George Weston looks to Ace and Keystone bakeries for growth

Baked goods and grocery giant George Weston Ltd. (TSX:WN) expects newly acquired Ontario-based Ace Bakery to help expand its sales of bread and rolls in the rest of Canada and the United States.

Baked goods and grocery giant George Weston Ltd. (TSX:WN) expects newly acquired Ontario-based Ace Bakery to help expand its sales of bread and rolls in the rest of Canada and the United States.

“There’s lots of white space, I think, in the Canadian market where it isn’t positioned and should be,” said Ralph Robinson, president of Weston Foods division.

Ace has already successfully launched products in several U.S. markets and there’s room for more growth, Robinson told a conference call on Tuesday after Weston reported it more than doubled third-quarter profit to $184 million.

“I think it fulfills one of our ambitions, which is to really start driving some growth in the bread and roll business south of the border,” Robinson said.

Galen Weston Sr., Weston’s chairman and president, said his company had been coveting Ace Bakery, a Toronto-based maker and supplier of artisanal and European-style bread, for some time.

“It’s a very good brand, a terrific brand, particularly in Ontario,” Weston told analysts.

“It’s something we have been jealous of for a long time and we’re very pleased to have it as part of our portfolio.”

George Weston Ltd. paid $110 million to acquire Ace Bakery.

While the brand is very strong in Ontario, it also has a growing presence in the Quebec market, Robinson added.

George Weston also recently purchased U.S.-based Keystone Bakery, which supplies frozen baked goods, for US$185 million.

Keystone has three operating businesses — Freed’s Bakery of Manchester, N.H., a baker of frozen, fully finished iced cupcakes, Granny’s Kitchens of Frankfort, N.Y., a supplier of pre-fried and thaw-and-sell doughnuts, and Heartland Baking of DuQuoin, Ill., a specialty supplier of thaw-and-serve cookies.

“Both these businesses complement our Weston Foods business and will contribute to our growth and profitability going forward,” Galen Weston said.

RBC Capital Markets analyst Irene Nattel noted the recent acquisitions of Ace and Keystone bakeries and said their offerings are “two growth categories in the commercial bread segment.”

“The key catalyst for becoming more positive on WN (Weston Foods) will likely be the re-deployment of the $2.5 billion of proceeds from the 2008 sale of WN’s U.S. baking operations, an event that we hope will occur by mid-late 2011,” Nattel wrote in a research note.

The climbing price of wheat is expected to have an impact.

“The price of wheat is going up through the roof and will be big additions in terms of price increases over the next 12 months,” said Galen Weston.

Despite a major increase in third-quarter net earnings, Weston’s sales were relatively flat.

The big Toronto-based food processor and distributor and owner of a controlling interest in the Loblaw (TSX:L) supermarket company, said earnings per share were $1.32, up from $86 million or 56 cents in the same 2009 quarter.

Sales rose a more modest 1.1 per cent to $9.88 billion from $9.78 billion in the 16-week period ended Oct. 9.

The improvement in net earnings per common share from continuing operations was even more pronounced — $1.32 versus 44 cents in the prior-year period.

The company said 31 cents of the 88-cent gain was attributable to improvements in the operating performance of the company’s two operating segments, Weston Foods and Loblaw Companies Ltd.

The balance of 57 cents included the positive impact of 51 cents per share related to unrealized foreign exchange losses and 24 cents per share related to the commodity derivatives fair value adjustment at Weston Foods.

Those gains were partially offset by a negative impact of 21 cents per share related to the accounting for Weston Holdings Ltd’s forward sale agreement for 9.6 million Loblaw common shares.

Operating income for the third quarter of 2010 was $490 million compared with $333 million in the same period in 2009, an increase of $157 million or 47.1 per cent.

Consolidated operating margin for the third quarter of 2010 was five per cent compared with 3.4 per cent for the same period in 2009.

The company cited productivity gains and cost cutting among reasons for improved operating income at its Weston Foods division.

The improvement in operating income at Loblaw was primarily attributable to “continued buying synergies, disciplined vendor management, improved control label profitability and inventory management and a stronger Canadian dollar,” the company said.

Shares in Weston Foods were down 92 cents, or 1.2 per cent, to $76.98, in early afternoon trading Tuesday on the Toronto Stock Exchange.