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Maple Leaf Foods reports Q1 loss, plans price increases

May 2, 2014
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Maple Leaf Foods Inc. reported its financial results for the first quarter, March 31, 2014. Adjusted Operating Earnings for the first quarter was a loss of $29.9 million compared to a loss of $27.9 million last year. Net loss from continuing operations was $124.6 million compared to $30.6 million last year.

"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,” he added. “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."

Maple Leaf Foods Inc. 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 Earningsfor 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 operationsfor 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.

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 labor 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 unfavorable operational variances, in part caused by the unusually cold winter in Ontario, Canada.

Source: Maple Leaf Foods

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