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George Weston not looking for big deals, says small tweaks will provide the most value

TORONTO - George Weston Ltd. (TSX:WN) said Tuesday it will continue to invest in small, strategic acquisitions but made it clear it wasn't looking to follow in Loblaw's footsteps with any big, transformational deals.

The company, whose Loblaw subsidiary completed a $12.4-billion deal to acquire Shoppers Drug Mart at the end of March, announced the more modest purchase Rubschlager Baking Corp. on Monday, a deal that George Weston president Pavi Binning now says was worth about $10 million.

"Our strategy is pretty clear: it's focused on organic growth of the business, supported by capital investments and small acquisitions that complement the portfolio that we have," Binning said during an analyst call Tuesday to discuss its first-quarter results.

"In terms of large transformational acquisitions, it's not something that we're looking at in the food segment for the foreseeable feature."

The purchase of Rubschlager, a maker of rye breads in Chicago, he said, gives Weston Food access to an bread division that is growing two to three per cent a year.

It comes as George Weston faces fresh competition from Grupo Bimbo, a Mexican company that has acquired Maple Leaf Foods' (TSX:MFI) Canada Bread (TSX:CBY) subsidiary.

But Binning said his company isn't too concerned with what the new owners may do, adding that George Weston's results were in line with the company's expectations given the competitive retail environment and higher commodity and input costs.

George Weston also increased its quarterly dividend to 42 cents, up from 41.5 cents, but it warned that second-quarter results will face continued pressure from higher costs as well as some softness in the overall market.

RBC Dominion Securities analyst Irene Nattel said the "tepid" 2014 outlook was consistent with forecasts, as fresh bakery sales were down slightly in the first quarter due to lower volumes and frozen bakery sales dipped slightly because of weakness in the market.

Biscuit sales were up almost five per cent on higher sales of cookies, including Girl Scout products.

"Weston Foods is continuing to invest in its footprint to drive organic growth," she said in a note to clients after the call.

"Continuous improvement and relentless focus on cost containment are part of Weston Foods DNA, but periodically (the company) ups that investment to drive the business forward, and 2013/14 is one of those periods."

The company, which has been struggling as customers continue to turn away from frozen and baked goods and toward healthier food choices, posted a profit of $109 million, down 32.7 per cent, from $162 million in the same quarter of 2013.

Earnings per share were 78 cents compared with $1.19 year-over-year with the Toronto company saying the decrease was due to the year-over-year unfavourable impact of the forward sale agreement for 9.6 million Loblaw common shares and a number of other items.

Adjusted earnings per share remained flat at 83 cents and adjusted operating income increased to $318 million from $313 million year-over-year, while sales were up 1.6 per cent at $7.61 billion.

In the first quarter, Weston Foods sales increased by 5.9 per cent to $449 million, up from $424 million year-over-year, with a foreign currency translation positively impacting sales by about 4.9 per cent.

For full year 2014, the company expects modest sales growth from the Weston Foods segment, but said adjusted operating income is expected to decline due to such things as plant start-up costs, marketing, and the performance of its frozen dough business.

Its Loblaw division increased sales in the quarter by 1.2 per cent to $7.2 billion, helped by an increase in revenue from its financial services segment which includes President's Choice Bank, a subsidiary of Loblaw.

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