Canada Bread Company, Limited
TSX : CBY

Canada Bread Company, Limited

July 28, 2005 13:05 ET

Canada Bread Reports Second Quarter Financial Results

TORONTO, ONTARIO--(CCNMatthews - July 28, 2005) - Canada Bread Company, Limited (TSX:CBY) today announced its financial results for the second quarter ended June 30, 2005.

"Our second quarter operating earnings reflect continued strong results in our Fresh Bakery operations, supported by operating cost improvements and a continued shift towards higher margin premium nutrition whole wheat and wholegrain products," said Richard Lan, President and CEO of Canada Bread.

Sales for the second quarter increased by 5% to $344.6 million from $329.7 million for the prior year, primarily due to the Fresh Bakery business. Sales for the first six months of 2005 were $661.5 million, an increase of 4% over 2004.

Net earnings for the quarter were $21.3 million ($0.84 per share) compared to $15.8 million ($0.62 per share) last year. Year-to-date net earnings before restructuring costs were $36.4 million ($1.43 per share), compared to $28.3 million ($1.11 per share) last year. Including restructuring costs, year-to-date net earnings were $33.1 million ($1.30 per share).

Operating Review

Earnings from operations increased 30% to $30.5 million compared to $23.4 million last year, driven by increased earnings in the Fresh Bakery operations. Earnings from operations before restructuring costs for the year-to-date increased 23% to $52.5 million. Comparisons of earnings from operations exclude $4.7 million ($3.2 million after tax) of restructuring costs in the first quarter of 2005. Management believes this is the most appropriate basis on which to evaluate operating results, as restructuring costs are not representative of ongoing operating earnings.

Fresh Bakery sales increased 5% to $247.0 million in the second quarter, and increased to $467.9 million for the first six months from $445.2 million last year. Earnings from operations increased to $25.7 million in the second quarter from $16.9 million last year, while earnings from operations for the year-to-date increased to $40.7 million from $26.8 million last year. Strong sales of premium nutrition multi-grain and specialty breads, operating cost reductions, particularly in the western and eastern fresh bakery operations, and price increases that offset inflationary cost increases all contributed to increased earnings. Fresh pasta and sauce earnings also increased due to new U.S. product distribution.

Frozen Bakery sales increased to $97.6 million from $95.1 million in the second quarter of 2004, while sales for the first six months increased to $193.6 million from $189.9 million last year, due mainly to ongoing growth in the U.K. bakery operations. Operating earnings declined to $4.7 million in the second quarter from $6.5 million last year, while operating earnings for the year-to-date were $11.8 million compared to $16.0 million in 2004. The decline in second quarter operating earnings was primarily due to higher advertising and promotional spending in the U.K. Bakery operations, as a new marketing campaign was launched to support increased production from the new bagel plant in Rotherham.

Cash Flow and Financing

Cash flow from operating activities for the second quarter was a source of funds of $30.4 million compared to a source of funds of $32.8 million last year, while year-to-date cash flow from operations was a source of funds of $26.5 million compared with $61.4 million in the prior year-to-date. This year-over-year change was due primarily to an increased investment in working capital offset by increased net earnings in the first and second quarters of 2005. Capital expenditures increased to $20.7 million from $13.9 million last year, including expenditures related to the installation of new equipment to support the new FroBake® line of products in the United States and completion of the new bagel plant in the United Kingdom.

Other Matters

The Company declared a dividend of $0.06 per share payable on July 4, 2005 to shareholders of record on June 17, 2005.

Canada Bread, which is 87.5% owned by Maple Leaf Foods Inc., is a leading manufacturer and distributor of fresh bakery products, frozen par-baked products and fresh pasta and sauces. The Company had 2004 sales of $1.3 billion and employs approximately 7,300 people at its operations across North America and in the United Kingdom.



Consolidated Financial Statements
(Expressed in Canadian dollars)

CANADA BREAD COMPANY, LIMITED

Six months ended June 30, 2005 and 2004


CANADA BREAD COMPANY, LIMITED
Consolidated Balance Sheets
(In thousands of Canadian dollars)

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As at As at As at
June 30, June 30, December 31,
2005 2004 2004
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(Unaudited) (Unaudited)
(As restated) (As restated)
(Note 2 (a)) (Note 2(a))

ASSETS

Current assets
Cash and cash equivalents $ 33,231 $ 33,121 $ 9,312
Accounts receivable (Note 4) 35,434 25,803 24,148
Due from Maple Leaf Foods Inc. - 2,433 -
Inventories 33,014 34,967 33,504
Future tax asset - current 6,723 6,214 5,193
Prepaid expenses and
other assets 5,233 5,388 2,103
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113,635 107,926 74,260

Property and equipment 362,402 341,017 354,128

Other long-term assets 2,799 2,606 3,386

Future tax asset - non-current 7,524 3,774 5,465

Goodwill 322,715 338,646 324,237

Other intangibles 5,661 7,809 6,167

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$ 814,736 $ 801,778 $ 767,643
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LIABILITIES AND
SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and
accrued charges $ 143,101 $ 149,398 $ 149,410
Due to Maple Leaf Foods Inc. 256 - 140
Dividends payable 1,525 1,525 1,525
Income and other taxes
payable 18,419 8,068 26,501
Current portion of
long-term debt (Note 5) 123,130 704 91,482
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286,431 159,695 269,058

Long-term debt (Note 5) 282 163,926 344

Future tax liability 24,220 32,558 21,780

Shareholders' equity 503,803 445,599 476,461

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$ 814,736 $ 801,778 $ 767,643
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.


CANADA BREAD COMPANY, LIMITED
Consolidated Statement of Earnings
(In thousands of Canadian dollars, except share amounts)

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(Unaudited) Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
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Sales $ 344,610 $ 329,668 $ 661,471 $ 635,080

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Earnings from operations
before restructuring costs 30,465 23,412 52,490 42,790
Restructuring costs (Note 3) - - 4,723 -
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Earnings from operations 30,465 23,412 47,767 42,790
Other income (expense) 656 (18) 964 94
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Earnings before interest
and income taxes 31,121 23,394 48,731 42,884
Interest expense 1,690 1,537 3,391 2,924
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Earnings before income taxes 29,431 21,857 45,340 39,960
Income taxes 8,169 6,058 12,193 11,612
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Net earnings for the period $ 21,262 $ 15,799 $ 33,147 $ 28,348
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Earnings per share - Basic $ 0.84 $ 0.62 $ 1.30 $ 1.11

Earnings per share - Diluted $ 0.83 $ 0.61 $ 1.29 $ 1.09

Dividends per share declared $ 0.06 $ 0.06 $ 0.12 $ 0.12

Weighted average number
of shares (millions) 25.4 25.4 25.4 25.4

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The accompanying notes to the consolidated financial statements are
an integral part of these statements.


Consolidated Statements of Retained Earnings
(In thousands of Canadian dollars)

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Six months ended June 30,
(Unaudited) 2005 2004
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Retained earnings, beginning of period $ 337,827 $ 277,279

Net earnings for the period 33,147 28,348
Dividends declared (3,050) (3,050)

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Retained earnings, end of period $ 367,924 $ 302,577
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.


CANADA BREAD COMPANY, LIMITED
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)


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Three months ended Six months ended
June 30, June 30,
(Unaudited) 2005 2004 2005 2004
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CASH PROVIDED BY (USED IN)

Operating activities
Net earnings $ 21,262 $ 15,799 $ 33,147 $ 28,348
Add (deduct) items not
affecting cash:
Depreciation and
amortization 10,611 10,329 21,210 20,773
Future income taxes (536) (367) (1,149) (655)
Loss (gain) on sale of
property and equipment (629) 66 (881) (8)
Other 1,676 (169) 1,780 (127)
Change in operating
working capital (1,951) 7,163 (27,617) 13,051
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30,433 32,821 26,490 61,382

Financing activities
Dividends paid (1,525) (1,525) (3,050) (3,050)
Change in long-term debt 3,282 (15,250) 28,506 (12,479)
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1,757 (16,775) 25,456 (15,529)

Investing activities
Additions to property
and equipment (20,666) (13,928) (32,606) (24,530)
Proceeds from sale of
property and equipment 2,292 31 4,361 719
Sale (purchase) intangible
assets 344 (325) 218 (449)
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(18,030) (14,222) (28,027) (24,260)

Increase in cash and
cash equivalents 14,160 1,824 23,919 21,593

Cash and cash equivalents,
beginning of period 19,071 31,297 9,312 11,528

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Cash and cash equivalents,
end of period $ 33,231 $ 33,121 $ 33,231 $ 33,121
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.


CANADA BREAD COMPANY, LIMITED
Segmented Financial Information
(In thousands of Canadian dollars)

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Three months ended Six months ended
June 30, June 30,
(Unaudited) 2005 2004 2005 2004
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Sales
Fresh Bakery $ 247,047 $ 234,552 $ 467,860 $ 445,182
Frozen Bakery 97,563 95,116 193,611 189,898
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$ 344,610 $ 329,668 $ 661,471 $ 635,080
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Earnings from operations,
before restructuring costs
Fresh Bakery $ 25,718 $ 16,912 $ 40,738 $ 26,827
Frozen Bakery 4,747 6,500 11,752 15,963
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$ 30,465 $ 23,412 $ 52,490 $ 42,790
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Additions to property
and equipment
Fresh Bakery $ 8,284 $ 8,074 $ 12,465 $ 12,896
Frozen Bakery 12,382 5,854 20,141 11,634
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$ 20,666 $ 13,928 $ 32,606 $ 24,530
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Depreciation and amortization
Fresh Bakery $ 5,552 $ 5,286 $ 11,174 $ 10,607
Frozen Bakery 5,059 5,043 10,036 10,166
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$ 10,611 $ 10,329 $ 21,210 $ 20,773
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As at As at As at
June 30, June 30, December 31,
2005 2004 2004
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(Unaudited) (Unaudited)

Total assets
Fresh Bakery $ 412,693 $ 410,964 $ 395,355
Frozen Bakery 385,094 381,811 364,919
Non-allocated assets 16,949 9,003 7,369
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$ 814,736 $ 801,778 $ 767,643
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CANADA BREAD COMPANY, LIMITED
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars)

Three months and six months ended June 30, 2005 and 2004

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1. THE COMPANY

Canada Bread Company, Limited ("Canada Bread" or "the Company") and its subsidiaries operate in the bakery industry across North America and internationally. Its principal business is the manufacture and sale of bakery and pasta products, including fresh bread, rolls, bagels and par-baked bread. Canada Bread is 87.5% owned by Maple Leaf Foods Inc. ("Maple Leaf") as at June 30, 2005.

2. SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2004. These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as were applied in the consolidated financial statements for the year ended December 31, 2004, except for the following:

(a) Convertible debentures

Effective January 1, 2005 the company adopted the amendment to Canadian accounting principles, section 3860 - "Financial Instruments - Disclosure and Presentation" on a retroactive basis with restatement of prior periods. The revised standard, which is effective for 2005, requires obligations of a fixed amount that may be settled, at the issuer's option, by a variable number of the issuer's own equity instruments to be presented as liabilities. As a result of adopting the revised standard, the company retroactively reclassified $20 million of convertible debt as a liability on the balance sheet. The Company had previously included the $20 million related to a debt facility with Maple Leaf in equity, due to the fact that it can be settled, at the option of Canada Bread, in common shares. There was no impact on net earnings, basic or diluted earnings per share for prior periods as a result of adopting this change retroactively.

(b) Variable interest entities

The Company adopted the guidance in Accounting Guideline 15, "Consolidation of Variable Interest Entities" retroactively without restatement of prior periods, effective January 1, 2005. This guideline addresses the consolidation of variable interest entities, which are entities that have insufficient equity and/or their equity investors lack one or more specified essential characteristics of a controlling financial interest. The guideline also provides guidance for determining who, if anyone, should consolidate the variable interest entity. The adoption of this standard did not have a material impact on the Company.

(c) Comparative figures

Certain 2004 comparative figures have been reclassified to conform to the financial statement presentation adopted in 2005.

3. RESTRUCTURING COSTS

During the first quarter of 2005, the Company recorded a $4.7 million in restructuring costs ($3.2 million after tax), relating primarily to the closure of its bakery in Peterborough, England and the closure of a pasta manufacturing line due to the termination of a co-packing arrangement with Maple Leaf.

4. ACCOUNTS RECEIVABLE

Under revolving securitization programs, the Company has sold, with limited recourse, certain of its trade accounts receivable to financial institutions. The Company retains servicing responsibilities and assumes limited recourse obligations for delinquent receivables. At June 30, 2005, trade accounts receivable being serviced under this program amounted to $70.0 million (June 30, 2004: $70.0 million; December 31, 2004: $70.0 million).

5. LONG-TERM DEBT

As at June 30, 2005, the Company had $123.4 million outstanding in long-term debt of which $84.3 million (June 30, 2004: $86.4 million; December 31, 2004: $90.8 million) was due to Maple Leaf.

6. PENSIONS

During the quarter, the Company recorded $2.5 million related to net benefit plan expense (2004: $2.1 million). For the first six months of 2005, the Company recorded $4.8 million in net benefit plan expense (2004: $4.3 million).



7. SUPPLEMENTAL CASH FLOW INFORMATION

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Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
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Interest paid $ 1,627 $ 2,645 $ 3,861 $ 3,735
Income taxes paid 5,307 1,924 20,497 9,287
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8. GOODWILL

Commencing January 1, 2002, in accordance with Canadian accounting standards section 3062, "Goodwill and Other Intangible Assets", the company tests goodwill for possible impairment on an annual basis and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the second quarter of 2005, the company completed the goodwill impairment test for all reporting units. The results of this test have indicated there is no impairment.

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