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Transitioning of meat business leaves Maple Leaf Foods with FY loss, brighter future

February 27, 2014
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Maple Leaf Foods Inc. reported its financial results for the fourth quarter and full year ended December 31, 2013. Adjusted Operating Earnings for the fourth quarter was a loss of $21.7 million compared to Adjusted Operating Earnings of $70.0 million last year. Year-to-date Adjusted Operating Earnings were a loss of $12.3 million compared to Adjusted Operating Earnings of $172.0 million last year.

"We are in a peak phase of executing our prepared meats network strategy, which added tremendous costs and inefficiency in the quarter as we ramped up five new facilities while continuing to operate our parallel older plants," said Michael H. McCain, President and CEO. "As expected, this is causing short-term earnings volatility, which was compounded by weak protein markets. Our Bakery business delivered solid results for the quarter and increased earnings for the full year. We are very pleased with this performance, particularly with strong gains in our U.K. and frozen bakery operations."

"For three years we have been building a new plant network, which entered a peak period in December of 2013 as we began commissioning Maple Leaf's single largest facility in Hamilton," continued Mr. McCain. "Now the focus changes. From here on, our job is to get the new plants running at peak performance, transfer production from older high cost plants to new low cost plants, and close the older plants down. Once completed, later this year, we expect to start seeing significant structural margin expansion. We also expect more normal market conditions to unfold in 2014. Combined with our plans to pay down debt, invest in the business and return excess capital to shareholders, we believe Maple Leaf will be very well positioned to drive profitable growth and deliver strong shareholder value."

Maple Leaf Foods Inc. sales of $1,107.0 million for the fourth quarter declined 2.1% from last year, or 0.7% after adjusting for the impacts of divestitures and foreign exchange, due to lower volumes which were partly offset by higher pricing. For the year ended December 31, 2013, sales decreased 3.2% from the prior year to $4,406.4 million, or 1.6% after adjusting for divestitures and foreign exchange, due to the same factors.

Adjusted Operating Earnings for the fourth quarter decreased to a loss of $21.7 million compared to Adjusted Operating Earnings of $70.0 million last year, primarily due to lower earnings in the Protein Group. For the full year, Adjusted Operating Earnings declined to a loss of $12.3 million compared to Adjusted Operating Earnings of $172.0 million last year, as lower Protein Group earnings more than offset an improvement in the Bakery Group.

Net loss from continuing operations for the fourth quarter was $14.4 million (loss of $0.13 per basic share attributable to common shareholders) compared to net earnings from continuing operations of $41.0 million ($0.28 per basic share attributable to common shareholders) last year. Net loss from continuing operations for the full year was $58.5 million (loss of $0.48 per basic share attributable to common shareholders) compared to net earnings from continuing operations of $42.0 million ($0.25 per basic share attributable to common shareholders) last year.

Adjusted Earnings per Share in the fourth quarter of 2013 was a loss of $0.25 compared to Adjusted Earnings per Share of $0.27 last year. Full year Adjusted Earnings per Share declined to a loss of $0.51 compared to Adjusted Earnings per Share of $0.47 last year.

Meat Products Group sales for the fourth quarter declined 1.1% to $742.7 million from $751.4 million last year. After adjusting for the impact of divesting the company's potato processing operations and poultry agricultural operations, and the impact of foreign exchange, sales increased 0.7%. Increased prepared meats volumes and higher pricing in fresh pork more than offset lower pricing in fresh poultry and lower fresh pork volumes.

Full year sales declined 4.0%, or 2.1% after adjusting for the impact of divestitures and foreign exchange, primarily due to lower volumes in the fresh pork and prepared meats businesses. Partly offsetting this was the benefit of higher commodity prices in fresh pork, price increases in the fresh poultry and prepared meats businesses, and higher fresh poultry volumes.

Adjusted Operating Earnings for the fourth quarter declined to a loss of $42.6 million compared to Adjusted Operating Earnings of $42.6 million last year.

The company is in a peak phase of completing its prepared meats strategy, designed to establish a low cost supply chain and achieve structural margin expansion. Earnings were significantly impacted by the cost of commissioning five new facilities, resulting in transitional costs of approximately $15 million during the quarter (2012: approximately $4 million) and approximately $50 million for the full year (2012: approximately $12 million). Start-up costs at newly expanded facilities in Winnipeg, Manitoba, and Saskatoon, Saskatchewan, decreased compared to the third quarter of 2013; however, this was offset by higher overhead costs associated with commissioning the newly constructed plant in Hamilton, Ontario. In addition to transitional costs, the company also experienced other manufacturing and distribution inefficiencies associated with operating legacy plants in parallel until production is fully transferred to newer, more efficient facilities in 2014.

Margins in the prepared meats business were also compressed by higher raw material and other input costs, as well as inflationary costs that were not fully offset by pricing. Selling, general, and administrative costs were higher than last year, due to comparatively lower variable compensation expense last year. During the fourth quarter of 2012, the prepared meats business recognized $5.9 million in provision reversals related to re-assessments of environmental remediation costs on facilities planned for closure that did not re-occur in 2013. Higher volumes in the fourth quarter of 2013, particularly in the branded retail category, partly offset the above earnings impacts.

Earnings in primary pork processing were negatively affected by lower export margins, primarily to the Japanese market, lower volumes, and declining values for by-product sales. These reductions were partly offset by lower selling, general, and administrative costs. Earnings in fresh poultry declined due to lower primary processing spreads and inflationary costs that were only partly offset by higher earnings from value-added sales.

The sale of the company's potato processing operations in January 2013 reduced Adjusted Operating Earnings in the fourth quarter by approximately $3 million compared to last year.

For the full year, Adjusted Operating Earnings was a loss of $86.2 million compared to Adjusted Operating Earnings of $98.4 million last year. Factors impacting the prepared meats business are the same as noted above, in addition to the impact of lower volumes in the first quarter of 2013. Factors impacting the fresh pork and poultry businesses are the same as noted above for the fourth quarter. The sale of the Company's potato processing operations in January 2013 reduced Adjusted Operating Earnings by approximately $13 million compared to last year.

Source: Maple Leaf Farms

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