• Losses widen amid pressure on raw material costs
  • Maple Leaf ups prices
  • Expects sale of 90% of Canada Bread to close this quarter
Maple Leaf has become focusing on protein

Maple Leaf has become focusing on protein

Canadian food group Maple Leaf Foods has sought to increase prices on its pork products after the US hog virus pushed up costs and contributed to pressure on profits in the first quarter of 2014.

Michael McCain, Maple Leaf's president and CEO, said the pork market had been "impacted in an unprecedented way" by the virus and hit the company's margins. McCain said Maple Leaf had acted.

"We have accelerated price increases in the second quarter to recover margins, and expect the effects of this to be transitory as the industry is forecasting a return to more normal conditions later in 2014," McCain said.

Maple Leaf reported an adjusted operating loss of C$29.9m for the first three months of the year, higher than the $27.9m loss it incurred a year earlier.

The company ran up a net loss from continuing operations of C$124.6m compared to C$30.6m last year amid a jump in finance costs.

Sales from continuing operations were C$711.3m, an increase of 3.2% from last year, or 2.1% after adjusting for the impacts of foreign exchange. The company cited higher pricing and "value sales mix".

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MAPLE LEAF FOODS REPORTS RESULTS FOR THE FIRST QUARTER 2014

TSX: MFI
www.mapleleaffoods.com

TORONTO, May 1, 2014 /PRNewswire/ - Maple Leaf Foods Inc. (TSX: MFI) today reported its financial results for the first quarter, March 31, 2014.

  • Adjusted Operating Earnings(1)(3) for the first quarter was a loss of $29.9 million compared to a loss of $27.9 million last year.
  • Adjusted Earnings per Share(3)(4) for the quarter was a loss of $0.24 compared to a loss per share of $0.24 last year.
  • Net loss from continuing operations was $124.6 million compared to $30.6 million last year.
  • The Company expects the proposed sale of its 90% interest in Canada Bread Company, Limited to Grupo Bimbo to close in the second quarter of 2014.

"Although our financial performance is challenging in transition, particularly with volatile raw material costs, our first quarter was marked by significant accomplishments," said Michael H. McCain, President and CEO. "Our prepared meats network transition continues to proceed on course as we ramped up production at our new flagship facility in Hamilton and materially improved performance in our Western Canadian plant expansions. The first of five plant closures occurring this year was completed early in the second quarter."

"Pork markets have been impacted in an unprecedented way due to a virus in the U.S. hog industry, which has renewed pressure from a sharp rise in raw material costs. We have accelerated price increases in the second quarter to recover margins, and expect the effects of this to be transitory as the industry is forecasting a return to more normal conditions later in 2014."

Financial Overview

Maple Leaf Foods Inc. ("the Company") sales from continuing operations of $711.3 million for the first quarter was an increase of 3.2% from last year, or 2.1% after adjusting for the impacts of foreign exchange, primarily due to higher pricing and a higher value sales mix.

Adjusted Operating Earnings for the first quarter was a loss of $29.9 million compared to a loss of $27.9 million last year, as higher costs related to the network transformation and margin compression in the prepared meats business were largely offset by improved market conditions in primary pork processing and hog production.

Net loss from continuing operations for the first quarter was $124.6 million (a loss of $0.89 per basic share attributable to common shareholders) compared to a loss of $30.6 million (a loss of $0.22 per basic share attributable to common shareholders) last year. Net loss from continuing operations included$114.7 million ($0.54 per basic share attributable to common shareholders) of pre-tax interest and other financing costs compared to $16.1 million ($0.07 per basic share attributable to common shareholders) last year. The increase was due to additional financing costs of $98.4 million related to the repayment of the Company's long-term notes payable in April 2014, including a $78.7 million early repayment premium to lenders, $10.1 million in financing costs, and a $9.6 million loss transferred from accumulated other comprehensive income into earnings related to the settlement of interest rate swaps that are no longer designated as hedging instruments. Net loss from continuing operations also included$8.6 million ($0.05 per basic share attributable to common shareholders) of pre-tax expenses related to the modification of a long-term incentive compensation plan (2013: $nil), which was a decision made as a result of the planned sale of Canada Bread Company, Limited, recorded in selling, general and administrative costs. Net loss from continuing operations also included $21.8 million ($0.12 per basic share attributable to common shareholders) of pre-tax expenses related to restructuring and other related costs (2013: $37.0 million, or $0.20 per basic share attributable to common shareholders).

Adjusted Earnings per Share in the first quarter was a loss of $0.24 compared to a loss of $0.24 last year.

Several items are excluded from the discussions of underlying earnings performance as they are not representative of ongoing operational activities. Please refer to the section entitled Reconciliation of Non-IFRS Financial Measures at the end of this news release for a description and reconciliation of all non-IFRS financial measures.

Business Segment Review

Following is a summary of sales by business segment:

 

           
(Unaudited)     First Quarter
($ thousands)     2014   2013
Meat Products Group    $ 705,399  $ 678,066
Agribusiness Group(5)     5,948   11,287
Total Sales(3)   $ 711,347  $ 689,353

 

The following table summarizes Adjusted Operating Earnings by business segment:

 

           
(Unaudited)     First Quarter
($ thousands)     2014   2013(3)
Meat Products Group    $ (27,447)  $ (10,452)
Agribusiness Group     (346)   (12,926)
Protein Group    $ (27,793)  $ (23,378)
Non-allocated Costs in Adjusted Operating Earnings(i)     (2,135)   (4,474)
Adjusted Operating Earnings(3)    $ (29,928)  $ (27,852)

 

(i)  Non-allocated costs comprise expenses not separately identifiable to business segment groups, and do not form part of the measures used by the Company when assessing the segments' operating results. Non-allocated costs for 2013 have been re-stated on a comparable basis.   

 

Meat Products Group

Includes value-added prepared meats, lunch kits, protein snacks, and value-added fresh pork, poultry and turkey products sold to retail, foodservice, industrial and convenience channels. Includes leading Canadian brands such as Maple Leaf ®, Schneiders ® and many leading sub-brands.

Meat Products Group sales for the first quarter increased 4.0% to $705.4 million, or 3.0% after adjusting for the impact of foreign exchange. Prepared meats sales increased due to higher volumes, the benefit of price increases implemented during the third quarter of 2013, and a higher-value sales mix. In primary processing, higher pricing for fresh pork and increased volumes in fresh poultry more than offset lower fresh pork volumes.

Adjusted Operating Earnings for the first quarter declined to a loss of $27.4 million compared to a loss of$10.5 million last year, as lower earnings in the prepared meats business were only partly offset by improved results in primary processing.

The prepared meats business continued to execute its strategy to establish a low cost supply chain by consolidating its manufacturing network, including commissioning activities at its plant in Saskatoon, Saskatchewan and the new Heritage plant in Hamilton, Ontario. As a result, transitional costs of approximately $23 million were incurred during the first quarter. Last year, transitional costs were approximately $8 million during the same period, and largely related to incremental resources to support the transformation project. Transitional costs increased significantly year-over-year as start-up activities ramped up and duplicative overhead costs were added to the network. During April 2014, the Company closed its legacy Hamilton, Ontario wiener facility and transferred production to the new Heritage facility. The closures of the remaining four legacy facilities are expected to take place during the fourth quarter of 2014.

Margins in the prepared meats business were compressed by sharply higher raw material and inflationary costs that were not fully offset by pricing. Pork input prices increased significantly from last year due to outbreaks of disease in hog production herds in the U.S. that has significantly increased the price of live hogs in response to a decline in hog supply. The weakening Canadian dollar also contributed to higher input costs. To manage these higher costs, the Company is implementing price increases in the second quarter of 2014.

Growth in branded retail packaged meats volumes compared to last year partly offset the factors described above.

Earnings in the fresh pork business increased due to higher primary pork processing margins and increased labour and yield efficiencies. These benefits were partly offset by lower export margins, primarily in the Japanese market, and lower volumes. Earnings in fresh poultry were relatively consistent with the prior year, as higher volumes and lower selling, general and administrative costs were offset by unfavourable operational variances, in part caused by the unusually cold winter inOntario, Canada.

Agribusiness Group 
Includes Canadian hog production operations that primarily supplies the Meat Products Group with livestock.

Agribusiness Group sales for the first quarter declined by 47.3% to $5.9 million compared to $11.3 million last year, due to lower hog volumes sold to third parties and reduced pricing on toll feed sales.

Adjusted Operating Earnings in the first quarter improved to a loss of $0.3 million compared to a loss of$12.9 million last year, primarily due to higher market prices for hogs, net of hedging activities, and lower feed costs.

Discontinued operations
Discontinued operations in the first quarter of 2014 pertain to the Company's 90.0% interest in Canada Bread Company, Limited, which forms the Bakery Products Group. Discontinued operations in the first quarter of 2013 were restated to include the Bakery Products Group, as well as the Rothsay and Olivieri businesses that were sold during the fourth quarter of 2013.

Sales from discontinued operations for the first quarter declined $84.2 million to $342.8 million from$427.0 million, of which $80.2 million relates to the divestitures of the Rothsay and Olivieri businesses in the fourth quarter of 2013. Excluding these divestitures, Bakery Product Group sales decreased by 1.1%, or 2.4% after adjusting for discontinued categories in the U.K. and the impact of currency translation on sales in the U.S. and U.K.

Net earnings from discontinued operations decreased $23.3 million to a loss of $7.4 million from earnings of $15.9 million last year, of which $14.8 million relates to the Rothsay and Olivieri businesses, which were sold during the fourth quarter of 2013. Excluding these divestitures, net earnings from discontinued operations in the Bakery Products Group decreased $8.5 million to a loss of $6.8 millionfrom earnings of $1.7 million last year. On a pre-tax basis, $31.0 million of the decline relates to transaction costs incurred in 2014 associated with the planned sale of Canada Bread. This decline was partly offset by a benefit of $8.5 million due to lower restructuring costs as the Ontario bakery consolidation was largely completed during 2013, and $6.5 million of lower depreciation, as no depreciation was taken after the assets were classified as held-for-sale following the announcement of the planned sale. Improvements in operations contributed a further $4.2 million, as lower overhead costs in the fresh bakery business, driven by the closure of a bakery in Toronto, Ontario during the second quarter of 2013, were only partly offset by higher selling, general and administrative costs. Lower input prices for wheat were offset by the impact of a weaker Canadian dollar on U.S. dollar denominated raw material costs, and higher inflationary costs. Higher other income contributed an additional $4.4 million, due to a legal settlement and gains on sale of investment properties in 2014, compared to an impairment loss on assets held for sale in the U.K. bakery business last year. Higher income taxes accounted for $1.2 million of the decrease. Although the Bakery Products Group generated a pre-tax loss, the transaction costs related to the planned sale do not give rise to a tax recovery as they will be offset against the gain on sale when recognized.

Proposed Sale of Canada Bread

On February 12, 2014, the Company announced that Grupo Bimbo, S.A.B. de C.V. of Mexico ("Grupo Bimbo") had agreed to acquire all of the issued and outstanding common shares of Canada Bread, a 90.0% owned subsidiary, by way of a statutory arrangement under the Business Corporations Act (Ontario) (the "Arrangement"). Under the terms of the Arrangement, Grupo Bimbo has agreed to acquire each common share of Canada Bread for $72.00 per share in cash. Maple Leaf expects to receive net proceeds of approximately $1.65 billion for its 90.0% interest in Canada Bread. The Company is not able to estimate the ultimate gain on disposition given the uncertainty surrounding the timing of the close of this proposed transaction.

On March 17, 2014, the proposed transaction received approval from the Canadian Competition Bureauto proceed. On March 24, 2014, the proposed transaction received clearance from the U.S. Department of Justice under the Hart-Scott-Rodino Act to proceed.

The arrangement was approved by the shareholders of Canada Bread at a special meeting held in April 2014. Subject to Investment Canada approval, the proposed transaction is expected to close in the second quarter of 2014.

Subsequent Events

On April 7, 2014, the Company terminated its cross-currency interest rate swaps maturing in December 2014 for a payment made of $29.6 million.

On April 14, 2014, the Company repaid notes payable for an amount of US$360.5 million (CAD$395.2 million) and CAD$400.0 million, including US$318.0 million (CAD$348.6 million) and CAD$354.5 millionof principal, US$36.7 million (CAD$40.2 million) and CAD$37.6 million of early repayment premium, andUS$5.8 million (CAD$6.4 million) and CAD$7.9 million of accrued interest.

Other Matters

On April 30, 2014, the Company declared a dividend of $0.04 per share payable June 30, 2014 to shareholders of record at the close of business on June 6, 2014. Unless indicated otherwise by the Company in writing on or before the time the dividend is paid, the dividend will be considered an Eligible Dividend for the purposes of the "Enhanced Dividend Tax Credit System".

Original source: Maple Leaf Foods