Maple Leaf Foods Reports First Quarter Financial Results; Operating Earnings Before Restructuring Costs Up 27%
TORONTO--(BUSINESS WIRE)--April 28, 2005--Maple Leaf Foods Inc. (TSX:MFI) today reported its financial results for the first quarter ended March 31, 2005.
"We are very pleased with our first quarter results, reflecting continued earnings momentum into 2005," said Michael McCain, President and Chief Executive Officer. "This growth was achieved despite market headwinds in our fresh pork and poultry operations and resulted from a combination of factors, including the benefit of portfolio balance across our protein value chain operations, excellent bakery results, and continued gains in operating efficiencies throughout our businesses."
Sales for the first quarter increased to $1.6 billion from $1.2 billion last year, mostly due to the acquisition of Schneider Foods in April 2004, and increased sales in the Company's fresh pork and hog production operations. Excluding Schneider Foods, sales for the first quarter increased 3%.
Net earnings for the quarter before restructuring costs were $21.1 million ($0.17 per share) compared to $18.1 million ($0.16 per share) last year. Including restructuring costs, net earnings were $12.7 million ($0.10 per share).
The Company recorded restructuring expenses of $13.2 million before tax ($8.8 million after tax) to account for several ongoing business restructuring initiatives, principally the integration of Schneider Foods, the closure of a bakery in Peterborough, England, and other smaller restructuring activities.
Earnings from operations before restructuring costs increased 27% to $61.2 million compared to $48.0 million last year. Comparisons of earnings from operations exclude $13.2 million in restructuring costs in the first quarter of 2005. Management believes that this is the most appropriate basis on which to evaluate operating results, as restructuring costs are not representative of continuing operations.
Operating Review
The following is a summary of operating earnings by segment. The combination of the Company's Meat Products Group and the Agribusiness Group comprise the Protein Value Chain operations, which are involved in producing animal protein products. These operations are highly interrelated and are strategically linked through the Company's Vertical Coordination business model. While each operation maintains a strong external customer focus, they are tightly coordinated to deliver superior performance where their operations intersect. Accordingly, it is more meaningful to review the combined results of the Protein Value Chain rather than each segment independently.
Earnings from operations before restructuring costs
(CDN$ millions) First Quarter
----------------------
2005 2004 Change
---- ---- ------
Meat Products Group 18.7 10.0 87%
Agribusiness Group (i) 21.9 20.3 8%
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Protein Value Chain 40.6 30.3 34%
Bakery Products Group 20.6 17.7 16%
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61.2 48.0 27%
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(i) Includes $0.2 million (2004: $4.1 million) of gains related to sales of poultry production quota.
The Protein Value Chain earnings improvement reflects positive contributions from Schneider Foods and hog production earnings, which more than offset decreases in industry wide poultry processing margins and lower rendering returns. Although industry margins in fresh pork declined, sales mix and operating improvements more than offset these impacts.
Meat Products Group (branded value-added prepared meat products; fresh, frozen and branded value-added pork products; fresh, frozen and branded value-added chicken and turkey products; and global food marketing, distribution and trading)
Meat Products Group sales for the first quarter of 2005 increased to $1.1 billion from $678.6 million last year, primarily due to the contribution of Schneider Foods and higher pork prices.
Earnings from operations increased to $18.7 million from $10.0 million in 2004. The increase was due to the contribution from Schneider Foods and a modest improvement in fresh pork earnings, which more than offset a significant decline in poultry processing earnings. The improved pork earnings were achieved despite an 88% decline in industry pork processing margins from the first quarter last year, and reflected a higher mix of valued added sales and increased manufacturing efficiencies. Earnings from the fresh poultry operations declined due to a significant reduction in industry wide processor margins, which reached high levels last year due to a supply shortage related to Avian flu. Maple Leaf continues to benefit from its balanced portfolio of fresh and processed meat products and new product innovation, which is creating new markets with higher growth rates and margins. The expanded value-added processing capabilities of this group have resulted in new growth opportunities in sliced meats to meet increased demand in the foodservice sandwich market. In addition, a new generation of a lighter version of Fully Cooked Roasts was launched in the first quarter, in order to expand demand for this very popular line of products throughout the summer season.
Agribusiness Group (research, development and supply of quality livestock nutrition products and services; pet food; swine production; and animal by-products recycling)
Agribusiness Group sales for the first quarter decreased to $189.5 million from $212.1 million last year, mainly due to lower market prices for feed and rendered products.
Earnings from operations increased to $21.9 million from $20.3 million last year, primarily due to a 19% increase in hog prices that benefited the Company through its 21% effective ownership of hogs processed in the quarter. Earnings from the Company's rendering operations declined from last year due to the lower value of finished products, which compete with alternative feed ingredients. Earnings from the animal nutrition operations remained consistent with last year.
On October 20, 2004, the U.S. government implemented a tariff on all Canadian hogs entering the United States. In a subsequent decision on April 6, 2005, the U.S. International Trade Commission ruled unanimously that the domestic U.S. hog industry has not suffered any material injury as a result of the importation of Canadian hogs. As a result, duties applied to Canadian hogs entering the U.S. have ceased, and will be reimbursed to Canadian producers. The decision will have no material impact on Maple Leaf Foods.
Bakery Products Group (fresh, frozen and branded value-added bakery products, including frozen par-baked bakery products; and specialty pasta and sauces)
Bakery Product Group sales for the first quarter increased to $316.2 million compared to $304.0 million last year, supported by increased sales of fresh and frozen bakery and fresh pasta products.
Earnings from operations increased to $20.6 million compared to $17.7 million last year, primarily driven by increased earnings in the fresh bakery operations. Strong sales of premium nutrition multigrain and specialty breads, operating cost reductions, and price increases that offset inflationary cost increases, all contributed to increased earnings for the quarter. Earnings from North American Frozen Bakery operations declined from last year due to increased distribution and input costs, although volumes increased for the quarter. Management anticipates some benefit from price increases through the remainder of the year to offset the significant cost increases, principally fuel costs. The Company commenced sales of its new FroBake(R) products in the U.S. late in the quarter, with good early market response. The U.K. bakery and fresh pasta operations both achieved strong sales in the quarter. A new bagel plant in the U.K. was substantially commissioned at the end of the quarter, resulting in the closure of an existing plant in Peterborough and consolidation of bagel manufacturing into a single location.
Cash Flow and Financing
Total debt, net of cash balances, of $1.2 billion at the end of the first quarter increased from $783.5 million last year due to the purchase of Schneider Foods in April 2004, partly offset by the proceeds of an equity issue in late 2004.
Cash flow from operating activities for the first quarter was a use of funds of $40.9 million compared to a source of funds of $23.1 million last year. This year over year change was due primarily to an increase in working capital in the first quarter of 2005, driven by a reduction in accounts payable and increased inventory balances.
Capital expenditures of $40.0 million compared to $21.1 million last year. Spending in the Bakery Products Group was primarily a result of the completion of a new bagel plant in the United Kingdom, as well as the installation of new equipment to support the FroBake(R) line of products. In the Agribusiness Group, significant capital was spent on a new biodiesel plant in Quebec and a new feed mill in Atlantic Canada.
Interest expense for the first quarter increased to $25.0 million from $18.4 million last year, primarily due to higher average debt incurred to finance the acquisition of Schneider Foods. The acquisition was initially funded with short-term debt that paid lower, short-term interest rates. In December 2004, the Company re-financed $500 million of debt at terms of seven, ten and twelve years at an effective average rate of 6.1%. As a result, interest expense will be higher than historical levels due to the higher interest rates on long-term debt.
Other Matters
Maple Leaf Foods declared a dividend of $0.04 per share payable on June 30, 2005 to shareholders of record on June 10, 2005.
Maple Leaf Foods Inc. is a leading Canadian food processing company committed to delivering quality food products to consumers around the world. Headquartered in Toronto, Canada, the Company employs approximately 23,000 people at its operations across Canada and in the United States, Europe and Asia. The Company had sales of $6.4 billion in 2004.
An investor presentation related to the Company's first quarter financial results is available at www.mapleleaf.com and can be found under Investor Relations on the Quarterly Results page. A conference call will be held at 3:30 p.m. EST on April 28, 2005 to review Maple Leaf Foods' first quarter financial results. To participate in the call, please dial 1-416-405-9310 or 877-211-7911. For those unable to participate, playback will be made available an hour after the event at 416-695-5800 / 800-408-3053 (Passcode 3149292#).
A web cast presentation of the first quarter financial results will be available at http://www.firstcallevents.com/service/ajwz404882369gf12.html at 3:30 p.m. EST and via a link on the Company's website www.mapleleaf.com. An archived replay of the web cast will be available following the call at each of the above links.
The Company is hosting its Annual and Special Meeting today at 11:00 a.m. at the Glenn Gould Studio, CBC Building, Main Floor, 250 Front Street West, Toronto. A live web cast of the meeting may be accessed at http://www.startcast.com/shows/91/A0003. A replay of the web cast will also be available at this link or via the Company's website at http://www.mapleleaf.com/Investor/PresentationsWebCast shortly after the close of the Annual and Special Meeting.
Consolidated Financial Statements
(Expressed in Canadian dollars)
MAPLE LEAF FOODS INC.
Three months ended March 31, 2005 and 2004
MAPLE LEAF FOODS INC.
Consolidated Balance Sheets
(In thousands of Canadian dollars)
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As at As at As at
March 31, March 31, December 31,
2005 2004 2004
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(Unaudited) (Unaudited)
ASSETS (As restated)
(Note 1(a))
Current assets
Cash and cash equivalents $ 89,011 $ 46,085 $ 111,770
Accounts receivable (Note 3) 277,953 226,256 292,462
Inventories 417,212 292,118 385,128
Future tax asset - current 20,020 4,352 6,708
Prepaid expenses and other assets 14,035 12,407 13,218
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818,231 581,218 809,286
Investments in associated companies 83,824 56,209 82,302
Property and equipment 1,090,020 795,972 973,718
Other long-term assets 232,875 179,453 230,201
Future tax asset - non-current 32,353 31,591 26,976
Goodwill 850,732 519,910 816,408
Other intangibles 81,552 12,008 82,840
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$ 3,189,587 $ 2,176,361 $ 3,021,731
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued
charges $ 559,425 $ 509,296 $ 621,564
Income and other taxes payable 17,783 5,079 27,651
Current portion of long-term debt 64,049 4,400 105,910
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641,257 518,775 755,125
Long-term debt 1,250,112 825,144 1,052,195
Future tax liability 43,359 56,246 29,207
Other long-term liabilities 247,835 35,907 205,542
Minority interest 76,831 70,734 74,109
Shareholders' equity 930,193 669,555 905,553
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$ 3,189,587 $ 2,176,361 $ 3,021,731
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.
MAPLE LEAF FOODS INC.
Consolidated Statements of Earnings
(In thousands of Canadian dollars, except share amounts)
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Three months ended March 31,
(Unaudited) 2005 2004
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(As restated)
(Note 1(a))
Sales $ 1,582,278 $ 1,194,731
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Earnings from operations before
restructuring costs 61,150 48,002
Restructuring costs (Note 2) 13,157 -
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Earnings from operations 47,993 48,002
Other income (expense) (Note 4) (542) 1,096
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Earnings before interest and income taxes 47,451 49,098
Interest expense 25,046 18,403
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Earnings before income taxes 22,405 30,695
Income taxes 7,554 10,837
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Earnings before minority interest 14,851 19,858
Minority interest 2,103 1,743
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Net earnings for the period $ 12,748 $ 18,115
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Basic earnings per share (Note 10) $ 0.10 $ 0.16
Diluted earnings per share (Note 10) $ 0.10 $ 0.16
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Weighted average number of shares
(millions) 126.0 113.2
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Consolidated Statements of Retained Earnings
(In thousands of Canadian dollars)
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Three months ended March 31,
(Unaudited) 2005 2004
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(As restated)
(Note 1(a))
Retained earnings, beginning of period $ 159,129 $ 74,982
Net earnings for the period 12,748 18,115
Dividends declared ($0.04 per share;
2004: $0.04 per share) (5,050) (4,528)
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Retained earnings, end of period $ 166,827 $ 88,569
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.
MAPLE LEAF FOODS INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
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Three months ended March 31,
(Unaudited) 2005 2004
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(As restated)
CASH PROVIDED BY (USED IN) (Note 1(a))
Operating activities
Net earnings $ 12,748 $ 18,115
Add (deduct) items not affecting cash:
Depreciation and amortization 32,620 26,304
Stock-based compensation (Note 5) 1,768 625
Minority interest 2,103 1,743
Future income taxes (4,538) 5,956
Increase in pension asset (5,231) (5,087)
Undistributed (earnings) losses of
associated companies (1,276) 443
Loss on redemption of convertible
debenture 1,108 -
Gain on sale of property and equipment (171) (1,049)
Other (1,757) (3,082)
Change in other long-term receivables 6,036 (655)
Change in operating working
capital (84,306) (20,178)
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(40,896) 23,135
Financing activities
Dividends paid (5,050) (4,528)
Dividends paid to minority interest (311) (234)
Increase in long-term debt 55,830 5,965
Proceeds from share issuance (Note 8) 4,723 277
Other 758 -
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55,950 1,480
Investing activities
Additions to property and equipment (39,958) (21,115)
Proceeds from sale of property
and equipment 3,703 3,674
Purchase of net assets of
businesses (Note 7) (2,746) -
Other 1,188 3
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(37,813) (17,438)
Increase (decrease) in cash and
cash equivalents (22,759) 7,177
Cash and cash equivalents, beginning
of period 111,770 38,908
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Cash and cash equivalents, end
of period $ 89,011 $ 46,085
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The accompanying notes to the consolidated financial statements are
an integral part of these statements.
MAPLE LEAF FOODS INC.
Segmented Financial Information
(In thousands of Canadian dollars)
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Three months ended March 31,
(Unaudited) 2005 2004
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Sales
Meat Products Group $ 1,076,628 $ 678,633
Agribusiness Group 189,474 212,125
Bakery Products Group 316,176 303,973
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$ 1,582,278 $ 1,194,731
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Earnings from operations, before
restructuring costs
Meat Products Group $ 18,656 $ 9,985
Agribusiness Group 21,851 20,275
Bakery Products Group 20,643 17,742
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$ 61,150 $ 48,002
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Additions to property and equipment
Meat Products Group $ 17,759 $ 6,701
Agribusiness Group 9,743 2,738
Bakery Products Group 12,456 11,676
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$ 39,958 $ 21,115
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Depreciation and amortization
Meat Products Group $ 16,353 $ 10,490
Agribusiness Group 5,370 5,067
Bakery Products Group 10,897 10,747
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$ 32,620 $ 26,304
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As at As at As at
March 31, March 31, December 31,
2005 2004 2004
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(Unaudited) (Unaudited)
Total assets
Meat Products Group $ 1,566,451 $ 683,577 $ 1,452,100
Agribusiness Group 631,358 582,899 597,806
Bakery Products Group 697,529 696,934 702,137
Non-allocated assets 294,249 212,951 269,688
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$ 3,189,587 $ 2,176,361 $ 3,021,731
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MAPLE LEAF FOODS INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of Canadian dollars, except share amounts)
Three months ended March 31, 2005 and 2004
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2004. These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using the same accounting policies as were applied in the consolidated financial statements for the year ended December 31, 2004, except for the following:
a) Convertible debentures
Effective January 1, 2005, the Company adopted the amendment to section 3860, "Financial Instruments - Disclosure and Presentation", on a retroactive basis with restatement of prior periods. The revised standard, which is effective for January 1, 2005, requires obligations of a fixed amount that may be settled, at the issuer's option, by a variable number of the issuer's own equity instruments to be presented as liabilities. As a result of adopting the revised standard, the Company reclassified the principal component of its convertible debenture (see Note 9) as a debt instrument and reclassified the interest, accretion charges and related tax effects in the statement of earnings in the comparative periods. Retroactive application of this standard resulted in a reclassification of $89.1 million from equity to debt as at March 31, 2004. The impact of the revised standard was a reduction in net earnings of $1.2 million (net of tax) for the three months ended March 31, 2004 and $4.5 million for the twelve months ended December 31, 2004. There was no impact to basic or diluted earnings per share for prior periods as a result of adopting this change retroactively.
b) Variable interest entities
The Company adopted the guidance in Accounting Guideline 15, "Consolidation of Variable Interest Entities", retroactively without restatement of prior period, effective January 1, 2005. As a result of the adoption, there are several entities that have now been consolidated with the results of the Company. The most significant impact was the consolidation of the hog processing facility in Brandon, Manitoba, as described in Note 22 of the Company's financial statements for the year ended December 31, 2004. This resulted in an increase in assets of $97.5 million and an increase in long-term debt of $97.5 million. The remaining impact of the adoption of Accounting Guideline 15 was the consolidation of several of the Company's investments in various hog facilities, which were not significant to the consolidated financial statements. There was no impact on the net earnings of the Company from the consolidation of these entities.
c) Comparative figures
Certain 2004 comparative figures have been reclassified to conform to the financial statement presentation adopted in 2005.
2. RESTRUCTURING COSTS
During the first quarter of 2005, the Company recorded $13.2 million in restructuring costs ($8.8 million after tax) in respect of certain plant closures and operational restructuring for several of its businesses associated with the integration of Schneider Corporation ("Schneider Foods"), the closure of the Company's bakery in Peterborough, England, and certain other operational restructuring items. Of the $13.2 million, $5.0 million relates to the write down of certain assets that were disposed of or that have become impaired as a result of the restructuring.
3. ACCOUNTS RECEIVABLE
Under revolving securitization programs, the Company has sold, with limited recourse, certain of its trade accounts receivable to financial institutions. The Company retains servicing responsibilities and assumes limited recourse obligations for delinquent receivables. At March 31, 2005, trade accounts receivable being serviced under this program amounted to $204.2 million (March 31, 2004: $201.7 million; December 31, 2004: $209.7 million).
4. OTHER INCOME (EXPENSE)
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Three months ended March 31,
2005 2004
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Earnings (loss) from associated companies $ 186 $ (12)
Gain on sale of property and equipment 171 1,049
Dividends received 230 -
Loss on redemption of convertible
debenture (1,108) -
Other (21) 59
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$ (542) $ 1,096
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5. STOCK-BASED COMPENSATION
The stock compensation charge to earnings during the first quarter was $1.8 million (2004: $0.6 million). During the quarter, the Company granted 25,000 stock options (2004: nil) at a weighted average exercise price per share of $15.60 and 21,250 restricted share units (2004: nil). The combined fair value of the stock options and restricted share units granted during the quarter was $0.2 million (2004: nil).
During 2002, the Company granted 2,503,500 stock options at a weighted average price per share of $14.36. The effect of these stock options, had they been charged to earnings on a fair value basis during the quarter, would have been nominal.
6. PENSIONS
During the quarter, the Company recorded income of $1.0 million related to net benefit plan income including post-retirement benefit costs (2004: $1.3 million).
7. ACQUISITIONS
On April 5, 2004, the Company acquired Schneider Foods for cash consideration of $376.7 million including transaction costs of $8.1 million and the assumption of Schneider Foods debt. As at March 31, 2005, a preliminary purchase price allocation (including fair values assigned to intangible assets, certain fixed assets, legal claims, long-term debt, pensions, post-retirement benefits and taxes) has been completed. Accordingly, the allocation of the purchase cost to the assets and liabilities acquired is still subject to change. Goodwill resulting from this transaction is included in the total assets of the Meat Products Group.
Details of purchase adjustments made in respect of this transaction
in the quarter are as follows:
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As at As at
Dec 31, 2004 Adjustments Mar 31, 2005
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Net working capital (deficit) $ 79,590 $ (1,602) $ 77,988
Investments 21,191 - 21,191
Property and equipment 152,604 (8,424) 144,180
Other assets 7,689 (668) 7,021
Goodwill 291,402 32,841 324,243
Other intangibles 72,480 - 72,480
Long-term debt (146,691) - (146,691)
Future income taxes 27,014 16,317 43,331
Pension benefit liability (75,993) (250) (76,243)
Post employment benefit
liability (49,631) (53) (49,684)
Other long-term liabilities (1,255) (38,161) (39,416)
Minority interest (1,737) - (1,737)
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Total purchase cost $ 376,663 $ - $ 376,663
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In January 2005, the Company purchased 66,900 shares in Canada Bread
Company, Limited for $2.7 million, increasing its ownership to 86.9%.
8. SHARE CAPITAL
The following table sets forth the continuity for shares issued and
outstanding during the quarter and the corresponding value:
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Number of shares Share capital $
---------------------------------------------
2005 2004 2005 2004
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Opening balance 125,174,627 113,174,213 $ 731,291 $ 565,048
Exercise of options 416,069 27,800 4,723 277
Conversion of convertible
debentures (Note 9) 763,933 - 12,217 -
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126,354,629 113,202,013 $ 748,231 $ 565,325
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9. CONVERTIBLE DEBENTURES
On December 8, 2004, the Company issued a redemption notice for the aggregate principal amount on the debentures of $91.3 million for cash at par plus accrued interest with a date fixed for redemption of January 7, 2005. As a result, the Company no longer had the option to satisfy repayment on redemption with common shares. Accordingly, as of that date the Company reclassified $90.0 million of the convertible debentures to current debt, leaving $7.3 million related to the debenture holders' conversion option within shareholders' equity. For the period from the date of the reclassification to December 31, 2004, the carrying charges, including coupon interest, were classified as interest expense.
On January 7, 2005, certain of the debenture holders exercised their conversion rights and the Company issued 763,933 common shares for a reduction in the total cash to be paid by the Company upon redemption of approximately $11.5 million and a proportionate reduction in the debenture holder's conversion option within shareholder's equity of $0.9 million. Accordingly, the Company paid $79.8 million to redeem the remaining debentures outstanding resulting in a net loss on redemption of $1.1 million for the quarter.
The remaining credit balance on the conversion feature of $6.4 million was recognized upon repayment of the bonds through contributed surplus as an equity transaction.
10. EARNINGS PER SHARE
The following table sets forth the calculation of basic and fully diluted earnings per share:
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Three months ended March 31,
2005 2004
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Weighted Weighted
Net Average Net Average
Earnings Shares EPS Earnings Shares EPS
(iii) (iii)
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Basic $ 12,748 126.0 $ 0.10 $ 18,115 113.2 $ 0.16
Stock options(i) - 3.2 - - 0.3 -
Convertible debt(ii) - - - 1,216 6.1 -
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Diluted $ 12,748 129.2 $ 0.10 $ 19,331 119.6 $ 0.16
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(i) Excludes the effect of 10.0 million options and restricted stock units (2004: 11.8 million) to purchase common shares that are anti-dilutive
(ii) As detailed in Note 9, the convertible debentures were all converted or repaid on January 7, 2005
(iii) In millions
11. SUPPLEMENTAL CASH FLOW INFORMATION
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Three months ended March 31,
2005 2004
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Net interest paid $ 14,891 $ 13,697
Net income taxes paid 20,581 15,254
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Maple Leaf Foods Inc. (TSX:MFI)
CONTACT: Maple Leaf Foods Inc.
Lynda Kuhn
Vice-President, Public & Investor Relations
(416) 926-2026
www.mapleleaf.com
SOURCE: Maple Leaf Foods Inc.
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