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Maple Leaf Reports Loss

28 February 2014

CANADA - Canadian meat and food processor Maple Leaf Foods saw sales fall by 2.1 per cent in the fourth quarter of the year to C$1,107.0 million for the fourth quarter because of lower volumes, which were partly offset by higher pricing.

For the year ended 31 December, sales fell 3.2 per cent from the prior year to C$4,406.4 million.

Adjusted Operating Earnings for the fourth quarter decreased to a loss of C$21.7 million compared to Adjusted Operating Earnings of C$70.0 million last year, primarily due to lower earnings in the Protein Group.

For the full year, Adjusted Operating Earnings fell to a loss of C$12.3 million compared to Adjusted Operating Earnings of C$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 C$14.4 million (loss of C$0.13 per basic share attributable to common shareholders) compared to net earnings from continuing operations of C$41.0 million (C$0.28 per basic share attributable to common shareholders) last year.

Net loss from continuing operations for the full year was C$58.5 million (loss of C$0.48 per basic share attributable to common shareholders) compared to net earnings from continuing operations of C$42.0 million (C$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 C$0.25 compared to Adjusted Earnings per Share of C$0.27 last year. Full year Adjusted Earnings per Share declined to a loss of C$0.51compared to Adjusted Earnings per Share of C$0.47 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.”

He added: "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.

"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."

Meat Products Group

Meat Products Group sales for the fourth quarter declined by 1.1 per cent to C$742.7 million from C$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 per cent.

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 per cent, or 2.1 per cent 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 C$42.6 million compared to Adjusted Operating Earnings of C$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 C$15 million during the quarter (2012: approximately C$4 million) and approximately C$50 million for the full year (2012: approximately C$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 C$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 C$3 million compared to last year.

For the full year, Adjusted Operating Earnings was a loss of C$86.2 million compared to Adjusted Operating Earnings of C$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 were the same as for the fourth quarter. The sale of the Company's potato processing operations in January 2013 reduced Adjusted Operating Earnings by approximately C$13 million compared to last year.
Agribusiness Group

Agribusiness Group sales for the fourth quarter declined to C$4.6 million from C$9.0 million last year due to lower pricing on toll feed sales and lower sales of live hogs to third parties. Sales for the full year increased 8.9 per cent to C$29.0 million from C$26.6 million last year due to higher hog volumes, partly offset by lower pricing on toll feed sales.

Adjusted Operating Earnings in the fourth quarter decreased to a loss of C$10.0 million compared to a loss of C$4.8 million last year, primarily due to lower contributions from hedging programs, which more than offset higher market prices for hogs. Feed costs were consistent with the prior year.

Full year Adjusted Operating Earnings decreased to a loss of C$38.3 million compared to a loss of C$15.5 million last year due to lower contributions from hedging programs, higher feed costs, and higher selling, general, and administrative expenses, partly offset by an increase in the market price for hogs.

Bakery Products Group

Bakery Products Group sales for the fourth quarter decreased 2.9 per cent to C$359.7 million, or 2.4 per cent after adjusting for discontinued categories in the U.K. and the impact of currency translation on sales in the U.S. and U.K. as lower sales volumes, primarily at the fresh bakery business, were partly offset by higher pricing.

Sales for the full year decreased 1.7 per cent to C$1,453.6 million, or 0.8 per cent after adjusting for discontinued categories and currency translation.

Lower sales volumes in the fresh and North American frozen bakery businesses were partly offset by stronger volumes in the UK and higher pricing across all the businesses.

Fourth quarter Adjusted Operating Earnings decreased 6.7 per cent to C$30.9 million from C$33.1 million last year, primarily reflecting lower fresh bakery earnings that were partly offset by stronger earnings in the UK bakery business.

Lower volumes in the fresh bakery business were only partly offset by increased efficiencies at the new Hamilton, Ontario bakery, simplification of the product portfolio, and the reorganisation of the distribution network, all of which contributed to lower operating costs.

The benefits of earlier price increases were offset by higher trade spend and inflationary costs in the quarter. North American frozen bakery business earnings decreased modestly, as inflationary costs, lower volumes, and higher selling, general, and administrative expenses were mostly offset by operating improvements.

The UK bakery business benefited from higher pricing and lower operating and selling, general, and administrative expenses, which more than offset higher raw material and inflationary costs.

For the full year, Adjusted Operating Earnings increased 17.9 per cent to C$113.7 million from C$96.4 million last year, primarily driven by operating improvements in the fresh and North American frozen bakery businesses, lower selling, general, and administrative costs at the fresh bakery business resulting from earlier restructuring initiatives, increased volumes in the UK bakery business, and higher pricing across all the businesses.

These benefits were partly offset by lower volumes in the fresh and North American frozen bakery businesses and higher raw material and inflationary costs.

Sale of Rothsay and Olivieri Businesses

During the fourth quarter, the Company sold its Rothsay by-product recycling and Olivieri fresh pasta businesses for net proceeds of C$628.5 million and C$116.3 million, respectively.

The operating results and gain on sale of these two businesses have been classified as discontinued operations and prior year amounts have been presented as discontinued operations on a comparable basis.

The Rothsay business was previously reported in the Agribusiness Group and the Olivieri business was previously reported in the Bakery Products Group. Earnings per share from discontinued operations were C$3.70 for the fourth quarter (2012: C$0.07) and C$4.03 for the year ended December 31, 2013 (2012: C$0.39). Included in the fourth quarter and full year 2013 figures is a net gain on sale of the businesses of C$3.69 per share.

 

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