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Maple Leaf CEO Reports Very Difficult Quarter

03 May 2013

CANADA - Sales for Maple Leaf Foods' Agribusiness Group (Canadian pig production and animal by-product recycling operations, including biodiesel manufacturing and distribution) were higher in the first quarter of 2013 than in the same period of the previous year but overall, the Company's net loss increased to $14.7 million.

Adjusted Operating Earnings decreased 76.2 per cent to $7.6 million compared to $31.7 million last year and the net loss increased to $14.7 million from a loss of $5.8 million last year. Adjusted Earnings per Share decreased to a loss of $0.06 per share from Adjusted Earnings per Share of $0.06 last year

Michael H. McCain, President and CEO, commented: "This was a very difficult quarter, with lower earnings in our Protein business overshadowing good improvement in our Bakery results. For some time, we expected a volatile first half to 2013, but this certainly has been more severe than anticipated.

"Our meat business has demonstrated multiple years of progressive and steady improvement, but this quarter experienced the aggregate impact of poor market conditions, weaker volumes in the wake of necessary price advances and transition costs related to our new network.

"While challenging in the near term, we expect steady improvements through the remainder of the year as a result of improved markets, restoring stable volumes and continued success in our supply chain conversions. Our strategic initiatives, which are the most material contributor to our margin expansion, are on track and contributing to results," said Mr McCain.

Financial Overview

Sales of $1,112.8 million were 4.1 per cent lower than last year, or 2.3 per cent after adjusting for the impacts of divestitures and foreign exchange, as lower volumes were partly offset by higher pricing.

Adjusted Operating Earnings for the first quarter were $7.6 million compared to $31.7 million last year, primarily due to lower earnings in the Protein Group as market pricing and foreign exchange impacted primary pork processing and hog production earnings.

Net loss increased to $14.7 million ($0.11 basic loss per share) compared to a loss of $5.8 million ($0.04 basic loss per share) last year. The net loss included $47.4 million ($0.25 per share) of pre-tax expenses related to restructuring and other related costs (2012: $20.4 million, or $0.11 per share). The increase in restructuring expenses resulted from the advanced level of planning and execution of the Company's transformation plans, which required Management to record employee related restructuring costs. Adjusted Earnings per Share declined by $0.12 to a loss of $0.06 from Adjusted Earnings per Share of $0.06 last year.

Several items are excluded from the discussions of underlying earnings performance as they are not representative of on-going operational activities. Refer to the section entitled Reconciliation of Non-IFRS Financial Measures in this news release.

Business Segment Review

Protein Group

Results for the Company's Meat Products and Agribusiness Groups should be viewed in combination due to intercompany transactions and correlated factors within these operations.

Sales for the Protein Group, which includes the Company's Meat Products and Agribusiness Groups, declined 5.9 per cent to $744.4 million in the first quarter of 2013 from $790.8 million last year. The decline was primarily driven by lower volumes and the divestiture of the Company's potato processing business, partly offset by higher pricing. Adjusted Operating Earnings declined to a loss of $5.1 million compared to Adjusted Operating Earnings of $33.3 million last year. The most significant factor was a $24 million impact from market conditions resulting from the record drought in the U.S. Midwest in 2012 and the devaluation of the Japanese Yen, which mostly impacted primary processing and hog production earnings. Other factors in the quarter included a $10 million impact related to lower volumes, primarily in prepared meats, principally as a reaction to price increases required to offset higher raw material costs, and an increase of $7 million in transitional costs related to the execution of strategic initiatives. Partially offsetting these factors was $9 million of cost reduction benefits from strategic value creation initiatives in the prepared meats business. Further detail on the Meat Products Group and Agribusiness Group are provided below.

Meat Products Group

Includes value-added prepared meats, lunch kits; and 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 declined 6.7 per cent to $677.0 million, or 4.3 per cent after adjusting for the impact of divesting the Company's potato processing business and a stronger Canadian dollar. Sales were lower as a result of lower volumes in the fresh pork and prepared meats businesses, partly offset by price increases in prepared meats and higher market pricing for pork and poultry products.

Adjusted Operating Earnings for the first quarter declined to a loss of $10.5 million compared to earnings of $15.1 million last year. As expected, last year's record drought in the US Midwest caused a significant rise in grain and meat costs. The Company experienced an eight per cent decline in prepared meats volumes in the wake of price increases required to offset these higher input costs.

Earnings were also impacted by additional transitional costs associated with executing the Company's network transformation project, principally duplicative overhead and start-up costs. In the quarter, these transitional costs were more than offset by earnings accretion from network transformation and simplification initiatives completed last year that, along with innovation and a higher value sales mix, expanded margins in the quarter.

The sale of the Company's potato processing business in the quarter reduced Adjusted Operating Earnings by approximately $3 million compared to last year.

Earnings in primary pork processing were primarily impacted by a rapid devaluation of the Japanese Yen that reduced margins on pork exports, lower contributions from hedging programmes and lower returns from by-product sales. Industry processing margins continued to be negative during the quarter, although improved compared to last year.

Earnings in the poultry business were affected by lower industry processing margins, partly offset by higher pricing in value-added channels.

Agribusiness Group

Consists of Canadian hog production and animal by-product recycling operations, including biodiesel manufacturing and distribution.

Sales in the Agribusiness Group increased 3.3 per cent to $67.5 million for the first quarter compared to $65.3 million last year due to higher pricing and volumes in the by-products recycling business.

Adjusted Operating Earnings in the first quarter declined 70.4 per cent to $5.4 million compared to $18.2 million last year, entirely driven by hog production earnings that were impacted by a combination of higher feed costs, lower market prices for hogs, and lower contribution from hedging activities. Earnings in the by-products recycling operations were consistent with last year, as increased raw material costs were offset by higher selling prices and biodiesel volumes.

Further Reading

You can view the full report by clicking here.

 

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