long term debt were as follows:
($ millions)
Unsecured Term Loan Facility
Loblaw Companies Limited
0.13% + prime or 1.13% + Bankers’ Acceptance, due 2019
0.45% + prime or 1.45% + Bankers’ Acceptance, due 2019
Choice Properties
1.45% + Bankers’ Acceptance, due 2022
1.45% + Bankers’ Acceptance, due 2023
Debentures
George Weston Limited Notes
Loblaw Companies Limited Notes
Shoppers Drug Mart Notes
Choice Properties Debentures
Series A, 7.00%, due 2031(i)
4.12%, due 2024
7.10%, due 2032
6.69%, due 2033
3.75%, due 2019
5.22%, due 2020
4.86%, due 2023
3.92% due 2024
6.65%, due 2027
4.49%, due 2028
6.45%, due 2028
6.50%, due 2029
11.40%, due 2031
Principal
Effect of coupon repurchase
6.85%, due 2032
6.54%, due 2033
8.75%, due 2033
6.05%, due 2034
6.15%, due 2035
5.90%, due 2036
6.45%, due 2039
7.00%, due 2040
5.86%, due 2043
2.36%, due 2018
Series A 3.55%, due 2018
Series B 4.90%, due 2023
Series C 3.50%, due 2021
Series D 4.29%, due 2024
Series E 2.30%, due 2020
Series F 4.06%, due 2025
Series G 3.20%, due 2023
Series H 5.27%, due 2046
Series I 3.01%, due 2022
Series J 3.55%, due 2025
Series K 3.56%, due 2024
Series L 4.18%, due 2028
Series 7 3.00%, due 2019
Series 8 3.60%, due 2020
Series 9 3.60%, due 2021
Series 10 3.60%, due 2022
Series B-C 4.32%, due 2021
Series C-C 2.56%, due 2019
Series D-C 2.95%, due 2023
Long Term Debt Secured by Mortgage
Guaranteed Investment Certificates
Independent Securitization Trust (note 12)
2.47% - 5.49%, due 2018 - 2029 (note 15)
0.85% - 3.78%, due 2019 - 2023
2.91%, due 2018
2.23%, due 2020
2.71%, due 2022
3.10%, due 2023
Independent Funding Trusts
Finance Lease Obligations (note 32)
Choice Properties Credit Facilities
Choice Properties Construction Loans
Transaction costs and other
Total long term debt
Less amount due within one year
Long term debt
As at
Dec. 31, 2018
Dec. 31, 2017
$
$
$
—
—
175
625
466
200
150
100
—
350
800
400
100
400
200
175
151
(4)
200
200
200
200
200
300
200
150
55
—
—
200
250
200
250
200
250
100
300
350
550
750
200
300
200
300
100
100
125
1,328
1,141
—
250
250
250
536
535
325
21
(36)
15,318
1,343
13,975
$
$
$
250
48
—
—
466
200
150
100
800
350
800
—
100
—
200
175
151
(19)
200
200
200
200
200
300
200
150
55
275
400
200
250
200
250
200
250
100
—
—
—
—
200
300
200
300
—
—
—
81
852
400
250
250
—
551
568
561
—
(22)
12,092
1,635
10,457
(i)
The Series A, 7.00% and Series B Debentures (see note 23) are secured by a pledge of 9.6 million Loblaw common shares.
George Weston Limited 2018 Annual Report 131
Notes to the Consolidated Financial Statements
Significant long term debt transactions are described below:
Debentures The following table summarizes the debentures issued or assumed in the years ended as indicated:
($ millions except where otherwise indicated)
Loblaw Term Loans
– Loblaw Companies Limited Notes(i)
– Loblaw Companies Limited Notes(i)
Choice Properties senior unsecured debentures
– Series I(ii)
– Series J(ii)
– Series K(iii)
– Series L(iii)
– Series A-C(iv)
– Series B-C(iv)
– Series C-C(iv)
– Series D-C(iv)
Total debentures issued
Interest
Rate
3.92%
4.49%
3.01%
3.55%
3.56%
4.18%
3.68%
4.32%
2.56%
2.95%
Maturity
Date
2018
Principal
Amount
2017
Principal
Amount
June 10, 2024
$
December 11, 2028
March 21, 2022
January 10, 2025
September 9, 2024
March 8, 2028
July 24, 2018
January 15, 2021
November 30, 2019
January 18, 2023
$
400
400
300
350
550
750
125
100
100
125
3,200
$
$
—
—
—
—
—
—
—
—
—
—
—
(i) On December 10, 2018, Loblaw issued debentures of $400 million bearing interest at rates of 3.92% and 4.49%, maturing
June 10, 2024 and December 11, 2028, respectively.
(ii) Offerings were made under the Choice Properties’ Short Form Base Shelf Prospectus filed in the first quarter of 2018.
(iii) In the first quarter of 2018, the net proceeds from the issuance of Series K and L were held in escrow as a part of the financing for the
acquisition of CREIT. During the second quarter of 2018, the Company completed the acquisition of CREIT and the proceeds were
released from escrow (note 6).
(iv) Assumed by the Company in connection with the acquisition of CREIT (note 6).
The following table summarizes the debentures, unsecured term loan facilities and term loans repaid in the years
ended as indicated:
($ millions except where otherwise indicated)
Shoppers Drug Mart Corporation Notes
Loblaw Companies Limited - Term Loan(i)
Loblaw Companies Limited - Term Loan(ii)
Loblaw Companies Limited - Term Loan(iii)
Choice Properties senior unsecured debentures
– Series A-C
– Series A
– Series 6
Total debentures and term loans repaid
Interest
Rate
2.36%
Variable
Variable
Maturity
Date
May 24, 2018
March 28, 2019
March 29, 2019
3.75%
March 12, 2019
3.68%
3.55%
3.00%
July 24, 2018
July 5, 2018(iv)
April 20, 2017(v)
2018
Principal
Amount
275
$
2017
Principal
Amount
—
$
48
250
800
125
400
—
1,898
$
$
—
—
—
—
—
200
200
(i)
Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.45% or Bankers’ Acceptance rate plus
1.45% were redeemed on August 29, 2018.
(ii) Loblaw unsecured term loan facility bearing interest at variable rates of either Prime plus 0.13% or Bankers’ Acceptance rate plus
1.13% were redeemed on August 29, 2018.
(iii) Redeemed on December 31, 2018.
(iv) Redeemed on February 12, 2018.
(v) Redeemed on January 23, 2017.
132 George Weston Limited 2018 Annual Report
Unsecured Term Loan Facilities In the second quarter of 2018, Choice Properties obtained $800 million through
two unsecured term loan facilities, one $175 million 4-year unsecured term loan provided by a syndicate of
lenders maturing May 4, 2022 and one $625 million 5-year unsecured term loan provided by a syndicate of
lenders maturing May 4, 2023. The term loans bear interest at variable rates of either Prime plus 0.45% or
Bankers’ Acceptance rate plus 1.45%. The pricing of these term loans is contingent on Choice Properties’ credit
ratings from DBRS and S&P remaining at “BBB”.
During the second quarter of 2018, Loblaw repaid the remaining mortgage balance of $72 million at maturity.
Guaranteed Investment Certificates (“GICs”) The following table summarizes PC Bank’s GIC activity, before
commissions, for the years ended as follows:
($ millions)
Balance, beginning of year
GICs issued
GICs matured
Balance, end of year
2018
852
495
(206)
1,141
$
$
$
$
2017
928
76
(152)
852
Independent Securitization Trust The notes issued by Eagle are debentures, which are collateralized by PC Bank’s
credit card receivables (see note 12). Loblaw has arranged letters of credit for the benefit of Eagle notes issued
prior to 2015 and outstanding as at year end 2018 (see note 36).
In 2018, Eagle issued $250 million of senior and subordinated term notes with a maturity date of July 17, 2023 at
a weighted average interest rate of 3.10%. In connection with this issuance, $250 million of bond forward
agreements were settled, resulting in a realized fair value loss of $1 million, in Other Comprehensive Income, and
a net effective interest rate of 3.15% on the Eagle notes issued.
In the fourth quarter of 2018, $400 million 2.91% of senior and subordinated term notes issued by Eagle matured
and were repaid.
Independent Funding Trusts As at year end 2018, the independent funding trusts had drawn $536 million
(2017 – $551 million) from the revolving committed credit facility that is the source of funding to the independent
funding trusts.
Committed Credit Facilities The components of the committed lines of credit available as at year end 2018 and
2017 were as follows:
($ millions)
As at
Dec. 31, 2018
Dec. 31, 2017
Maturity
Date
Available
Credit
Drawn
Available
Credit
Drawn
Loblaw committed credit facility
June 10, 2021
$
1,000
$
Choice Properties committed bi-lateral
credit facility
Choice Properties committed
syndicated credit facility
Choice Properties committed
syndicated credit facility
Total committed credit facilities
December 21, 2018
July 5, 2022
May 4, 2023
—
—
1,500
2,500
$
$
325
325
—
—
—
$
1,000
$
—
250
500
—
$
1,750
$
250
311
—
561
In the first half of 2018, Choice Properties repaid and cancelled the $250 million committed bi-lateral credit
facility and the $500 million committed syndicated credit facility.
George Weston Limited 2018 Annual Report 133
Notes to the Consolidated Financial Statements
In the second quarter of 2018, Choice Properties entered into a new syndicated $1.5 billion senior unsecured
committed revolving credit facility maturing May 4, 2023. The credit facility bears interest at variable rates of
either: Prime plus 0.45% or bankers’ acceptance rate plus 1.45%. The pricing of this credit facility is contingent on
Choice Properties’ credit ratings from DBRS and S&P remaining at “BBB”.
These facilities contain certain financial covenants (see note 28).
Long Term Debt due Within One Year The components of long term debt due within one year were as follows:
($ millions)
Choice Properties debenture
Shoppers Drug Mart MTN
GICs
Independent Securitization Trust
Independent funding trusts
Finance lease obligations
Long term debt secured by mortgage
Construction Loans
Choice Properties Credit Facility
Long term debt due within one year
As at
Dec. 31, 2018
300
$
—
274
—
536
37
182
14
—
1,343
$
Dec. 31, 2017
400
$
275
193
400
—
44
73
—
250
1,635
$
Schedule of Repayments The schedule of repayment of long term debt, based on maturity is as follows:
($ millions)
2019
2020
2021
2022
2023
Thereafter
Long Term Debt (excludes transaction costs)
See note 33 for the fair value of long term debt.
As at
Dec. 31, 2018
1,343
$
1,823
937
1,280
2,784
7,191
15,358
$
134 George Weston Limited 2018 Annual Report
Reconciliation of Long Term Debt The following table reconciles the changes in cash flows from financing
activities for long term debt in the year ended as indicated:
($ millions)
Total long term debt, beginning of period
Long term debt assumed on acquisition on CREIT (note 6)
Long term debt issuances(i)(ii)
Long term debt repayments(ii)(iii)
Total cash flow from long term debt financing activities
Finance lease additions, net of disposals
Other non-cash changes
Total non-cash long term debt activities
Total long term debt, end of period
$
$
2018
12,092
1,841
4,880
(3,565)
1,315
13
57
70
15,318
$
$
2017
11,785
—
686
(450)
236
16
55
71
12,092
Includes net issuances from the Independent Funding Trust, which are revolving debt instruments.
Includes net issuances or repayment from Choice Properties’ credit facilities depending on the activity in the period.
(i)
(ii)
(iii) Includes repayment on finance lease obligations of $83 million (2017 – $94 million).
Note 25. Other Liabilities
The components of other liabilities were as follows:
($ millions)
Net defined benefit plan obligation (note 29)
Other long term employee benefit obligation
Deferred lease obligation
Fair value of acquired leases
Share-based compensation liability (note 30)
Other
Other liabilities
Note 26. Share Capital
The components of share capital were as follows:
($ millions)
Common share capital
Preferred shares, Series I
Preferred shares, Series III
Preferred shares, Series IV
Preferred shares, Series V
Share capital
As at
Dec. 31, 2018
347
$
115
148
54
6
21
691
$
Dec. 31, 2017
380
$
115
140
65
4
58
762
$
As at
Dec. 31, 2018
2,766
$
228
196
197
196
3,583
$
Dec. 31, 2017
221
$
228
196
197
196
1,038
$
George Weston Limited 2018 Annual Report 135
Notes to the Consolidated Financial Statements
Common Share Capital (authorized – unlimited) Common shares issued are fully paid and have no par value.
The following table summarizes the activity in the Company’s common shares issued and outstanding for the
years ended December 31, 2018 and December 31, 2017:
($ millions except where otherwise indicated)
Issued and outstanding, beginning of year
Issued for Loblaw’s Spin-out of Choice
Properties (note 5)
Issued for settlement of stock
options (note 30)
Purchased and cancelled
Issued and outstanding, end of year
Shares held in trusts, beginning of year
Purchased for future settlement
of RSUs and PSUs
Released for settlement of RSUs
and PSUs (note 30)
Shares held in trusts, end of year
Issued and outstanding, net of shares held
in trusts, end of year
Weighted average outstanding, net of shares
held in trusts
Number of
Common
Shares
127,905,581
26,596,641
145,076
(1,277,190)
153,370,108
(228,803)
$
$
—
108,498
(120,305)
2018
Common
Share
Capital
221
2,547
12
(14)
2,766
—
—
—
—
Number of
Common
Shares
127,898,582
—
293,976
(286,977)
127,905,581
(266,999)
$
$
(70,198)
108,394
(228,803)
2017
Common
Share
Capital
195
—
26
—
221
—
—
—
—
153,249,803 $
2,766
127,676,778 $
221
131,844,880
127,692,789
Preferred Shares, Series I (authorized – 10.0 million) GWL has 9.4 million 5.80% non-voting Preferred Shares,
Series I outstanding, with a face value of $235 million, which entitle the holders to a fixed cumulative preferred
cash dividend of $1.45 per share per annum which will, if declared, be payable quarterly. GWL may, at its option,
redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together with all
accrued and unpaid dividends to the redemption date.
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holders, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Preferred Shares, Series III (authorized – 10.0 million) GWL has 8.0 million 5.20% non-voting Preferred Shares,
Series III outstanding, with a face value of $200 million, which entitle the holders to a fixed cumulative preferred
cash dividend of $1.30 per share per annum which will, if declared, be payable quarterly. GWL may, at its option,
redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together with all
accrued and unpaid dividends to the redemption date.
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Preferred Shares, Series IV (authorized – 8.0 million) GWL has 8.0 million 5.20% non-voting Preferred Shares,
Series IV outstanding, with a face value of $200 million, which entitle the holders to a fixed cumulative preferred
cash dividend of $1.30 per share per annum which will, if declared, be payable quarterly. GWL may, at its option,
redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together with all
accrued and unpaid dividends to the redemption date.
136 George Weston Limited 2018 Annual Report
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Preferred Shares, Series V (authorized – 8.0 million) GWL has 8.0 million 4.75% non-voting Preferred Shares,
Series V outstanding, with a face value of $200 million, which entitle the holders to a fixed cumulative preferred
cash dividend of $1.1875 per share per annum which will, if declared, be payable quarterly. GWL may, at its
option, redeem for cash, in whole or in part, these outstanding preferred shares at $25.00 per share, together
with all accrued and unpaid dividends to the redemption date.
At any time after issuance, GWL may, at its option, give the holders of these preferred shares the right, at the
option of the holder, to convert their preferred shares into preferred shares of a further series designated by
GWL on a share-for-share basis on a date specified by GWL.
Dividends The declaration and payment of dividends on the Company’s common shares and the amount thereof
are at the discretion of the Company’s Board which takes into account the Company’s financial results, capital
requirements, available cash flow, future prospects of the Company’s business and other factors considered
relevant from time to time. Over time, it is the Company’s intention to increase the amount of the dividend while
retaining appropriate free cash flow to finance future growth. In the second quarter of 2017, the Board raised
the quarterly common share dividend by $0.015 to $0.455 per share. During 2018, the Board raised the quarterly
common share dividend by $0.035 to $0.49 in the second quarter and by $0.025 to $0.515 in the fourth quarter.
The Board declared dividends as follows:
($)
Dividends declared per share(i):
Common share
Preferred share:
Series I
Series III
Series IV
Series V
2018
2017
$
$
$
$
$
1.950
1.45
1.30
1.30
1.1875
$
$
$
$
$
1.805
1.45
1.30
1.30
1.1875
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V were payable on January 1, 2019 and
subsequently paid on January 2, 2019. Dividend declared on Preferred Shares, Series I were payable on December 15, 2018 and
subsequently paid on December 17, 2018.
The following table summarizes the Company’s cash dividends declared subsequent to year end 2018:
($)
Dividends declared per share(i) – Common share
– Preferred share:
Series I
Series III
Series IV
Series V
$
0.515
0.3625
$
0.3250
$
$
0.3250
$ 0.296875
(i) Dividends declared on common shares and Preferred Shares, Series III, Series IV and Series V are payable on April 1, 2019.
Dividends declared on Preferred Shares, Series I are payable on March 15, 2019.
George Weston Limited 2018 Annual Report 137
Notes to the Consolidated Financial Statements
Normal Course Issuer Bid (“NCIB”) Program The following table summarizes the Company’s activity under its
NCIB program:
($ millions except where otherwise indicated)
Purchased for future settlement of RSUs and PSUs (number of shares)
Purchased and cancelled (number of shares)
Cash consideration paid
Purchased and held in trusts
Purchased and cancelled
Premium charged to retained earnings
Reduction in share capital
2018
—
1,277,190
2017
70,198
286,977
$
$
$
— $
(123)
109
14
$
$
(7)
(31)
38
—
In the second quarter of 2018, GWL renewed its NCIB program to purchase on the Toronto Stock Exchange
(“TSX”) or through alternative trading systems up to 6,398,134 of its common shares, representing
approximately 5% of the common shares outstanding. In accordance with the rules of the TSX, the Company may
purchase its common shares from time to time at the then market price of such shares.
In the third quarter of 2018, GWL was granted an exemption from TSX in connection with GWL’s NCIB, which
commenced in the second quarter of 2018, subject to certain conditions. Pursuant to the exemption, GWL was
permitted to purchases up to 1.9 million common shares during the five trading days immediately following the
announcement of the reorganization, up to a daily maximum limit of 25% of the actual aggregate trading volume
of its common shares across all Canadian published markets on each such day.
In the third quarter of 2018, the Company entered into and completed an automatic share purchase plan
(“ASPP”) with a broker in order to facilitate the repurchase of the Company’s common shares under its current
NCIB, contingent on the closing of the reorganization. Under the Company’s ASPP, the Company’s broker
purchased common shares at times when the Company ordinarily would not be active in the market.
In the fourth quarter of 2018, GWL was granted an exemption from the TSX in connection with its NCIB. During
the two week period following the closing of the reorganization, GWL was permitted to purchase up to 1.36
million common shares, up to a daily maximum limit of 25% of the actual aggregate trading volume of its
common shares across all Canadian published markets on each such day.
As of December 31, 2018, the Company purchased 1,275,562 common shares under its current NCIB program, of
which 713,700 common shares were purchased under the exemption.
138 George Weston Limited 2018 Annual Report
Note 27. Loblaw Capital Transactions
Loblaw Preferred Shares As at year end 2018, the Second Preferred Shares, Series B in the amount of
$221 million net of $4 million of after-tax issuance costs, and related cash dividends, were presented as a
component of non-controlling interests in the Company’s consolidated balance sheet. In 2018, Loblaw
declared dividends of $12 million (2017 – $12 million) related to the Second Preferred Shares, Series B.
Loblaw Common Shares The following table summarizes Loblaw’s common share activity under its share-based
compensation arrangements and NCIB program, and includes the impact on the Company’s consolidated
financial statements for the years ended as follows:
($ millions except where otherwise indicated)
Issued (number of shares)
Purchased and held in trusts (number of shares)
Purchased and cancelled(i)
(number of shares)
Cash consideration received (paid)
Share-based compensation
Purchased and held in trusts
Purchased and cancelled
Increase (decrease) in contributed surplus
Share-based compensation
Purchased and held in trusts
Purchased and cancelled
2018
2,709,946
(582,500)
(16,584,209)
(14,456,763)
2017
2,030,292
(686,000)
(15,555,539)
(14,211,247)
$
$
$
$
78
(36)
(1,082)
(1,040)
18
(9)
(359)
(350)
$
$
$
$
41
(48)
(1,091)
(1,098)
14
(12)
(277)
(275)
(i) Common shares purchased and cancelled for the year ended December 29, 2018 does not include the shares repurchased from the ASPP entered into
by Loblaw in the fourth quarter of 2018. Common shares purchased and cancelled for the year ended December 30, 2017 includes 22,012 shares held
in escrow that were transferred and cancelled in a private transaction and are excluded from Loblaw’s NCIB.
George Weston Limited 2018 Annual Report 139
Notes to the Consolidated Financial Statements
Note 28. Capital Management
In order to manage its capital structure, the Company, among other activities, may adjust the amount of
dividends paid to shareholders, purchase shares for cancellation pursuant to its NCIB program, issue new shares
or issue or repay long term debt with the objective of:
• ensuring sufficient liquidity is available to support its financial obligations and to execute its operating and
strategic plans;
• maintaining financial capacity and flexibility through access to capital to support future development of the
business;
• minimizing the after-tax cost of its capital while taking into consideration current and future industry, market
and economic risks and conditions;
• utilizing short term funding sources to manage its working capital requirements and long term funding
•
sources to manage the long term capital investments of the business; and
targeting an appropriate leverage and capital structure for the Company and each of its reportable operating
segments.
The Company has policies in place which govern debt financing plans and risk management strategies for
liquidity, interest rates and foreign exchange. These policies outline measures and targets for managing capital,
including a range for leverage consistent with the desired credit rating. Management and the Audit Committee
regularly review the Company’s compliance with, and performance against, these policies. In addition,
management regularly reviews these policies to ensure they remain consistent with the risk tolerance acceptable
to the Company.
The following table summarizes the Company’s total capital under management:
As at
($ millions)
Bank indebtedness
Short term debt
Long term debt due within one year
Long term debt
Certain other liabilities
Fair value of financial derivatives related to the above debt
Total debt
Equity attributable to shareholders of the Company
Total capital under management
Dec. 31, 2018
56
$
1,579
1,343
13,975
48
(556)
16,445
8,040
24,485
$
$
Dec. 31, 2017
110
$
1,258
1,635
10,457
41
(435)
13,066
7,934
21,000
$
$
Short Form Base Shelf Prospectus In 2017, Loblaw filed a Short Form Base Shelf Prospectus, which allows for the
potential issuance of up to $2 billion of unsecured debentures and/or preferred shares subject to the availability
of funding in the capital markets.
In 2017, Eagle filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up to
$1 billion of notes over a 25-month period.
In 2018, Choice Properties filed a Short Form Base Shelf Prospectus, which allows for the potential issuance of up
to $2 billion of Units and debt securities, or any combination thereof, over a 25-month period. Under this
Prospectus, Choice Properties issued $650 million of senior unsecured debentures (note 24).
In 2018, GWL filed a Base Shelf Prospectus allowing for the issuance of up to $1 billion of senior and
subordinated debt securities, and preferred shares, or any combination thereof over a 25-month period.
140 George Weston Limited 2018 Annual Report
Covenants and Regulatory Requirements Loblaw is subject to certain key financial and non-financial covenants
under its existing credit facility, unsecured term loan facilities, certain debentures and letters of credit. These
covenants, which include interest coverage and leverage ratios, as defined in the respective agreements, are
measured by Loblaw on a quarterly basis to ensure compliance with these agreements. As at year end 2018 and
throughout the year, Loblaw was in compliance with each of the covenants under these agreements.
Choice Properties has certain key financial covenants in its debentures and credit facilities which include debt
service ratios and leverage ratios, as defined in the respective agreements. These ratios are measured by Choice
Properties on an on-going basis to ensure compliance with the agreements. As at year end 2018 and throughout
the year, Choice Properties was in compliance with each of the key financial covenants under these agreements.
Loblaw is subject to externally imposed capital requirements from the Office of the Superintendent of Financial
Institutions (“OSFI”), the primary regulator of PC Bank. PC Bank’s capital management objectives are to maintain
a consistently strong capital position while considering the economic risks generated by its credit card
receivables portfolio and to meet all regulatory capital requirements as defined by OSFI. PC Bank uses Basel III as
its regulatory capital management framework, which includes a common equity Tier 1 capital ratio of 4.5%, a
Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%. In addition to the regulatory capital ratios
requirement, PC Bank is subject to the Basel III Leverage ratio. PC Bank is also subject to the OSFI’s Guideline on
Liquidity Adequacy Requirements (“LARs”). The LARs guideline establishes standards based on the Basel III
framework, including a Liquidity Coverage Ratio (“LCR”). As at year end 2018 and throughout the year, PC Bank
has met all applicable regulatory requirements.
In addition, the Company has wholly-owned subsidiaries that engage in insurance related activities. These
subsidiaries each exceeded their minimum regulatory capital and surplus requirements as at year end 2018.
George Weston Limited 2018 Annual Report 141
Notes to the Consolidated Financial Statements
Note 29. Post-Employment and Other Long Term Employee Benefits
Post-Employment Benefits The Company sponsors a number of pension plans, including registered defined
benefit pension plans, registered defined contribution pension plans and supplemental unfunded arrangements
providing pension benefits in excess of statutory limits. Certain obligations of the Company under these
supplemental pension arrangements are secured by a standby letter of credit issued by a major Canadian
chartered bank.
GWL’s and Loblaw’s Pension Committees (“the Committees”) oversee the Company’s pension plans. The
Committees are responsible for assisting GWL’s and Loblaw’s Boards in fulfilling their general oversight
responsibilities for the plans. The Committees assist the Boards with oversight of management’s administration
of the plans, pension investment and monitoring responsibilities, and compliance with legal and regulatory
requirements.
The Company’s defined benefit pension plans are primarily funded by the Company, predominantly
non-contributory and the benefits are, in general, based on career average earnings subject to limits. The
funding is based on a solvency valuation for which the assumptions may differ from the assumptions used for
accounting purposes as detailed in this note.
The Company also offers certain other defined benefit plans other than pension plans. These other defined
benefit plans are generally not funded, are mainly non-contributory and include health care, life insurance and
dental benefits. Employees eligible for these other defined benefit plans are those who retire at certain ages
having met certain service requirements. The majority of other defined benefit plans for current and future
retirees include a limit on the total benefits payable by the Company.
The Company’s defined benefit pension plans and other defined benefit plans expose it to a number of actuarial
risks, such as longevity risk, interest rate risk and market risk.
In Canada, the Company also has a national defined contribution plan for salaried employees. All newly hired
salaried employees are only eligible to participate in this defined contribution plan.
The Company also contributes to various MEPPs, which are administered by independent boards of trustees
generally consisting of an equal number of union and employer representatives. The Company’s responsibility
to make contributions to these plans is limited by amounts established pursuant to its collective agreements.
The Company expects to make contributions in 2019 to its defined benefit and defined contribution plans and
the MEPPs in which it participates as well as make benefit payments to the beneficiaries of the supplemental
unfunded defined benefit pension plans, other defined benefit plans and other long term employee benefit
plans.
142 George Weston Limited 2018 Annual Report
Other Long Term Employee Benefits The Company offers other long term employee benefit plans that include
long term disability benefits and continuation of health care and dental benefits while on disability.
Defined Benefit Pension Plans and Other Defined Benefit Plans
(i)
Information on the Company’s defined benefit pension plans and other defined benefit plans, in aggregate, is
summarized as follows:
($ millions)
Present value of funded obligations
Present value of unfunded obligations
Total present value of defined benefit obligations
Fair value of plan assets
Total funded status of surpluses (obligations)
Assets not recognized due to asset ceiling
Total net defined benefit plan obligations
Recorded on the consolidated balance sheets
as follows:
Other assets (note 20)
Other liabilities (note 25)
Defined
Benefit
Pension
Plans
(1,561)
(181)
(1,742)
1,802
60
(22)
38
233
(195)
$
$
$
$
$
$
$
$
$
$
$
$
As at
Dec. 31, 2018
Other
Defined
Benefit
Plans
— $
(152)
(152)
—
(152)
—
(152)
$
$
$
$
Dec. 31, 2017
Other
Defined
Benefit
Plans
—
(158)
(158)
—
(158)
—
(158)
$
$
$
Defined
Benefit
Pension
Plans
(1,870)
(197)
(2,067)
2,023
(44)
(24)
(68)
— $
$
(152)
154
(222)
$
$
—
(158)
George Weston Limited 2018 Annual Report 143
Notes to the Consolidated Financial Statements
The following are the continuities of the fair value of plan assets and the present value of the defined benefit
plan obligations:
($ millions)
Changes in the fair value of plan assets
Fair value, beginning of year
Employer contributions
Employee contributions
Benefits paid
Interest income
Actuarial (losses) gains in other
comprehensive income
Settlements(i)
Other(ii)
Fair value, end of year
Changes in the present value of the
defined benefit plan obligations
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial (gains) losses in other
comprehensive income
Settlements(i)
Balance, end of year
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2018
Total
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2017
Total
$ 2,023 $
45
5
(66)
70
(43)
(228)
(4)
$ 1,802 $
61
74
(80)
3
— $ 2,023
45
—
5
—
(66)
—
70
—
(43)
—
(228)
—
(4)
—
— $ 1,802
158 $ 2,225
66
79
(88)
3
5
5
(8)
—
$ 2,099 $
57
4
(79)
82
149
(285)
(4)
$ 2,023 $
$ 2,077 $
59
84
(89)
4
— $ 2,099
57
—
4
—
(79)
—
82
—
149
—
(285)
—
(4)
—
— $ 2,023
176 $ 2,253
65
90
(96)
4
6
6
(7)
—
(156)
(227)
$ 1,742 $
(8)
—
(164)
(227)
152 $ 1,894
203
(271)
$ 2,067 $
(23)
—
180
(271)
158 $ 2,225
Balance, beginning of year
$ 2,067 $
(i) Relates to annuity purchases and pension buy-outs completed.
(ii)
Includes foreign exchange impact on U.S. defined benefit pension plans.
In 2018, the Company completed several annuity purchases with respect to former employees. In 2017, the
Company also completed several annuity purchases and pension buy-outs with respect to former employees.
These activities are designed to reduce the Company’s defined benefit pension plan obligations and decrease
future risks and volatility associated with these obligations. The Company paid $228 million (2017 – $285 million)
from the impacted plans’ assets to settle $227 million (2017 – $271 million) of pension obligations and recorded
settlement charges of $1 million (2017 – $14 million) in SG&A. The settlement charges resulted from the
difference between the amount paid for the annuity purchases and pension buy-outs and the value of the
Company’s defined benefit plan obligations related to these annuity purchases and buy-outs at the time of the
settlement.
Subsequent to the year ended 2018, the Company completed several annuity purchases and paid $187 million
from the impacted plans’ assets to settle $177 million on pension obligations and management is expected to
record settlement charges of $10 million in SG&A.
For the year ended 2018, the actual return on plan assets was $27 million (2017 – $231 million).
144 George Weston Limited 2018 Annual Report
The net defined benefit obligation can be allocated to the plans’ participants as follows:
• Active plan participants – 56% (2017 – 55%)
• Deferred plan participants – 10% (2017 – 10%)
• Retirees – 34% (2017 – 35%)
During 2019, the Company expects to contribute approximately $79 million (2018 – contributed $45 million) to
its registered defined benefit pension plans. The actual amount paid may vary from the estimate based on
actuarial valuations being completed, investment performance, volatility in discount rates, regulatory
requirements and other factors.
The net cost recognized in net earnings before income taxes for the Company’s defined benefit pension plans
and other defined benefit plans was as follows:
($ millions)
Current service cost
Interest cost on net defined benefit
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
$
61 $
5 $
plan obligations
Settlement charges(i)
Other
Net post-employment defined benefit costs
4
1
4
70 $
5
—
—
10 $
$
2018
Total
66
9
1
4
80
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
$
59 $
6 $
2
14
4
79 $
6
—
—
12 $
$
2017
Total
65
8
14
4
91
(i) Relates to annuity purchases and pension buy-outs.
The actuarial gains (losses) recognized in other comprehensive income for defined benefit plans were as follows:
($ millions)
Return on plan assets excluding amounts
included in interest income
Experience adjustments
Actuarial (gains) losses from change in
financial assumptions
Change in liability arising from asset ceiling
Total net actuarial (gains) losses recognized
in other comprehensive income
before income taxes
Income tax expenses (recoveries) on
actuarial (gains) losses (note 8)
Actuarial (gains) losses net of income tax
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2018
Total
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
2017
Total
$
43 $
8
— $
2
43
10
$
(149) $
29
— $
(28)
(149)
1
(164)
(5)
(10)
—
(174)
(5)
174 $
(3)
5
—
179
(3)
$
(118) $
(8) $
(126)
$
51 $
(23) $
28
33
1
34
(14)
6
(8)
expenses (recoveries)
$
(85) $
(7) $
(92)
$
37 $
(17) $
20
George Weston Limited 2018 Annual Report 145
Notes to the Consolidated Financial Statements
The cumulative actuarial (gains) losses before income taxes recognized in equity for the Company’s defined
benefit plans were as follows:
($ millions)
Cumulative amount, beginning of year
Net actuarial (gains) losses recognized in
the year before income taxes
Cumulative amount, end of year
$
$
Defined
Benefit
Pension
Plans
Other
Defined
Benefit
Plans
65 $
(75) $
2018
Total
(10)
(118)
(53) $
(8)
(83) $
(126)
(136)
Defined
Benefit
Pension
Plans
$
$
14 $
51
65 $
Other
Defined
Benefit
Plans
(52) $
(23)
(75) $
2017
Total
(38)
28
(10)
Composition of Plan Assets The defined benefit pension plan assets are held in trust and consisted of the
following asset categories:
($ millions except where otherwise indicated)
Equity securities
Canadian – pooled funds
– pooled funds
Foreign
Total equity securities
Debt securities
Fixed income securities – government
– corporate
Fixed income pooled funds(i)
– government
– corporate
Total debt securities
Other investments
Cash and cash equivalents
Total
As at
Dec. 31, 2018
Dec. 31, 2017
$
$
$
$
$
$
$
53
481
534
468
165
304
10
947
123
198
1,802
3% $
27%
30% $
25% $
9%
17%
1%
52% $
7% $
11% $
100% $
83
749
832
466
140
433
11
1,050
117
24
2,023
4%
37%
41%
23%
7%
21%
1%
52%
6%
1%
100%
(i) Both government and corporate securities may be included within the same fixed income pooled fund.
As at year end 2018 and 2017, the defined benefit pension plans did not directly include any GWL or Loblaw or
Choice Properties securities.
All equity and debt securities and other investments are valued based on quoted prices (unadjusted) in active
markets for identical assets or liabilities or based on inputs other than quoted prices in active markets that are
observable for the asset or liability, either directly as prices or indirectly, either derived from prices or as per
agreements for contractual returns.
The Company’s asset allocation reflects a balance of interest rate sensitive investments, such as fixed income
investments, and equities, which are expected to provide higher returns over the long term. The Company’s
targeted asset allocations are actively monitored and adjusted on a plan by plan basis to align the asset mix with
the liability profiles of the plans.
146 George Weston Limited 2018 Annual Report
Principal Actuarial Assumptions The principal actuarial assumptions used in calculating the Company’s defined
benefit plan obligations and net defined benefit plan cost for the year were as follows (expressed as weighted
averages):
Defined
Benefit
Pension
Plans
2018
Other
Defined
Benefit
Plans
4.00%
4.00%
n/a
CPM-RPP2014Pub/Priv CPM-RPP2014Pub/Priv
3.00%
Defined
Benefit
Pension
Plans
3.50%
3.00%
CPM-RPP2014Pub/Priv
2017
Other
Defined
Benefit
Plans
3.50%
n/a
CPM-RPP2014Pub/Priv
Generational
Generational
Generational
Generational
3.50%
3.50%
4.00%
3.75%
n/a
CPM-RPP2014Pub/Priv CPM-RPP2014Pub/Priv
3.00%
n/a
CPM-RPP2014Pub/Priv CPM-RPP2014Pub/Priv
3.00%
Generational
Generational
Generational
Generational
Defined Benefit Plan
Obligations
Discount rate
Rate of compensation
increase
Mortality table(i)
Net Defined Benefit
Plan Cost
Discount rate
Rate of compensation
increase
Mortality table(i)
n/a – not applicable
(i) Public or private sector mortality table is used depending on the prominent demographics of each plan.
The weighted average duration of the defined benefit obligations as at year end 2018 is 17.4 years
(2017 – 17.4 years).
The growth rate of health care costs, primarily drug and other medical costs, for the other defined benefit plan
obligations as at year end 2018 was estimated at 4.50% and is expected to remain at 4.50% by year end 2019
and thereafter.
George Weston Limited 2018 Annual Report 147
Notes to the Consolidated Financial Statements
Sensitivity of Key Actuarial Assumptions The following table outlines the key assumptions for 2018 (expressed
as weighted averages) and the sensitivity of a 1% change in each of these assumptions on the defined benefit
plan obligations and the net defined benefit plan cost.
The sensitivity analysis provided in the table is hypothetical and should be used with caution. The sensitivities of
each key assumption have been calculated independently of any changes in other key assumptions. Actual
experience may result in changes in a number of key assumptions simultaneously. Changes in one factor may
result in changes in another, which could amplify or reduce the impact of such assumptions.
Defined Benefit Pension Plans
Other Defined Benefit Plans
Increase (Decrease)
($ millions)
Discount rate
Impact of:
1% increase
1% decrease
Expected growth rate of health care costs
Impact of:
1% increase
1% decrease
Defined
Benefit
Net
Plan
Obligations
4.00%
(286)
344
$
$
$
$
Defined
Benefit
Plan Cost(i)
3.50%
(29)
28
Defined
Benefit
Plan
Obligations
4.00%
(18)
23
4.50%
16
(13)
$
$
$
$
Net
Defined
Benefit
Plan Cost(i)
3.50%
—
—
4.50%
1
(1)
$
$
$
$
n/a
n/a
n/a
n/a
n/a – not applicable
(i) Discount rate and expected growth rate of health care costs sensitivity is for current service and interest costs only.
(ii) Multi-Employer Pension Plans
During 2018, the Company recognized an expense of $67 million (2017 – $67 million) in operating income, which
represents the contributions made in connection with MEPPs. During 2019, the Company expects to continue to
make contributions into these MEPPs.
Loblaw, together with its franchises, is the largest participating employer in the Canadian Commercial Workers
Industry Pension Plan (“CCWIPP”), with approximately 54,000 (2017 – 54,000) employees as members. Included
in the 2018 expense described above are contributions of $65 million (2017 – $65 million) to CCWIPP.
(iii) Post-Employment and Other Long Term Employee Benefit Costs
The net cost recognized in net earnings before income taxes for the Company’s post-employment and other long
term employee benefit plans was as follows:
($ millions)
Net post-employment defined benefit cost(i)
Defined contribution costs(ii)
Multi-employer pension plan costs(iii)
Total net post-employment benefit costs
Other long term employee benefit costs(iv)
Net post-employment and other long term employee benefit costs
Recorded on the consolidated statements of earnings as follows:
Operating income (note 31)
Net interest expense and other financing charges (note 7)
Net post-employment and other long term employee benefits costs
2018
80
34
67
181
30
211
199
12
211
$
$
$
$
$
2017
91
32
67
190
29
219
208
11
219
$
$
$
$
$
Includes settlement charges of $1 million (2017 – $14 million) related to annuity purchases and pension buy-outs.
(i)
(ii) Amounts represent the Company’s contributions made in connection with defined contribution plans.
(iii) Amounts represent the Company’s contributions made in connection with MEPPs.
(iv) Other long term employee benefit costs include $3 million (2017 – $3 million) of net interest expense and other financing charges.
148 George Weston Limited 2018 Annual Report
Note 30. Share-Based Compensation
The Company’s share-based compensation arrangements include stock option plans, RSU plans, PSU plans, DSU
plans, EDSU plans and Choice Properties’ unit-based compensation plans. The Company’s costs recognized in
SG&A related to its share-based compensation arrangements in 2018 were $60 million (2017 – $72 million).
The following is the carrying amount of the Company’s share-based compensation arrangements:
($ millions)
Trade payables and other liabilities
Other liabilities (note 25)
Contributed surplus
As at
Dec. 31, 2018
7
$
6
$
123
$
Dec. 31, 2017
11
$
4
$
132
$
During 2018, Loblaw cancelled stock options and granted new stock options at an adjusted share price to “make-
whole” stock option holders for the decline in the Loblaw’s share price as a result of the spin-out of the Loblaw’s
equity interest in Choice Properties. In addition, Loblaw issued additional RSUs, PSUs, DSUs, and EDSUs to
“make-whole” unit holders as a result of the spin-out. These "make-whole" arrangements were not considered
modifications to Loblaw's equity-based compensation plans and as a result had no impact on Loblaw's financial
statements.
Details related to the share-based compensation plans of GWL and Loblaw are as follows:
Stock Option Plans GWL maintains a stock option plan for certain employees. Under this plan, GWL may grant
options for up to 6,453,726 of its common shares.
Loblaw maintains a stock option plan for certain employees. Under this plan, Loblaw may grant options for up
to 28,137,162 of its common shares.
The following is a summary of GWL’s stock option plan activity:
Outstanding options, beginning of year
Granted
Exercised
Forfeited/cancelled
Expired
Outstanding options, end of year
Options exercisable, end of year
2018
Weighted
Average
Exercise
Price/Share
87.41
104.81
71.51
103.55
111.97
90.82
81.50
$
$
$
$
$
$
$
Options
(number
of shares)
1,527,125
234,517
(145,076)
(67,878)
(644)
1,548,044
926,956
Options
(number
of shares)
1,662,855
166,058
(293,976)
(7,812)
1,527,125
851,666
$
$
$
$
— $
$
$
2017
Weighted
Average
Exercise
Price/Share
82.65
112.54
74.62
92.87
—
87.41
76.81
George Weston Limited 2018 Annual Report 149
Notes to the Consolidated Financial Statements
The following table summarizes information about GWL’s outstanding stock options:
Outstanding Options
2018
Exercisable Options
Number of
Options
Outstanding
459,761
519,350
568,933
1,548,044
Weighted
Average
Remaining
Contractual
Life (years)
1
3
5
Weighted
Average
Exercise
Price/Share
68.26
90.67
109.18
90.82
$
$
$
$
Number of
Exercisable
Options
459,761
362,045
105,150
926,956
Weighted
Average
Exercise
Price/Share
68.26
89.42
112.13
81.50
$
$
$
$
Range of Exercise Prices ($)
$59.74 - $77.83
$77.84 - $101.88
$101.89 - $123.73
During 2018, GWL issued common shares on the exercise of stock options with a weighted average market share
price of $102.13 (2017 – $109.91) per common share and received $10 million (2017 – $22 million) of cash
consideration.
During 2018, GWL granted stock options with a weighted average exercise price of $104.81 (2017 – $112.54) per
common share and a fair value of $4 million (2017 – $2 million). The assumptions used to measure the grant
date fair value of the GWL options granted during the years ended under the Black-Scholes stock option
valuation model were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2018
1.7%
14.9% - 15.6%
2.0% - 2.1%
4.6 - 6.6 years
2017
1.6
15.3% - 17.1%
1.0% - 1.9%
4.6 - 6.6 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture
rate applied as at year end 2018 was 0.8% (2017 – 0.7%).
The following is a summary of Loblaw’s stock option plan activity:
Outstanding options, beginning of year
Granted
Exercised
Forfeited/cancelled
Outstanding options, end of year
Options exercisable, end of year
2018
Weighted
Average
Exercise
Price/Share
53.77
53.26
38.87
59.36
51.60
45.14
$
$
$
$
$
$
Options
(number
of shares)
7,487,774
9,672,806
(2,081,235)
(7,569,714)
7,509,631
3,033,156
2017
Weighted
Average
Exercise
Price/Share
48.93
70.02
39.98
64.74
53.77
43.57
$
$
$
$
$
$
Options
(number
of shares)
7,322,358
1,584,407
(1,019,610)
(399,381)
7,487,774
3,847,491
During 2018, Loblaw cancelled all 6,725,773 stock options and granted 8,013,333 stock options at an adjusted
share price to “make-whole” stock option holders for the decline in the Loblaw’s share price as a result of the
spin-out of the Loblaw’s equity interest in Choice Properties.
150 George Weston Limited 2018 Annual Report
The following table summarizes information about Loblaw’s outstanding stock options:
Outstanding Options
2018
Exercisable Options
Weighted
Average
Remaining
Contractual
Life (years)
2
6
5
Weighted
Average
Exercise
Price/Share
42.74
55.79
58.59
51.60
$
$
$
$
Number of
Exercisable
Options
2,253,523
28,111
751,522
3,033,156
Weighted
Average
Exercise
Price/Share
40.56
57.06
58.42
45.14
$
$
$
$
Number of
Options
Outstanding
2,968,083
1,954,149
2,587,399
7,509,631
Range of Exercise Prices ($)
$27.37 - $54.30
$54.31 - $57.83
$57.84 - $65.46
During 2018, Loblaw issued common shares on the exercise of stock options with a weighted average
market share price of $65.45 (2017 – $70.98) per common share and received cash consideration of $78 million
(2017 – $41 million).
During 2018, Loblaw granted stock options with a weighted average exercise price of $53.26 (2017 – $70.02) per
common share and a fair value of $15 million (2017 – $15 million). The assumptions used to measure the grant
date fair value of the Loblaw options granted during the years ended as indicated under the Black-Scholes stock
option valuation model were as follows:
Expected dividend yield
Expected share price volatility
Risk-free interest rate
Expected life of options
2018
1.8%
15.2% - 21.0%
1.9% - 2.3%
3.9 - 6.3 years
2017
1.5%
16.0% - 18.2%
0.9% - 1.7%
3.8 - 6.3 years
Estimated forfeiture rates are incorporated into the measurement of stock option plan expense. The forfeiture
rate applied as at year end 2018 was 9.0% (2017 – 10.0%).
Restricted Share Unit Plans The following is a summary of GWL’s and Loblaw’s RSU plan activity:
(Number of awards)
Outstanding RSUs, beginning of year
Granted
Reinvested
Settled
Forfeited
Outstanding RSUs, end of year
GWL
Loblaw
2018
183,960
63,694
1,810
(67,526)
(15,780)
166,158
2017
213,084
58,325
656
(74,875)
(13,230)
183,960
2018
824,705
528,614
7,954
(277,698)
(59,300)
1,024,275
2017
858,106
337,846
4,418
(323,894)
(51,771)
824,705
The fair value of GWL’s and Loblaw’s RSUs granted during 2018 was $7 million (2017 – $6 million) and $24 million
(2017 – $24 million), respectively.
During 2018, as a result of the Loblaw’s spin-out of Choice Properties, Loblaw granted additional 164,322 RSUs
to “make-whole” RSU unitholders for the decline in the Loblaw’s share price as a result of the spin-out of the
Loblaw’s equity interest in Choice Properties.
George Weston Limited 2018 Annual Report 151
Notes to the Consolidated Financial Statements
Performance Share Unit Plans The following is a summary of GWL’s and Loblaw’s PSU plan activity:
(Number of awards)
Outstanding PSUs, beginning of year
Granted
Reinvested
Settled
Forfeited
Outstanding PSUs, end of year
GWL
Loblaw
2018
100,263
36,769
848
(44,695)
(3,529)
89,656
2017
127,866
24,924
288
(40,820)
(11,995)
100,263
2018
631,528
434,692
5,409
(355,618)
(41,066)
674,945
2017
965,863
404,150
3,152
(687,007)
(54,630)
631,528
The fair value of GWL’s and Loblaw’s PSUs granted during 2018 was $3 million (2017 – $3 million) and $15 million
(2017 – $16 million), respectively.
During 2018, as a result of Loblaw’s spin-out of Choice Properties, Loblaw granted additional 114,778 PSUs due
to “make-whole” PSU unitholders for the decline in the Loblaw’s share price as a result of the spin-out of the
Loblaw’s equity interest in Choice Properties.
Settlement of Awards from Shares Held in Trusts The following table summarizes GWL’s settlement of RSUs and
PSUs from shares held in trusts for the years ended as indicated:
(Number of awards)
Settled
Released from trusts (note 26)
2018
112,221
108,498
2017
115,695
108,394
During 2018, the settlement of awards from shares held in trusts resulted in an increase of $10 million
(2017 – $9 million) in retained earnings. There were nominal increases in share capital in 2018 and 2017
related to these settlements.
Director Deferred Share Unit Plans The following is a summary of GWL’s and Loblaw’s DSU plan activity:
(Number of awards)
Outstanding DSUs, beginning of year
Granted
Reinvested
Settled
Outstanding DSUs, end of year
GWL
Loblaw
2018
176,688
19,330
3,476
(12,894)
186,600
2017
191,232
16,373
3,043
(33,960)
176,688
2018
220,672
78,860
2,917
(6,120)
296,329
2017
188,202
29,289
3,181
—
220,672
The fair value of GWL’s and Loblaw’s DSUs granted during 2018 was $2 million (2017 – $2 million) and $2 million
(2017 – $2 million), respectively.
During 2018, as a result of Loblaw’s spin-out of Choice Properties, Loblaw granted additional 47,027 DSUs due to
“make-whole” DSU unitholders for the decline in the Loblaw’s share price as a result of the spin-out of the
Loblaw’s equity interest in Choice Properties.
152 George Weston Limited 2018 Annual Report
Executive Deferred Share Unit Plans The following is a summary of GWL’s and Loblaw’s EDSU plan activity:
(Number of awards)
Outstanding EDSUs, beginning of year
Granted
Reinvested
Settled
Outstanding EDSUs, end of year
GWL
Loblaw
2018
44,847
—
883
(2,665)
43,065
2017
45,199
1,955
716
(3,023)
44,847
2018
47,294
11,402
578
(13,801)
45,473
2017
35,559
16,558
686
(5,509)
47,294
The fair value of GWL’s and Loblaw’s EDSUs granted during 2018 was nominal (2017 – nominal) and nominal
(2017 – $1 million), respectively.
During 2018, as a result of Loblaw’s spin-out of Choice Properties, Loblaw granted additional 7,868 EDSUs due to
“make-whole” EDSU unitholders for the decline in the Loblaw’s share price as a result of the spin-out of the
Loblaw’s equity interest in Choice Properties.
Choice Properties The following are details related to the unit-based compensation plans of Choice Properties:
Unit Option Plan Choice Properties maintains a Unit Option plan for certain employees. Under this plan, Choice
Properties may grant Unit Options totaling up to 19,744,697 Units, as approved at the annual and special
meeting of Unitholders on April 29, 2015. The Unit Options vest in tranches over a period of four years. The
following is a summary of Choice Properties’ Unit Option plan activity:
Outstanding Unit Options, beginning
of year
Granted
Exercised
Cancelled
Outstanding Unit Options, end
of year
Unit Options exercisable, end of year
2018
Weighted
average
exercise price/
unit
11.56
11.92
11.01
12.41
11.66
11.24
Number
of awards
$
4,403,857
724,571
$
(899,566) $
(464,755) $
3,764,107
2,287,879
$
$
2017
Weighted
average
exercise price/
unit
11.25
14.20
10.24
—
11.56
10.99
Number
of awards
$
3,990,231
451,000
$
(37,374) $
— $
4,403,857
2,308,008
$
$
The assumptions used to measure the fair value of the Unit Options under the Black-Scholes model were as
follows:
Expected average distribution yield
Expected average Unit price volatility
Average risk-free interest rate
Expected average life of options
2018
6.42%
2017
5.54%
14.39% - 25.19% 10.03% - 16.88%
0.01% - 1.85%
0.1 - 4.8 Years
0.02% - 1.88%
0.1 - 4.6 Years
George Weston Limited 2018 Annual Report 153
Notes to the Consolidated Financial Statements
Restricted Unit Plan RUs entitle certain employees to receive the value of the RU award in cash or Units at the
end of the applicable vesting period, which is usually three years. The RU plan provides for the crediting of
additional RUs in respect of distributions paid on Units for the period when a RU is outstanding. The fair value of
each RU granted is measured based on the market value of a Trust Unit at the balance sheet date. There were no
RUs vested as at year end 2018 (2017 – nil).
The following is a summary of Choice Properties’ RU plan activity:
(Number of awards)
Outstanding Restricted Units, beginning of year
Granted
Reinvested
Settled
Cancelled
Outstanding RUs, end of year
2018
359,154
215,002
28,029
(118,670)
(37,174)
446,341
2017
264,691
160,361
17,517
(83,398)
(17)
359,154
Unit-Settled Restricted Unit Plan Under the terms of the URU plan, certain employees were granted URUs,
which are subject to vesting conditions and disposition restrictions. Typically, full vesting of the URUs would not
occur until the employee had remained with Choice Properties for three or five years from the date of grant.
Depending on the nature of the grant, the URUs are subject to a six- or seven-year holding period during which
the Units cannot be disposed. There were 1,110,761 URUs vested, but still subject to disposition restrictions as
at year end 2018 (2017 – nil).
The following is a summary of Choice Properties’ URU plan activity for units not yet vested:
(Number of awards)
Outstanding Unit-Settled Restricted Units, beginning of year
Assumed in conjunction with the acquisition of CREIT
Granted
Forfeited
No longer subject to disposition restrictions
Outstanding URUs, end of year
2018
—
626,128
577,306
(28,946)
(456,673)
717,815
2017
—
—
—
—
—
—
On May 4, 2018, Choice Properties assumed the obligations of CREIT under the CREIT URU plan and holders of
CREIT RUs had each CREIT RU redeemed for Units in Choice Properties as part of the acquisition. Plan
participants are subject to the same vesting, forfeiture and disposition provisions and such other terms and
conditions as were applicable to the CREIT RUs pursuant to the CREIT RU plan immediately prior to the
completion of the acquisition of CREIT.
Performance Unit Plan PUs entitle certain employees to receive the value of the PU award in cash or Units at
the end of the applicable performance period, which is usually three years in length, based on the Trust
achieving certain performance conditions. The PU plan provides for the crediting of additional PUs in respect of
distributions paid on Units for the period when a PU is outstanding. The fair value of each PU granted is
measured based on the market value of a Trust Unit at the balance sheet date. PUs were first granted in 2016;
there were no PUs vested as at year end 2018 (2017 – nil).
154 George Weston Limited 2018 Annual Report
The following is a summary of Choice Properties’ PU plan activity:
(Number of awards)
Outstanding Performance Units, beginning of year
Granted
Reinvested
Cancelled
Added by performance factor
Settled
Outstanding PUs, end of year
2018
79,612
44,374
6,727
(16,194)
8,836
(18,906)
104,449
2017
39,696
36,099
3,817
—
—
—
79,612
Trustee Deferred Unit Plan Members of the Choice Properties’ Board of Trustees, who are not management of
Choice Properties, are required to receive a portion of their annual retainer in the form of DUs and may also
elect to receive up to 100% of their remaining fees in DUs. Distributions paid earn fractional DUs, which are
treated as additional awards. The fair value of each DU granted is measured based on the market value of a Unit
at the balance sheet date. All DUs vest when granted, however, they cannot be settled while Trustees are
members of the Board.
A summary of the DU plan activity is as follows:
(Number of awards)
Outstanding Trustee Deferred Units, beginning of year
Granted
Reinvested
Cancelled
Exercised
Outstanding Trustee DUs, end of year
Note 31. Employee Costs
Included in operating income were the following employee costs:
($ millions)
Wages, salaries and other short term employee benefits
Post-employment benefits (note 29)
Other long term employee benefits (note 29)
Share-based compensation (note 30)
Capitalized to fixed assets
Employee costs
2018
283,704
56,705
17,631
(1,108)
(54,343)
302,589
2017
218,992
51,865
12,847
—
—
283,704
2018
6,296
172
27
56
(54)
6,497
$
$
2017
5,962
182
26
68
(46)
6,192
$
$
George Weston Limited 2018 Annual Report 155
Notes to the Consolidated Financial Statements
Note 32. Leases
The Company leases certain of Loblaw’s retail stores, Weston Foods’ and Loblaw’s distribution centres, corporate
offices, and other assets under operating or finance lease arrangements. Substantially all of Loblaw’s retail store
leases have renewal options for additional terms. The contingent rents under certain of Loblaw’s retail store
leases are based on a percentage of Loblaw’s Retail segment sales. The Company also has properties which are
sub-leased to third parties.
Determining whether a lease arrangement is classified as finance or operating requires judgment with respect to
the fair value of the leased asset, the economic life of the lease, the discount rate and the allocation of leasehold
interests between the land and building elements of property leases.
Operating Leases – As Lessee Future minimum lease payments relating to the Company’s operating leases are
as follows:
($ millions)
Operating lease
payments
Sub-lease income
Net operating lease
payments
$
$
2019
2020
Payments due by year
2022
2021
2023 Thereafter
Dec. 31, 2018
Dec. 31, 2017
As at
708 $
666 $
602 $
523 $
447 $
1,880
(70)
(45)
(37)
(34)
(32)
(102)
638 $
621 $
565 $
489 $
415 $
1,778
$
$
4,826
(320)
4,506
$
$
4,742
(300)
4,442
In 2018, the Company recorded operating lease expenses of $712 million (2017 – $704 million) and sub-lease
income of $63 million (2017 – $55 million) in operating income. In addition, contingent rent expense in respect
of operating leases and contingent rental income in respect of sub-leased operating leases were $2 million (2017
– $1 million) and $3 million (2017 – $3 million), respectively, and were also recognized in operating income.
Operating Leases – As Lessor Future minimum lease payments to be received by the Company relating to
properties that are leased to third parties are as follows:
($ millions)
Net operating
lease income
Payments to be received by year
As at
2019
2020
2021
2022
2023 Thereafter
Dec. 31, 2018
Dec. 31, 2017
$
357 $
327 $
289 $
249 $
206 $
708
$
2,136
$
680
156 George Weston Limited 2018 Annual Report
As at year end 2018, the Company leased certain owned land and buildings used by the Company with a cost of
$2,214 million (2017 – $2,974 million) and related accumulated depreciation of $556 million (2017 –
$796 million). For the year ended 2018, rental revenue was $67 million (2017 – $131 million) and contingent rent
was $1 million (2017 – $2 million), both of which were recognized in operating income.
Finance Leases – As Lessee Future minimum lease payments relating to Loblaw’s finance leases are as follows:
($ millions)
Finance lease
payments
Less future
finance charges
Present value
of minimum
lease payments
2019
2020
Payments due by year
2022
2021
2023 Thereafter
Dec. 31, 2018
Dec. 31, 2017
As at
$
77 $
71 $
65 $
64 $
62 $
594
$
933
$
914
(39)
(33)
(31)
(29)
(27)
(239)
(398)
(346)
$
38 $
38 $
34 $
35 $
35 $
355
$
535
$
568
In 2018, contingent rent recognized by Loblaw as an expense in respect of finance leases was $2 million (2017 –
$1 million).
Certain assets classified as finance leases have been sub-leased by Loblaw to third parties. Future sub-lease
income relating to these sub-lease agreements are as follows:
($ millions)
2019
2020
2021
2022
Sub-lease income
$
5 $
4 $
2 $
2 $
2023 Thereafter
16
2 $
Dec. 31, 2018
31
$
Dec. 31, 2017
59
$
Payments to be received by year
As at
In 2018, the sub-lease income earned under finance leases was $5 million (2017 – $15 million).
George Weston Limited 2018 Annual Report 157
Notes to the Consolidated Financial Statements
Note 33. Financial Instruments
The following table presents the fair values and fair value hierarchy of the Company’s financial instruments and
excludes financial instruments measured at amortized cost that are short term in nature. The carrying values of
the Company’s financial instruments approximate their fair values except for long term debt.
($ millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
As at
Dec. 31, 2018
Dec. 31, 2017
Financial assets
Amortized cost:
Franchise loans receivable
Certain other assets(i)
Fair value through other comprehensive income:
Certain long term investments(i)
Derivatives included in prepaid expenses and
other assets
Fair value through profit and loss:
Security deposits
Certain other assets(i)
Derivatives included in accounts receivable
Derivatives included in prepaid expenses and
other assets
Derivatives included in other assets
Financial liabilities
Amortized cost:
Long term debt
Certain other liabilities(i)
Fair value through other comprehensive income:
Derivatives included in trade payables and
other liabilities
Fair value through profit and loss:
Trust Unit liability
Derivatives included in trade payables and
other liabilities
$ — $ — $
—
50
—
87
—
(2)
2
—
—
20
2
—
—
7
11
556
78
154
$
78
154
$ — $ — $
$ —
3
166
23
$
$
166
26
—
—
—
76
—
—
—
70
2
87
76
5
13
556
20
—
86
—
(2)
3
—
21
—
—
—
(7)
—
435
—
—
—
—
—
2
—
41
—
86
—
(9)
5
435
— 16,012
—
—
— 16,012
13
13
— 13,103
—
—
— 13,103
18
18
—
2,658
11
7
—
—
—
—
3
7
—
2,658
634
14
—
1
—
10
—
—
—
1
634
10
(i) Certain other assets, certain other long term investments, and certain other liabilities are included in the consolidated balance
sheets in Other Assets and Other Liabilities, respectively.
There were no transfers between the levels of the fair value hierarchy during 2018 and 2017.
During 2018, a gain of $6 million (2017 – loss of $6 million) was recognized in operating income on financial
instruments designated as amortized cost. In addition, a net gain of $5 million (2017 – loss of $3 million) was
recognized in earnings before income taxes on financial instruments required to be classified as fair value
through profit or loss.
Cash and Cash Equivalents, Short Term Investments and Security Deposits As at year end 2018, the Company
had cash and cash equivalents, short term investments and security deposits of $1,889 million (2017 –
$3,233 million), including U.S. dollars of $161 million (2017 – $573 million) that was held primarily by Dunedin
Holdings GmbH (“Dunedin”), a subsidiary of GWL, and certain of its affiliates (see note 10).
In 2018, a gain of $84 million (2017 – loss of $64 million) was recognized in other comprehensive income related
to the effect of foreign currency translation on the Company’s U.S. net investment in foreign operations.
In addition, in 2018, a gain of $17 million (2017 – loss of $34 million) was recorded in SG&A related to the effect
of foreign currency translation on a portion of the U.S. dollar denominated cash and cash equivalents and short
term investments held by foreign operations that have the same functional currency as that of the Company.
158 George Weston Limited 2018 Annual Report
Level 3 Financial Instruments
Franchise Loans Receivable and Franchise Investments in Other Assets As at year end 2018, the value of Loblaw
franchise loans receivable of $78 million (2017 – $166 million) was recorded on the consolidated balance sheets.
In 2018, Loblaw recorded a gain of $3 million (2017 – gain of $8 million) in operating income related to these
loans receivable.
As at year end 2018, the value of Loblaw franchise investments was $14 million (2017 – $20 million) and was
recorded in other assets. During 2018, Loblaw recorded a gain of $3 million (2017 – $2 million) in operating
income related to these investments.
Embedded Derivatives The Level 3 financial instruments classified as fair value through profit or loss consist of
Loblaw embedded derivatives on purchase orders placed in neither Canadian dollars nor the functional currency
of the vendor. These derivatives are valued using a market approach based on the differential in exchange rates
and timing of settlement. The significant unobservable input used in the fair value measurement is the cost of
purchase orders. Significant increases (decreases) in any one of the inputs would result in a significantly higher
(lower) fair value measurement.
In 2018, a fair value loss of $5 million (2017 – gain of $4 million) was recognized in operating income related to
these derivatives. In addition, as at year end 2018, a corresponding liability of $3 million was included in trade
payables and other liabilities (2017 – $2 million asset included in prepaid expenses and other assets). As at
December 31, 2018, a 1% increase (decrease) in foreign currency exchange rates would result in a $1 million gain
(loss) in fair value.
Equity Derivative Contracts As at year end 2018, Weston Holdings Limited (“WHL”), a subsidiary of GWL, held an
outstanding equity forward sale agreement based on 9.6 million Loblaw common shares at an original forward
price of $48.50 per Loblaw common share. As at year end 2018, the forward price had increased to $118.42
(2017 – $113.45) per Loblaw common share under the terms of the agreement. In 2018, a fair value loss of
$50 million (2017 – gain of $25 million) was recorded in net interest expense and other financing charges related
to this agreement (see note 7).
Trust Unit Liability In 2018, a fair value gain of $41 million (2017 – $7 million) was recognized in net interest
expense and other financing charges (see note 7).
George Weston Limited 2018 Annual Report 159
Notes to the Consolidated Financial Statements
Other Derivatives The Company uses bond forwards and interest rate swaps, to manage its anticipated
exposure to fluctuations in interest rates on future debt issuances. The Company also uses futures, options and
forward contracts to manage its anticipated exposure to fluctuations in commodity prices and exchange rates in
its underlying operations. The following is a summary of the fair values recognized in the consolidated balance
sheet and the net realized and unrealized gains (losses) before income taxes related to the Company’s other
derivatives:
($ millions)
Derivatives designated as cash flow hedges
Foreign Exchange Currency Risk - Foreign Exchange Forwards
Interest Rate Risk - Bond Forwards(i)
Interest Rate Risk - Interest Rate Swaps(ii)
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange and Other Forwards
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
Net asset
(liability)
fair value
Gain/(loss)
recorded in
OCI
Dec. 31, 2018
Gain/(loss)
recorded in
operating
income
$
$
1
(4)
(1)
(4)
$
2
(5)
6
3
$
18
$
— $
(13)
5
1
—
—
3
—
1
—
1
41
(24)
17
18
(i) As a result of the issuance of Eagles’ notes, bond forward agreements with a notional value of $250 million were settled in 2018,
resulting in a realized fair value off of $1 million recorded in OCI (note 24).
(ii) Choice Properties uses interest rate swaps, with a notional value of $322 million, which were assumed during the second quarter of
2018 in connection with the acquisition of CREIT, to manage its interest rate risk related to variable rate mortgages. The fair value of
the derivatives is included in other assets and other liabilities.
($ millions)
Derivatives designated as cash flow hedges(i)
Foreign Exchange Currency Risk - Foreign Exchange Forwards
Interest Rate Risk - Bond Forwards(ii)
Total derivatives designated as cash flow hedges
Derivatives not designated in a formal hedging relationship
Foreign Exchange Futures and Forwards
Other Non-Financial Derivatives
Total derivatives not designated in a formal hedging relationship
Total derivatives
Net asset
(liability)
fair value
Gain/(loss)
recorded in
OCI
Dec. 31, 2017
Gain/(loss)
recorded in
operating
income
$
$
(1) $
—
(1)
(3) $
6
3
(17) $
— $
1
(16)
(17)
—
—
3
1
—
1
(36)
(3)
(39)
(38)
(i)
Includes interest rate swap agreements with a notional value of $100 million. During 2017, a nominal unrealized fair value gain was
recorded in OCI relating to these agreements.
(ii) Bond forward agreements with a notional value of $200 million were settled in 2017, resulting in realized fair value gain of $6 million
recorded in OCI.
160 George Weston Limited 2018 Annual Report
Note 34. Financial Risk Management
As a result of holding and issuing financial instruments, the Company is exposed to certain risks. The following is
a description of those risks and how the exposures are managed:
Liquidity Risk Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its
equivalents in a cost effective manner to fund its obligations as they come due. The Company is exposed to
liquidity risk through, among other areas, PC Bank and its credit card business, which requires a reliable source
of funding for its credit card business. PC Bank relies on its securitization programs and the acceptance of GIC
deposits to fund the receivables of its credit cards. The Company would experience liquidity risk if it fails to
maintain appropriate levels of cash and short term investments, is unable to access sources of funding or fails to
appropriately diversify sources of funding. If any of these events were to occur, they could adversely affect the
financial performance of the Company.
Liquidity risk is mitigated by maintaining appropriate levels of cash and cash equivalents and short term
investments, actively monitoring market conditions, and by diversifying sources of funding, including the
Company’s committed credit facilities, and maintaining a well diversified maturity profile of debt and capital
obligations.
Maturity Analysis The following are the undiscounted contractual maturities of significant financial liabilities as
at December 31, 2018:
($ millions)
Long term debt including
interest payments(i)
2019
2020
2021
2022
2023
Thereafter
Total(ii)
$
2,745 $
2,369 $
1,435 $
1,745 $
3,200 $
9,719 $ 21,213
Foreign exchange forward contracts
Short term debt (note 23)
Bank indebtedness
Certain other liabilities
446
1,579
56
2
—
—
—
3
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
—
446
1,579
56
8
$
4,828 $
2,372 $
1,438 $
1,745 $
3,200 $
9,719 $ 23,302
(i)
Fixed interest payments are based on the maturing face values and annual interest for each instrument, including GICs, long term
independent securitization trusts and an independent funding trust, as well as annual payment obligations for consolidated
structured entities, mortgages and finance lease obligations. Variable interest payments are based on the forward rates as at year
end 2018.
(ii) The Trust Unit liability has been excluded as this liability does not have a contractual maturity date. The Company also excluded trade
payables and other liabilities which are due within the next 12 months.
Foreign Currency Exchange Rate Risk The Company’s consolidated financial statements are expressed in
Canadian dollars, however a portion of the Company’s (excluding Loblaw’s) net assets are denominated in U.S.
dollars through both its net investment in foreign operations in the U.S. and its foreign subsidiaries held by
Dunedin and certain of its affiliates with a functional currency that is the same as that of the Company. The U.S.
dollar denominated net assets are translated into Canadian dollars at the foreign currency exchange rate in effect
at the balance sheet date. As a result, the Company is exposed to foreign currency translation gains and losses.
Those gains and losses arising from the translation of the U.S. dollar denominated assets of foreign subsidiaries
with a functional currency that is the same as that of the Company are included in operating income, while
translation gains and losses on the net investment in foreign operations in the U.S. are recorded in accumulated
other comprehensive income (loss). The Company estimates that based on the U.S. net assets held by foreign
operations that have the same functional currency as that of the Company at the end of 2018, an appreciation of
the Canadian dollar of one cent relative to the U.S. dollar would result in a loss of $0.3 million in earnings before
income taxes.
Revenues and expenses of all foreign operations are translated into Canadian dollars at the foreign currency
exchange rates that approximate the rates in effect at the dates when such items are recognized. An appreciating
U.S. dollar relative to the Canadian dollar will positively impact operating income and net earnings, while a
depreciating U.S. dollar relative to the Canadian dollar will have the opposite impact.
George Weston Limited 2018 Annual Report 161
Notes to the Consolidated Financial Statements
Weston Foods and Loblaw are also exposed to fluctuations in the prices of U.S. dollar denominated purchases
as a result of changes in U.S. dollar exchange rates. A depreciating Canadian dollar relative to the U.S. dollar will
negatively impact operating income and net earnings, while an appreciating Canadian dollar relative to the
U.S. dollar will have the opposite impact. Weston Foods and Loblaw entered into derivative instruments in the
form of futures contracts and forward contracts to manage their current and anticipated exposure to
fluctuations in U.S. dollar exchange rates.
Credit Risk The Company is exposed to credit risk resulting from the possibility that counterparties could default
on their financial obligations to the Company including derivative instruments, cash and cash equivalents, short
term investments, security deposits, PC Bank’s credit card receivables, Loblaw’s franchise loans receivable,
pension assets held in the Company’s defined benefit plans, Loblaw’s accounts receivable including amounts due
from franchisees, government, prescription sales and third-party drug plans, independent accounts and amounts
owed from vendors, and other receivables from Weston Foods’ customers and suppliers. Failure to manage
credit risk could adversely affect the financial performance of the Company.
The risk related to derivative instruments, cash and cash equivalents, short term investments and security
deposits is reduced by policies and guidelines that require that the Company enters into transactions only with
counterparties or issuers that have a minimum long term “A-” credit rating from a recognized credit rating
agency and place minimum and maximum limits for exposures to specific counterparties and instruments.
Choice Properties mitigates the risk of credit loss relating to rent receivables by evaluating the creditworthiness
of new tenants, obtaining security deposits wherever permitted by legislation, ensuring its tenant mix is
diversified and by limiting its exposure to any one tenant except Loblaw. Choice Properties establishes an
allowance for doubtful accounts that represents the estimated losses with respect to rents receivable. The
allowance is determined on a tenant-by-tenant basis based on the specific factors related to the tenant.
PC Bank manages its credit card receivable risk by employing stringent credit scoring techniques, actively
monitoring the credit card portfolio and reviewing techniques and technology that can improve the effectiveness
of the collection process. In addition, these receivables are dispersed among a large, diversified group of credit
card customers.
Loblaw’s franchise loans receivable and Loblaw’s accounts receivable including amounts due from franchisees,
governments, prescription sales covered by third-party drug plans, independent accounts and amounts owed
from vendors, and other receivables from Weston Foods’ customers and suppliers, are actively monitored on an
ongoing basis and settled on a frequent basis in accordance with the terms specified in the applicable
agreements.
The Company’s maximum exposure to credit risk as it relates to derivative instruments is approximated by the
positive fair market value of the derivatives on the consolidated balance sheets (see note 33).
Refer to notes 11 and 12 for additional information on the credit quality performance of Loblaw’s credit card
receivables and other receivables, mentioned above, of Loblaw and Weston Foods.
162 George Weston Limited 2018 Annual Report
Common Share and Trust Unit Price Risk Changes in the Loblaw common share price impact the Company’s net
interest expense and other financing charges. The obligation of WHL under the equity forward sale agreement
based on 9.6 million Loblaw common shares, which matures in 2031, is secured by the underlying Loblaw
common shares. If the market value of the underlying Loblaw common shares exceeds the obligation of WHL
under this forward, a portion of the proceeds from a future sale of these shares may be used to satisfy the
obligation under this forward contract upon termination or maturity. At maturity, if the forward price is greater
(less) than the market price of the Loblaw common shares, WHL will receive (pay) cash equal to the difference
between the notional value and the market value of the forward contract. A one dollar increase in the market
value of the underlying shares of the equity forward, with all other variables held constant, would result in an
increase of $10 million in net interest expense and other financing charges.
The Company is exposed to market price risk from Choice Properties’ Trust Units that are held by unitholders
other than the Company. These Trust Units are presented as a liability on the Company’s consolidated balance
sheets as they are redeemable for cash at the option of the holders. The liability is recorded at fair value at each
reporting period based on the market price of Trust Units. The change in the fair value of the liability negatively
impacts net earnings when the Trust Unit price increases and positively impacts net earnings when the Trust Unit
price declines. A one dollar increase in the market value of Trust Units, with all other variables held constant,
would result in an increase of $231 million in net interest expense and other financing charges.
Interest Rate Risk The Company is exposed to interest rate risk from fluctuations in interest rates on its floating
rate debt and from the refinancing of existing financial instruments. The Company manages interest rate risk by
monitoring the respective mix of fixed and floating rate debt and by taking action as necessary to maintain an
appropriate balance considering current market conditions, with the objective of maintaining the majority of its
debt at fixed interest rates. The Company estimates that a 100 basis point increase (decrease) in short term
interest rates, with all other variables held constant, would result in an increase (decrease) of $7 million in net
interest expense and other financing charges.
Commodity Price Risk Weston Foods’ costs are directly impacted by fluctuations in the prices of commodity
linked raw materials such as wheat flours, sugars, vegetable oils, cocoa powders and chocolate. Loblaw is also
exposed to fluctuations in the commodity prices as a result of the indirect effect of changing commodity prices
on the price of consumer products. In addition, both Weston Foods and Loblaw are exposed to increases in the
prices of energy in operating, in the case of Weston Foods, its bakeries and distribution networks, and, in the
case of Loblaw, its stores and distribution networks. Both Weston Foods and Loblaw use purchase commitments
and derivative instruments in the form of futures contracts, option contracts and forward contracts to manage
their current and anticipated exposure to fluctuations in commodity prices.The Company estimates that based
on the outstanding derivative contracts held by the Company as at year end 2018, a 10% decrease in relevant
commodity prices, with all other variables held constant, would result in a net loss of $13 million in earnings
before income taxes. This amount excludes the offsetting impact of the commodity price risk inherent in the
transactions being hedged.
George Weston Limited 2018 Annual Report 163
Notes to the Consolidated Financial Statements
Note 35. Contingent Liabilities
In the ordinary course of business, the Company is involved in and potentially subject to legal actions and
proceedings. In addition, the Company is subject to tax audits from various tax authorities on an ongoing basis.
As a result, from time to time, tax authorities may disagree with the positions and conclusions taken by the
Company in its tax filings or legislation could be amended or interpretations of current legislation could change,
any of these events could lead to reassessments.
There are a number of uncertainties involved in such matters, individually or in aggregate, and as such, there is a
possibility that the ultimate resolution of these matters may result in a material adverse effect on the Company’s
reputation, operations or financial condition or performance in future periods. It is not currently possible to
predict the outcome of the Company’s legal actions and proceedings with certainly. Management regularly
assesses its position on the adequacy of such accruals or provisions and will make any necessary adjustments.
The following is a description of the Company’s significant legal proceedings:
On August 26, 2015, the Company was served with a proposed class action, which was commenced in the
Ontario Superior Court of Justice (“the Superior Court”) against the Company, Loblaw and certain of its
subsidiaries and others in connection with the collapse of the Rana Plaza complex in Dhaka, Bangladesh in
2013. The claim seeks approximately $2 billion in damages. The Company believes this proceeding is without
merit and is vigorously defending it. The Company does not currently have any significant accruals or
provisions for this matter recorded in the consolidated financial statements. In July 2017, the Superior Court
dismissed the action and the plaintiffs appealed. The decision of the Ontario Court of Appeal, released
December 20, 2018, upheld the Superior Court’s dismissal of the action. Costs awarded in respect of the
original motion were reduced by 30%. The plaintiffs are seeking leave to appeal to the Supreme Court of
Canada.
Shoppers Drug Mart has been served with an Amended Statement of Claim in a class action proceeding that
has been filed in the Superior Court by two licensed Associates, claiming various declarations and damages
resulting from Shoppers Drug Mart’s alleged breaches of the Associate Agreement, in the amount of
$500 million. The class action comprises all of Shoppers Drug Mart’s current and former licensed Associates
residing in Canada, other than in Québec, who are parties to Shoppers Drug Mart’s 2002 and 2010 forms of
the Associate Agreement. On July 9, 2013, the Superior Court certified as a class proceeding portions of the
action. The Superior Court imposed a class closing date based on the date of certification. New Associates
after July 9, 2013 are not members of the class. Loblaw believes this claim is without merit and is vigorously
defending it. Loblaw does not currently have any significant accruals or provisions for this matters recorded in
the consolidated financial statements.
In 2017, the Company and Loblaw announced actions taken to address their role in an industry-wide price-
fixing arrangement involving certain packaged bread products. The arrangement involved the coordination of
retail and wholesale prices of certain packaged bread products over a period extending from late 2001 to
March 2015. Under the arrangement, the participants regularly increased prices on a coordinated basis. Class
action lawsuits have been commenced against the Company and Loblaw as well as a number of other major
grocery retailers and another bread wholesaler. It is too early to predict the outcome of such legal
proceedings. Neither the Company nor Loblaw believes that the ultimate resolution of such legal proceedings
will have a material adverse impact on its financial condition or prospects. The Company’s cash balances far
exceed any realistic damages scenario and therefore it does not anticipate any impacts on its dividend,
dividend policy or share buyback plan. The Company has not recorded any amounts related to the potential
civil liability associated with the class action lawsuits in 2018 on the basis that a reliable estimate of the
liability cannot be determined at this time. The Company will continue to assess whether a provision for civil
liability associated with the class action lawsuits can be reliably estimated and will record an amount in the
period at the earlier of when a reliable estimate of liability can be determined or the matter is ultimately
resolved.
164 George Weston Limited 2018 Annual Report
As part of its response to this issue, Loblaw and the Company acknowledged their involvement in an industry
wide price-fixing arrangement. In connection with the arrangement, Loblaw offered customers a $25 Loblaw
Card, which can be used to purchase items sold in Loblaw grocery stores across Canada. Loblaw recorded a
charge of $107 million associated with the Loblaw Card Program in the fourth quarter of 2017. In 2018, on a
year-to-date basis, Loblaw had recorded an additional charge of $4 million. The Company expects that Loblaw
Cards issued to customers will be an offset against civil liability. The charge recorded for the Loblaw Card
Program should not be viewed as an estimate of damages.
As a result of their admission that they participated in the arrangement and their cooperation in the Competition
Bureau’s investigation, the Company and Loblaw will not face criminal charges or penalties.
In August 2018, the Province of British Columbia filed a class action against numerous opioid manufacturers and
distributors, including Loblaw and its subsidiaries, Shoppers Drug Mart Inc. and Sanis Health Inc. The claim
contains allegations of breach of the Competition Act, fraudulent misrepresentation and deceit and negligence,
and seeks damages (unquantified) for the expenses incurred by the province in paying for opioid prescriptions
and other healthcare costs related to opioid addiction and abuse in British Columbia. Loblaw believes this
proceeding is without merit and is vigorously defending it. Loblaw does not currently have any significant
accruals or provisions for this matter recorded in the consolidated financial statements.
Indemnification Provisions The Company from time to time enters into agreements in the normal course of
its business, such as service and outsourcing arrangements, lease agreements in connection with business or
asset acquisitions or dispositions, and other types of commercial agreements. These agreements by their nature
may provide for indemnification of counterparties. These indemnification provisions may be in connection with
breaches of representations and warranties or in respect of future claims for certain liabilities, including liabilities
related to tax and environmental matters. The terms of these indemnification provisions vary in duration and
may extend for an unlimited period of time. In addition, the terms of these indemnification provisions vary in
amount and certain indemnification provisions do not provide for a maximum potential indemnification amount.
Indemnity amounts are dependent on the outcome of future contingent events, the nature and likelihood of
which cannot be determined at this time. As a result, the Company is unable to reasonably estimate its total
maximum potential liability in respect of indemnification provisions. Historically, the Company has not made any
significant payments in connection with these indemnification provisions.
George Weston Limited 2018 Annual Report 165
Notes to the Consolidated Financial Statements
Note 36. Financial Guarantees
The Company established letters of credit used in connection with certain obligations mainly related to real
estate transactions, benefit programs, purchase orders and guarantees with a gross potential liability of
approximately $400 million (2017 – $424 million). In addition, Loblaw and Choice Properties has provided to
third parties the following significant guarantees:
Associate Guarantees Loblaw has arranged for its Associates to obtain financing to facilitate their inventory
purchases and fund their working capital requirements by providing guarantees to various Canadian
chartered banks that support Associate loans. As at year end 2018, Loblaw’s maximum obligation in respect of
such guarantees was $580 million (2017 – $580 million) with an aggregate amount of $466 million (2017 –
$509 million) in available lines of credit was allocated to the Associates by the various banks. As at year end
2018, Associates had drawn an aggregate amount of $56 million (2017 – $110 million) against these available
lines of credit. Any amounts drawn by the Associates are included in bank indebtedness on the Company’s
consolidated balance sheets. As recourse in the event that any payments are made under the guarantees,
Loblaw holds a first-ranking security interest on all assets of Associates, subject to certain prior-ranking statutory
claims.
Independent Funding Trusts The full balance relating to the debt of the independent funding trusts has been
consolidated on the balance sheets of the Company (see note 24). As at year end 2018, Loblaw has agreed to
provide a credit enhancement of $64 million (2017 – $64 million) in the form of a standby letter of credit for the
benefit of the independent funding trusts representing not less than 10% (2017 – 10%) of the principal amount
of the loans outstanding. This credit enhancement allows the independent funding trusts to provide financing to
Loblaw’s franchisees. As well, each franchisee provides security to the independent funding trusts for its
obligations by way of a general security agreement. In the event that a franchisee defaults on its loan and Loblaw
has not, within a specified time period, assumed the loan, or the default is not otherwise remedied, the
independent funding trusts would assign the loan to Loblaw and draw upon this standby letter of credit. This
standby letter of credit has never been drawn upon. Loblaw has agreed to reimburse the issuing bank for any
amount drawn on the standby letter of credit.
Lease Obligations In connection with historical dispositions of certain of its assets, Loblaw has assigned leases
to third parties. Loblaw remains contingently liable for these lease obligations in the event any of the assignees
are in default of their lease obligations. The minimum rent, which does not include other lease related
expenses such as property tax and common area maintenance charges, was in aggregate, approximately
$12 million (2017 – $15 million). Additionally, Loblaw has guaranteed lease obligations of a third-party
distributor in the amount of $3 million (2017 – $3 million).
Glenhuron Bank Limited Surety Bond In connection with the Canada Revenue Agency’s reassessment of Loblaw
on certain income earned by Glenhuron (see note 8), Loblaw arranged for a surety bond to the Ontario Ministry
of Finance in order to appeal the reassessments. As a result of the decision of the Tax Court of Canada and
incremental payments by Loblaw, the amount of the surety bond was reduced to $46 million (2017 –
$149 million).
Cash Collateralization As at year end 2018, GWL and Loblaw had agreements to cash collateralize certain
uncommitted credit facilities up to amounts of $45 million (2017 – $45 million) and $103 million (2017 –
$102 million), respectively. As at year end 2018, GWL and Loblaw had $45 million (2017 – $45 million) and
$2 million (2017 – $3 million) deposited with major financial institutions, respectively, and classified as security
deposits on the consolidated balance sheets.
166 George Weston Limited 2018 Annual Report
Financial Services Loblaw has provided a guarantee on behalf of PC Bank to MasterCard® International
Incorporated (“MasterCard®”) for accepting PC Bank as a card member and licensee of MasterCard®
As at year
end 2018, the guarantee on behalf of PC Bank to MasterCard® was U.S. dollars $190 million (2017 – U.S. dollars
$190 million).
.
Loblaw had in place an irrevocable standby letter of credit from a major Canadian chartered bank on behalf of
one of its wholly-owned subsidiaries in the amount of $11 million (2017 – $76 million).
Letters of credit for the benefit of independent securitization trusts with respect to the securitization programs
of PC Bank have been issued by major financial institutions. These standby letters of credit can be drawn upon in
the event of a major decline in the income flow from or in the value of the securitized credit card receivables.
Loblaw has agreed to reimburse the issuing banks for any amount drawn on the standby letters of credit. The
aggregate gross potential liability under these arrangements for the Other Independent Securitization Trusts was
$89 million (2017 – $62 million), which represented approximately 10% (2017 – 10%) of the securitized credit
card receivables amount (see note 23).
Choice Properties Letters of credit to support guarantees related to its investment properties including
maintenance and development obligations to municipal authorities are issued by Choice Properties.
As at year end 2018, the aggregate gross potential liability related to these letters of credit totaled $39 million
(2017 – $33 million).
Choice Properties’ credit facilities and debentures are guaranteed by each of the General Partner, the
Partnership and any other person that becomes a subsidiary of Choice Properties (with certain exceptions). In
the case of default by Choice Properties, the Indenture Trustee will be entitled to seek redress from the
Guarantors for the guaranteed obligations in the same manner and upon the same terms that it may seek to
enforce the obligations of Choice Properties. These guarantees are intended to eliminate structural
subordination, which would otherwise arise as a consequence of Choice Properties’ assets being primarily held
in its various subsidiaries.
CPH Master LP guarantees certain debt assumed by purchasers in connection with past dispositions of properties
made by CREIT before the acquisition. These guarantees will remain until the debt is modified, refinanced or
extinguished. Credit risks arise in the event that the purchasers default on repayment of their debt. These credit
risks are mitigated by the recourse which the Trust has under these guarantees, in which case the Trust would
have a claim against the underlying property. The estimated amount of debt as at year end 2018 subject to such
guarantees, and therefore the maximum exposure to credit risk, was $38 million with an estimated weighted
average remaining term of 4.5 years.
George Weston Limited 2018 Annual Report 167
Notes to the Consolidated Financial Statements
Note 37. Related Party Transactions
The Company’s majority shareholder is Mr. W. Galen Weston, who beneficially owns, directly and indirectly
through private companies which he controls, including Wittington, a total of 81,465,025 of GWL’s common
shares, representing approximately 53.1% (2017 – 63.2%) of GWL’s outstanding common shares.
The Company’s policy is to conduct all transactions and settle all balances with related parties on market terms
and conditions. Transactions between the Company and its consolidated entities have been eliminated on
consolidation and are not disclosed in this note.
In 2018, the Company made rental payments to Wittington in the amount of $4 million (2017 – $4 million). As at
year end 2018 and 2017, there were no rental payments outstanding.
In 2018, inventory purchases from Associated British Foods plc, a related party by virtue of Mr. W. Galen Weston
being a director of such entity’s parent company, amounted to $44 million (2017 – $39 million). As at year
end 2018, $3 million (2017 – $6 million) was included in trade payables and other liabilities relating to these
inventory purchases.
Joint Venture In 2014, a joint venture, formed between Choice Properties and Wittington, completed the
acquisition of property from Loblaw. The joint venture intends to develop the acquired site into a mixed-used
property, anchored by a Loblaw food store. As at year end 2018, the joint venture did not have any operating
activity. Choice Properties uses the equity method of accounting to record its 40% interest in the joint venture,
which is included in other assets.
Operating Lease Choice Properties entered into a ten-year lease for office space with Wittington that
commenced in 2014. Lease payments will total $3 million over the term of the lease. Effective January 1, 2018,
Choice Properties entered into a sub-lease for additional office space with a subsidiary of the Company, with a
term effective until the end of the existing lease in 2024. Over the term of the sub-lease, lease payments will
total $1 million.
Post-Employment Benefit Plans The Company sponsors a number of post-employment plans, which are related
parties. Contributions made by the Company to these plans are disclosed in note 29.
Income Tax Matters From time to time, the Company and Wittington may enter into agreements to make
elections that are permitted or required under applicable income tax legislation with respect to affiliated
corporations.
Compensation of Key Management Personnel The Company’s key management personnel is comprised of
certain members of the executive team of GWL, Loblaw, Weston Foods and Wittington, as well as members of
the Boards of GWL, Loblaw and Wittington to the extent that they have the authority and responsibility for
planning, directing and controlling the day-to-day activities of the Company.
Annual compensation of key management personnel that is directly attributable to the Company was as follows:
($ millions)
Salaries, director fees and other short term employee benefits
Share-based compensation
Total compensation
2018
8
12
20
$
$
2017
9
13
22
$
$
168 George Weston Limited 2018 Annual Report
Note 38. Segment Information
The Company has three reportable operating segments: Weston Foods, Loblaw and Choice Properties.
In 2018, the Company and Loblaw completed a reorganization under which Loblaw spun out its approximate
61.6% effective interest in Choice Properties to the Company (see note 5). Following the reorganization, the
Company owned an approximate 65.4% effective interest in Choice Properties directly and Choice Properties
became a reportable operating segment of the Company.
The accounting policies of the reportable operating segments are the same as those described in the Company’s
summary of significant accounting policies (see note 2). The Company measures each reportable operating
segment’s performance based on adjusted EBITDA(iii) and adjusted operating income(iii). Neither reportable
operating segment is reliant on any single external customer.
($ millions)
Revenue
Weston
Foods
Loblaw
Choice
Properties
Other and
Intersegment(i)
2018
Total
Weston
Foods
Loblaw(v)
Choice
Properties(v)
Other and
Intersegment(i)(v)
2017(ii)
Total
$ 2,122 $ 46,693 $ 1,148 $
(1,395) $ 48,568
$ 2,243 $46,587 $
830 $
(1,371) $ 48,289
Operating income
$
73 $ 1,915 $
593 $
4 $ 2,585
$
91 $ 2,041 $
756 $
(327) $ 2,561
Net interest expense and
other financing charges
Earnings before
income tax
Operating income
Depreciation and
amortization
Adjusting items(iii)
Adjusted EBITDA(iii)
Depreciation and
amortization(iv)
Adjusted operating
income(iii)
88
564
(57)
353
948
13
374
351
(215)
523
$
$
(15) $ 1,351 $
650 $
(349) $ 1,637
73 $ 1,915 $
593 $
4 $ 2,585
$
$
78 $ 1,667 $
405 $
(112) $ 2,038
91 $ 2,041 $
756 $
(327) $ 2,561
130
16
1,497
108
1
230
118
(157)
1,746
197
117
48
1,454
1
18
(160)
113
185
1,685
91
$
219 $ 3,520 $
824 $
(35) $ 4,528
$
256 $ 3,513 $
597 $
(29) $ 4,337
121
976
1
118
1,216
107
930
1
113
1,151
$
98 $ 2,544 $
823 $
(153) $ 3,312
$
149 $ 2,583 $
596 $
(142) $ 3,186
George Weston Limited 2018 Annual Report 169
Notes to the Consolidated Financial Statements
(i) Other and intersegment includes the following items:
(unaudited)
($ millions)
Before Other and Intersegment
Choice Properties Intersegment Consolidation
Revenue
$ 49,963 $
2018
Net
Interest
Expense
and Other
Financing
Charges
595
Adjusted
Operating
Income(iii)
3,465 $
2017(ii)(v)
Net
Interest
Expense
and Other
Financing
Charges
738
Adjusted
Operating
Income(iii)
3,328 $
Revenue
$
49,660 $
and Elimination
Elimination of rental revenue
Elimination of cost recovery
Elimination of lease surrender
Intercompany charges
Weston Foods’ net gain on sales leaseback of property
to Choice Properties
Loblaw’s net gain on sales leaseback of property to
Choice Properties
Recognition of depreciation on Choice Properties’
investment properties classified as fixed assets by
the Company and measured at cost
Fair value adjustment on Choice Properties’
Class B LP Units
Fair value adjustment on Trust Unit liability
Unit distribution on Exchangeable Units paid by Choice
Properties to GWL and Loblaw
Unit distribution on Trust Units paid by
Choice Properties, excluding amounts paid to GWL
and Loblaw
Interest on debt due from Choice Properties to Loblaw
and accretion income earned on intercompany
Class C Units
Other
Other
Intercompany sales
Total Consolidated
(555)
(181)
(10)
—
—
—
—
—
—
—
—
—
(1)
—
—
(10)
(4)
(10)
(6)
(118)
—
—
—
—
—
(5)
—
—
—
—
—
—
—
594
(41)
(271)
126
(55)
—
(529)
(183)
(6)
—
—
—
—
—
—
—
—
—
—
—
—
(6)
(7)
—
(7)
(113)
—
—
—
—
—
(9)
(648)
$ 48,568 $
—
3,312 $
—
948
(653)
48,289 $
$
—
3,186 $
—
—
—
—
—
—
—
38
(10)
(232)
34
(45)
—
—
523
(ii) Certain comparative figures have been restated (see note 2).
(iii) Excludes certain items and is used internally by management when analyzing segment underlying operating performance.
(iv) Excludes $521 million (2017 – $524 million) of amortization of intangible assets acquired with Shoppers Drug Mart, recorded by
Loblaw, and $9 million (2017 – $10 million) of accelerated depreciation recorded by Weston Foods, included in restructuring and
other charges.
(v) Certain comparative figures have been restated to to present Continuing Operations at Loblaw as a result of Loblaw’s spin-out of
Choice Properties (see note 5).
170 George Weston Limited 2018 Annual Report
($ millions)
Total Assets
Weston Foods
Loblaw
Choice Properties
Other(ii)
Intersegment
Consolidated
As at
Dec. 31, 2018
Dec. 31, 2017(i)
$
$
3,008
30,228
15,518
298
(5,238)
43,814
$
$
2,645
34,230
9,924
927
(9,186)
38,540
(i) Certain comparative figures have been restated as a result of the implementation of IFRS 15 “Revenue from Contracts with
Customers”, a change in accounting policy and to present continuing operations at Loblaw as a result of Loblaw’s spin-out of Choice
Properties (see notes 2 and 5).
(ii) Other includes cash and cash equivalents and short term investments held by foreign operations that have the same functional
currency as that of the Company.
($ millions)
Additions to Fixed Assets and Intangible Assets
Weston Foods
Loblaw
Choice Properties
Consolidated
2018
212
1,070
311
1,593
$
$
2017(i)
215
1,026
233
1,474
$
$
(i) Certain comparative figures have been restated to present continuing operations at Loblaw as a result of Loblaw’s spin-out of Choice
Properties (see note 5).
The Company operates primarily in Canada and the United States.
($ millions)
Revenue (excluding intersegment)
Canada
United States
Consolidated
($ millions)
Fixed Assets and Goodwill and Intangible Assets
Canada
United States
Consolidated
2018
47,415
1,153
48,568
$
$
2017(i)
$
$
47,065
1,224
48,289
As at
Dec. 31, 2018
Dec. 31, 2017
$
$
23,936
904
24,840
$
$
23,652
782
24,434
(i) Certain comparative figures have been restated as a result of the implementation of IFRS 15 “Revenue from Contracts with
Customers” (see notes 2).
George Weston Limited 2018 Annual Report 171
Three Year Summary
CONSOLIDATED INFORMATION(i)
As at or for the years ended December 31
($ millions except where otherwise indicated)
Operating Results
Sales
Operating income
Adjusted EBITDA(iii)
Depreciation and amortization(iv)
Net interest expense and other financing charges
Adjusted net interest expense and other financing charges(iii)
Income taxes
Adjusted income taxes(iii)
Net earnings
Net earnings attributable to shareholders of the Company
Net earnings available to common shareholders of the
Company
Adjusted net earnings available to common shareholders of
the Company(iii)
Financial Position
Fixed assets
Goodwill and intangible assets
Total assets
Cash and cash equivalents, short term investments
and security deposits
Total debt
Total equity attributable to shareholders of the Company
Total equity
Cash Flows
Cash flows from operating activities
Capital investments
Free cash flow(iii)
Per Common Share ($)
Diluted net earnings
Adjusted diluted net earnings(iii)
Financial Measures and Ratios
Adjusted EBITDA margin (%)
Adjusted return on average equity attributable to common
(iii)
shareholders of the company (%)
Adjusted return on capital (%)
(iii)
(iii)
2018
(52 weeks)
2017(ii)
(52 weeks)
2016
(52 weeks)
48,568
2,585
4,528
1,746
948
762
639
680
998
574
530
908
12,101
12,739
43,814
1,889
16,445
8,040
14,204
2,719
1,593
134
3.99
6.85
9.3
12.7
12.0
48,289
2,561
4,337
1,685
523
555
449
712
1,589
766
722
903
11,689
12,745
38,540
3,233
13,066
7,934
14,795
3,425
1,474
1,395
5.58
6.99
9.0
12.9
13.0
47,999
2,255
4,140
1,654
700
568
465
678
1,090
550
506
838
11,534
13,239
37,946
2,660
12,804
7,764
14,790
3,760
1,465
1,725
3.90
6.49
8.6
12.1
12.1
For financial definitions and ratios refer to the Glossary beginning on page 174.
(i)
(ii) Certain comparative figures have been restated as a result of the implementation of IFRS 15 “Revenue from Contracts with
Customers” and a change in accounting policy (see note 2).
(iii) See non-GAAP financial measures beginning on page 68.
(iv) Includes $521 million (2017 – $524 million; 2016 – $535 million) of amortization of intangible assets, acquired with Shoppers Drug
Mart, recorded by Loblaw and $9 million (2017 – $10 million; 2016 – $14 million) of accelerated depreciation and amortization
recorded by Weston Foods, related to restructuring and other charges.
172 George Weston Limited 2018 Annual Report
Three Year Summary
SEGMENT INFORMATION(i)
As at or for the years ended December 31
($ millions except where otherwise indicated)
OPERATING RESULTS
Revenue
Operating income
Adjusted EBITDA(iv)
Adjusted EBITDA Margin (%)
(iv)
Depreciation and Amortization(v)
FINANCIAL POSITION
Total Assets
CASH FLOWS
Fixed Asset Purchases and Intangible
Asset Additions
2018
(52 weeks)
2017(ii)(iii)
(52 weeks)
2016(iii)
(52 weeks)
Weston Foods
Loblaw
Choice Properties
Other & Intersegment
Consolidated
Weston Foods
Loblaw
Choice Properties
Other & Intersegment
Consolidated
Weston Foods
Loblaw
Choice Properties
Other & Intersegment
Consolidated
Weston Foods
Loblaw
Consolidated
Weston Foods
Loblaw
Choice Properties
Other & Intersegment
Consolidated
Weston Foods
Loblaw
Choice Properties
Other(vi)
Intersegment
Consolidated
Weston Foods
Loblaw
Choice Properties
Other & Intersegment
Consolidated
2,122
46,693
1,148
(1,395)
48,568
73
1,915
593
4
2,585
219
3,520
824
(35)
4,528
10.3
7.5
9.3
130
1,497
1
118
1,746
3,008
30,228
15,518
298
(5,238)
43,814
212
1,070
383
(72)
1,593
2,243
46,587
830
(1,371)
48,289
91
2,041
756
(327)
2,561
256
3,513
597
(29)
4,337
11.4
7.5
9.0
117
1,454
1
113
1,685
2,645
34,230
9,924
927
(9,186)
38,540
215
1,026
274
(41)
1,474
2,268
46,295
784
(1,348)
47,999
173
1,667
677
(262)
2,255
296
3,325
678
(159)
4,140
13.1
7.2
8.6
111
1,435
1
107
1,654
2,670
33,746
9,435
1,004
(8,909)
37,946
241
996
377
(149)
1,465
For financial definitions and ratios refer to the Glossary beginning on page 174.
(i)
(ii) Certain comparative figures have been restated as a result of the implementation of IFRS 15 “Revenue from Contracts with
Customers” and a change in accounting policy (see note 2).
(iii) Certain comparative figures have been restated to to present Continuing Operations at Loblaw as a result of Loblaw’s spin-out of
Choice Properties (see note 5).
(iv) See non-GAAP financial measures beginning on page 68.
(v)
Includes $521 million (2017 – $524 million; 2016 – $535 million) of amortization of intangible assets, acquired with Shoppers Drug
Mart, recorded by Loblaw and $9 million (2017 – $10 million; 2016 – $14 million) of accelerated depreciation and amortization
recorded by Weston Foods, related to restructuring and other charges.
(vi) Other includes cash and cash equivalents and short term investments held by foreign operations that have the same functional
currency as that of the Company and GWL’s direct investment in Choice Properties.
George Weston Limited 2018 Annual Report 173
Glossary
Term
Adjusted diluted net earnings per common share
Adjusted EBITDA
Adjusted EBITDA margin
Adjusted income taxes
Adjusted income tax rate
Adjusted net earnings attributable to
shareholders of the Company
Adjusted net earnings available to common
shareholders of the Company
Adjusted net interest expense and other
financing charges
Adjusted operating income
Adjusted return on average equity attributable
to common shareholders of the Company
Adjusted return on capital
Basic net earnings per common share
Capital
Capital under management
Capital investment
Choice Properties’ Funds from Operations
Choice Properties’ Funds From Operations per
unit - diluted
Choice Properties’ Net Operating income for same
properties, excluding development activities
174 George Weston Limited 2018 Annual Report
Definition
Adjusted net earnings available to common shareholders of the Company
including the effect of all dilutive instruments divided by the weighted average
number of common shares outstanding during the period adjusted for the impact
of dilutive items (see Section 18, “Non-GAAP Financial Measures”, of the
Company’s Management’s Discussion and Analysis).
Adjusted operating income before depreciation and amortization (see Section 18,
“Non-GAAP Financial Measures”, of the Company’s Management’s Discussion and
Analysis).
Adjusted EBITDA divided by sales (see Section 18, “Non-GAAP Financial
Measures”, of the Company’s Management’s Discussion and Analysis).
Income taxes adjusted for the tax impact of items included in adjusted operating
income less adjusted net interest and other financing charges (see Section 18,
“Non-GAAP Financial Measures”, of the Company’s Management’s Discussion and
Analysis).
Adjusted income taxes divided by adjusted operating income less adjusted net
interest and other financing charges (see Section 18, “Non-GAAP Financial
Measures”, of the Company’s Management’s Discussion and Analysis).
Net earnings attributable to shareholders of the Company adjusted for items that
are not necessarily reflective of the Company’s underlying operating performance
(see Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Adjusted net earnings attributable to shareholders of the Company less preferred
dividends (see Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Net interest expense and other financing charges adjusted for items that are not
necessarily reflective of the Company’s ongoing net financing costs (see Section
18, “Non-GAAP Financial Measures”, of the Company’s Management’s Discussion
and Analysis).
Operating income adjusted for items that are not necessarily reflective of the
Company’s underlying operating performance (see Section 18, “Non-GAAP
Financial Measures”, of the Company’s Management’s Discussion and Analysis).
Adjusted net earnings available to common shareholders of the Company divided
by average total equity attributable to common shareholders of the Company
(see Section 18, “Non-GAAP Financial Measures”, of the Company’s
Management’s Discussion and Analysis).
Tax-effected adjusted operating income divided by average capital (see Section
18, “Non-GAAP Financial Measures”, of the Company’s Management’s Discussion
and Analysis).
Net earnings available to common shareholders of the Company divided by the
weighted average number of common shares outstanding during the period.
Total debt, plus total equity attributable to shareholders of the Company, less
cash and cash equivalents, short term investments and amounts held in escrow.
Total debt plus total equity attributable to shareholders of the Company.
Fixed asset purchases and intangible asset additions.
Choice Properties’ net income (loss) adjusted for items that are not necessarily
reflective of Choice Properties’ underlying operating performance capital (see
Section 18, “Non-GAAP Financial Measures”, of the Company’s Management’s
Discussion and Analysis).
Choice Properties’ Funds from Operations available to unit holders adjusted for
the impact of dilutive items divided by the weighted average number of average
unit outstanding during the period adjusted for the impact of dilutive items.
Choice Properties’ net operating income for same properties, adjusting for the
impact of recent property acquisition and disposition transactions.
Glossary
Term
Control brand
Conversion
Diluted net earnings per common share
Free cash flow
Major expansion/contraction
Minor expansion
Definition
A brand and associated trademark that is owned by Loblaw for use in connection
with its own products and services.
A store that changes from one Loblaw banner to another Loblaw banner.
Net earnings available to common shareholders of the Company adjusted for the
impact of dilutive items divided by the weighted average number of common
shares outstanding during the period adjusted for the impact of dilutive items.
Cash flows from operating activities less interest paid, fixed asset purchases and
intangible asset additions (see Section 18, “Non-GAAP Financial Measures”, of the
Company’s Management’s Discussion and Analysis).
Expansion/contraction of a store that results in an increase/decrease in square
footage that is greater than 25% of the square footage of the store prior to the
expansion/contraction.
Expansion of a store that results in an increase in square footage that is less than
or equal to 25% of the square footage of the store prior to the expansion.
Net earnings attributable to shareholders of the
Net earnings less non-controlling interests.
Company
Net earnings available to common shareholders
of the Company
New store
Operating income
Renovation
Retail debt to adjusted EBITDA
Retail gross profit
Retail sales
Retail square footage
Rolling year adjusted return on capital
Rolling year adjusted return on average equity
attributable to common shareholders of the
Company
Same-store sales
Total equity attributable to common shareholders
of the Company
Net earnings attributable to shareholders of the Company less preferred
dividends.
A newly constructed store, acquisition, conversion or major expansion.
Net earnings before net interest expense and other financing charges and
income taxes.
A capital investment in a store resulting in no significant change to the store
square footage.
Retail segment total debt divided by Retail segment adjusted EBITDA.
Loblaw retail sales less cost of merchandise inventories sold.
Combined sales of stores owned by Loblaw’s corporate stores, franchisees and
associate-owned drug stores.
Retail square footage includes Loblaw’s corporate stores, franchised stores and
associate-owned drug stores.
Tax-effected rolling year (most recent four quarters) adjusted operating income
divided by average capital (see Section 18, “Non-GAAP Financial Measures”, of
the Company’s Management’s Discussion and Analysis).
Rolling year (most recent four quarters) adjusted net earnings available to
common shareholders of the Company divided by average total equity
attributable to common shareholders of the Company (see Section 18, “Non-
GAAP Financial Measures”, of the Company’s Management’s Discussion and
Analysis).
Retail sales from the same location for stores in operation in that location in both
periods excluding sales from a store that has undergone a major expansion/
contraction in the period.
Total equity less preferred shares outstanding and non-controlling interests.
Total equity attributable to shareholders of the
Total equity less non-controlling interests.
Company
Weighted average common shares outstanding
Year
The number of common shares outstanding determined by relating the portion of
time within the period the common shares were outstanding to the total time in
that period.
The Company’s year end is December 31. Activities are reported on a fiscal year
ending on the Saturday closest to December 31, usually 52 weeks in duration
but includes a 53rd week every five to six years. Each of the years ended
December 31, 2018 and December 31, 2017 contained 52 weeks.
George Weston Limited 2018 Annual Report 175
Corporate Directory
Board of Directors
Galen G. Weston, B.A., M.B.A.
Chairman and Chief Executive Officer of the
Corporation; Executive Chairman, Loblaw
Companies Limited; Chairman, President’s
Choice Bank; Director, Wittington Investments,
Limited; former Chairman, Choice Properties
Real Estate Investment Trust.
Sarabjit (Sabi) S. Marwah(2)
Senator with the Senate of Canada; former
Vice-Chairman and Chief Operating Officer of
The Bank of Nova Scotia; Director, Cineplex Inc.
and TELUS Corporation; Trustee and Chair,
Hospital for Sick Children; former member of
the Board of Directors, Toronto International
Film Festival.
Alannah Weston(4)
Deputy Chairman, former Creative Director,
Selfridges Group Limited; Chair, Selfridges
Group Foundation; Director, Wittington
Investments, Limited; former Board member,
Reta Lila Weston Trust and Reta Lila Howard
Foundation; former Trustee, Blue Marine
Foundation.
Gordon M. Nixon, C.M., O.Ont.(1,2)
Corporate Director; Chair, BCE Inc. and Director,
BlackRock, Inc.; former President and Chief
Executive Officer, Royal Bank of Canada;
Advisory Board, KingSett Canadian Real Estate
Income Fund L.P.; Director, MaRS Discovery
District; Trustee, Art Gallery of Ontario.
Christi Strauss(1,4)
Corporate Director; former President and Chief
Executive Officer, Cereal Partners Worldwide, a
General Mills joint venture with Nestlé; Director
of two not-for-profit organizations, Social
Venture Partners Minnesota and Health Builders.
Barbara Stymiest, F.C.A., F.C.P.A.(1*,2,3*)
Corporate Director; Director, Blackberry Limited;
Director, Sun Life Financial Inc.; Director,
President’s Choice Bank; former Member, Group
Executive, Royal Bank of Canada; former Chief
Executive Officer, TMX Group Inc., Chair,
Canadian Institute for Advanced Research; Vice
Chair, University Health Network; Chair, Advisory
Council for the Ivey Institute for Leadership.
Andrew Ferrier(1,4)
Executive Chairman of Canz Capital Limited;
Director, Bunge Limited; former Chief Executive
Officer of Fonterra Co-operative Group Limited;
former President and Chief Executive Officer,
GSW Inc.
Isabelle Marcoux, B.A., LL.B.(4*)
Chair, Board of Directors, Transcontinental Inc.;
Director, Rogers Communications Inc. and
Power Corporation of Canada; Director of the
Montreal Children’s Hospital Foundation; Chair
of the Major Donors’ Circle and Co-Chair of the
2016 campaign of Centraide of Greater
Montreal.
J. Robert S. Prichard, O.C., O.Ont., LL.B.,
M.B.A., LL.M., LL.D.(2*,3)
Non-Executive Chair, Torys LLP; Chair, Bank
of Montreal; Director, Onex Corporation;
President Emeritus, University of Toronto;
Trustee, Hospital for Sick Children; former
Chair, President and Chief Executive Officer,
Metrolinx.
Robert Sawyer(1,4)
Corporate Director; Director, Walter Group;
former Director and President and Chief
Executive Officer, RONA Inc.; former Chief
Operating Officer of Metro Inc.
(1) Audit Committee
(2) Governance, Human Resource, Nominating
and Compensation Committee
(3) Pension Committee
(4) Risk and Compliance Committee
* Chair of the Committee
Corporate Officers
W. Galen Weston, O.C.
Chairman Emeritus
Allan Bifield
Deputy Chief Financial Officer
Galen G. Weston
Chairman and Chief Executive Officer
Khush Dadyburjor
Chief Strategy Officer
Wendy Mizuno
Group Head,
Pension and Benefits
John Williams
Group Treasurer
Richard Dufresne
President
and Chief Financial Officer
Andrew Bunston
Vice President,
Legal and Secretary
Peter Effer
Group Head, Tax
Gordon A.M. Currie
Executive Vice President,
Chief Legal Officer
Nadeem Mansour
Vice President,
Internal Audit Services
Rashid Wasti
Executive Vice President,
Chief Talent Officer
Lina Taglieri
Group Controller
176 George Weston Limited 2018 Annual Report
Shareholder and Corporate Information
Executive Office
George Weston Limited
22 St. Clair Avenue East
Toronto, Canada M4T 2S7
Tel: 416.922.2500
Fax: 416.922.4395
www.weston.ca
Stock Exchange Listing and Symbols
The Company’s common and preferred shares are listed on the Toronto
Stock Exchange and trade under the symbols: “WN”, “WN.PR.A”,
“WN.PR.C”, “WN.PR.D” and “WN.PR.E”.
Common Shares
At year end 2018, there were 153,370,108 common shares issued and
outstanding.
The average 2018 daily trading volume of the Company’s common
shares was 192,317.
Preferred Shares
As at year end 2018, there were 9,400,000 preferred shares Series I,
8,000,000 preferred shares Series III, 8,000,000 preferred shares
Series IV and 8,000,000 preferred shares Series V issued and
outstanding.
The average 2018 daily trading volume of the Company’s preferred
shares was:
Series I:
Series III:
Series IV:
Series V:
4,094
3,549
5,250
2,379
Preferred Dividend Dates
The declaration and payment of quarterly preferred dividends are made
subject to approval by the Board of Directors. The record and payment
dates for 2019 are:
Series I
Record Date
Feb. 28
May 31
Aug. 31
Nov. 30
Payment Date
March 15
June 15
Sept. 15
Dec. 15
Series III, Series IV and Series V
Record Date
March 15
June 15
Sept. 15
Dec. 15
Payment Date
April 1
July 1
Oct. 1
Jan. 1
Common Dividend Policy
The declaration and payment of dividends on the Company’s common
shares and the amount thereof are at the discretion of the Board of
Directors which takes into account the Company’s financial results,
capital requirements, available cash flow, future prospects of the
Company’s business and other factors considered relevant from time to
time. Over time, it is the Company’s intention to increase the amount of
the dividend while retaining appropriate free cash flow to finance
future growth.
Common Dividend Dates
The declaration and payment of quarterly common dividends are made
subject to approval by the Board of Directors. The anticipated record
and payment dates for 2019 are:
Record Date
March 15
June 15
Sept. 15
Dec. 15
Payment Date
April 1
July 1
Oct. 1
Jan. 1
Printing: TC Transcontinental Printing www.tcprinting.tc
Normal Course Issuer Bid
The Company has a Normal Course Issuer Bid on the Toronto Stock
Exchange.
Value of Common Shares
For capital gains purposes, the valuation day (December 22, 1971) cost
base for the Company, adjusted for the 4 for 1 stock split (effective
May 27, 1986) and the 3 for 1 stock split (effective May 8, 1998), is
$1.50 per share. The value on February 22, 1994 was $13.17 per share.
Registrar and Transfer Agent
Computershare Investor Services Inc.
100 University Avenue
Toronto, Canada M5J 2Y1
1.800.564.6253 (Canada and U.S.A.)
Toll Free Tel:
International Tel: 514.982.7555 (direct dial)
Fax:
Toll Free Fax:
416.263.9394
1.888.453.0330
To change your address or eliminate multiple mailings,
or for other shareholder account inquiries, please contact
Computershare Investor Services Inc.
Independent Auditors
KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
Annual Meeting
The George Weston Limited Annual Meeting of Shareholders
will be held on Tuesday, May 7, 2019, at 11:00 a.m. (EDT) at
The Royal Conservatory, TELUS Centre for Performance and
Learning, Koerner Hall, 273 Bloor Street West, Toronto, Ontario,
Canada.
Trademarks
George Weston Limited, Loblaw Companies Limited and their respective
subsidiaries own a number of trademarks. These trademarks are the
exclusive property of George Weston Limited, Loblaw Companies
Limited and their respective subsidiary companies. Trademarks where
used in this report are in italics.
Investor Relations
Shareholders, security analysts and investment professionals should
direct their requests to Mr. Roy MacDonald, Vice President, Investor
Relations, at the Company’s Executive Office or by e-mail at
investor@weston.ca.
Additional financial information has been filed electronically with the
Canadian securities regulatory authorities in Canada through the
System for Electronic Document Analysis and Retrieval (SEDAR). The
Company holds an analyst call shortly following the release of its
quarterly results. These calls are archived in the Investor Centre section
of the Company’s website.
This Annual Report includes selected information on Loblaw Companies
Limited, a public company with shares trading on the Toronto Stock
Exchange.
Ce rapport est disponible en français.
George Weston Limited 2018 Annual Report 177
This 2018 Annual Report was printed in Canada on
Enviro print, which contains 100% post-consumer waste
and is processed chlorine-free, using biogas energy.
www.weston.ca