Maple Leaf Foods Reports Results for Third Quarter 2013

TSX: MFI
www.mapleleaffoods.com

TORONTO, Oct. 30, 2013 /PRNewswire/ - Maple Leaf Foods Inc. (TSX: MFI) today reported its financial results for the third quarter ended September 30, 2013.

• Adjusted Operating Earnings^(1)(2)(3) for the third quarter was $18.6 million compared to $47.9 million last year. Year-to-date Adjusted Operating Earnings were $12.0 million compared $102.3 million last year
• Adjusted Earnings per Share^(2)(3)(4) was a loss of $0.01 compared to Adjusted Earnings per Share of $0.13 last year. Year-to-date Adjusted Earnings per Share was a loss of $0.25 compared to Adjusted Earnings per Share of $0.21 last year.
• The Bakery Products Group achieved Adjusted EBITDA⁽²⁾⁽⁵⁾ margins of 13.5%, reflecting contributions from efficiency improvements and volume growth in the U.K. business

"This is a very challenging period of transition for the Maple Leaf organization, as the short-term impact of volatile protein market conditions, combined with the significant cost of change, has been material," said Michael H. McCain, President and CEO. "We have five significant operational start-ups occurring simultaneously, during a year when commodity markets have not been friendly. However, these transitory conditions do not detract from the underlying strength of the business or the strategic direction. Our commercial performance is solid and we are satisfied with the progress we are making in implementing our prepared meats strategy. Our bakery business is performing at record levels as we come into the back half of 2013. Through exploring strategic alternatives, we are committed to optimizing the value of this business, either as part of Maple Leaf or under new ownership."

Financial Overview

Maple Leaf Foods Inc. ("the Company") sales of $1,150.2 million for the third quarter declined 2.5% from last year, or 1.1% after adjusting for the impacts of divestitures and foreign exchange, due to lower volumes which were partly offset by higher pricing and improved sales mix. For the nine months ended September 30, 2013, sales decreased 3.6% from the prior year to $3,364.2 million, or 2.1% after adjusting for divestitures and foreign exchange, due to the same factors.

Adjusted Operating Earnings for the third quarter decreased 61.1% to $18.6 million compared to $47.9 million last year, as earnings in the Protein Group were impacted by higher costs related to the implementation of its prepared meats strategy and poor commodity market conditions, which were only partly offset by stronger Bakery Group results. For the nine months ended September 30, 2013, Adjusted Operating Earnings declined 88.2% to $12.0 million compared to $102.3 million last year, due to similar factors noted above.

Net earnings from continuing operations⁽²⁾ for the third quarter were $nil (a loss of $0.02 per basic share attributable to common shareholders) compared to $11.4 million ($0.06 per basic share attributable to common shareholders) last year. Net earnings from continuing operations included $15.1 million ($0.08 per basic share attributable to common shareholders) of pre-tax expenses related to restructuring and other related costs (2012: $4.6 million, or $0.02 per basic share attributable to common shareholders). Year-to-date net loss from continuing operations was $42.2 million (loss of $0.34 per basic share attributable to common shareholders) compared to net earnings of $1.2 million (a loss of $0.02 per basic share attributable to common shareholders) last year. The year-to-date net loss included $77.9 million ($0.40 per basic share attributable to common shareholders) of pre-tax expenses related to restructuring and other related costs (2012: $34.7 million, or $0.19 per basic share attributable to common shareholders).

Adjusted Earnings per Share in the third quarter was a loss of $0.01 compared to Adjusted Earnings per Share of $0.13 last year. Year-to-date Adjusted Earnings per Share declined to a loss of $0.25 compared to Adjusted Earnings per Share of $0.21 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 at the end of this News Release for a description and reconciliation of all non-IFRS financial measures.

Business Segment Review

Following is a summary of sales by business segment:

The following table summarizes Adjusted Operating Earnings by business segment:

Protein Group

Results for the Protein Group, which include the operations of the Company's Meat Products and Agribusiness Groups, should be viewed in totality due to intercompany transactions and correlated factors within these operations.

Sales for the third quarter in the Protein Group declined 2.8% to $757.3 million from $778.8 million last year. For the first nine months, sales decreased 4.6% to $2,205.4 million. The quarter and year-to-date declines were primarily driven by lower volumes and the divestiture of the Company's potato processing operations, partly offset by higher pricing and sales mix.

Adjusted Operating Earnings in the third quarter was a loss of $20.1 million compared to Adjusted Operating Earnings of $18.9 million last year, reflecting transitory costs related to commissioning newly expanded prepared meats facilities and continued weakness in commodity market conditions.

For the first nine months, Adjusted Operating Earnings decreased to a loss of $71.8 million compared to Adjusted Operating Earnings of $45.2 million last year, due to similar factors noted above as well as lower prepared meats volumes in the first quarter of 2013.

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 third quarter declined 2.8% to $750.9 million, or 1.0% after adjusting for the impact of divesting the Company's potato processing operations and foreign exchange. Lower volumes in primary pork processing and the prepared meats business were partly offset by higher pricing in primary processing and favourable sales mix in the prepared meats business. For the first nine months, sales declined 5.0%, or 3.0% after adjusting for the impact of divesting the Company's potato processing operations and foreign exchange. Volumes in the prepared meats business decreased by approximately 8% in the first quarter as consumers responded in the short-term to higher prices, but subsequently improved in the second and third quarters.

Adjusted Operating Earnings for the third quarter declined to a loss of $21.6 million compared to Adjusted Operating Earnings of $22.9 million last year, due to the factors discussed below.

The Company is in an intense phase of implementing a strategy to increase scale, productivity and profitability in its prepared meats network. This includes commissioning activities at three recently expanded facilities, a new distribution centre servicing Central and Eastern Canada, and a newly constructed state-of-the-art scale plant in Hamilton, Ontario. Supporting these activities resulted in transitional costs of approximately $15 million during the quarter (2012: approximately $3 million) and approximately $34 million for the nine months ended September 30, 2013 (2012: approximately $8 million), particularly related to installing new technologies, transferring volume, and providing incremental resources required to support these start-ups. Beyond the transformation initiatives, earnings were negatively impacted by higher raw material and other inflationary costs, primarily due to an increase in fresh pork prices. Partly offsetting these declines were improvements in sales mix, resulting from several new product launches in the second half of 2012 and the first half of 2013.

Earnings in primary pork processing continued to be negatively affected by the devaluation of the Japanese Yen, which lowered profitability on export sales. North American primary pork processing spreads also contracted as live hog costs outpaced an increase in pork prices. Earnings in fresh poultry were consistent as lower primary processing spreads were offset by lower selling, general, and administrative costs.

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

For the first nine months, Adjusted Operating Earnings were a loss of $43.6 million compared to Adjusted Operating Earnings of $55.8 million last year due to similar factors noted above, as well as lower volumes in the prepared meats business in the first quarter of 2013. The sale of the Company's potato processing operations reduced Adjusted Operating Earnings for the nine months ended September 30, 2013 by approximately $10 million compared to last year.

Agribusiness Group
Includes Canadian hog production operations.

Agribusiness Group sales for the third quarter of $6.3 million were consistent with the prior year. Sales for the first nine months increased 38.3% to $24.4 million from $17.7 million last year due to higher hog volumes and higher pricing on toll feed sales.

Adjusted Operating Earnings in the third quarter increased to $1.6 million compared to a loss of $4.0 million last year. Hog production earnings increased due to the reversal of a provision, reflecting the termination of a preliminary arrangement with a supplier to receive hogs on a cost of production basis rather than at market price. Earnings also benefited from an increase in live hog prices that more than offset higher feed costs. Partly offsetting these increases was a lower contribution from hedging programs compared to last year.

Year-to-date Adjusted Operating Earnings decreased to a loss of $28.3 million compared to a loss of $10.6 million last year due to higher feed costs that outpaced an increase in hog prices, and a lower contribution from hedging programs. The third quarter provision reversal noted above did not impact year-to-date results as the costs associated with the provision were recorded in the first and second quarters of 2013.

Bakery Products Group
Includes fresh and frozen bakery products, including breads, rolls, bagels, specialty and artisan breads, sweet goods, and fresh pasta and sauces sold to retail, foodservice and convenience channels. It includes national brands such as Dempster's^®, Tenderflake^®, Olivieri^® and New York Bakery Co^TM, and many leading regional brands.

Bakery Products Group sales for the third quarter decreased 2.1% to $ 392.9 million, or 1.3% after adjusting for discontinued categories in the U.K. and the impact of currency translation on sales in the U.S. and U.K. The impact of lower sales volumes in the fresh bakery business were partially offset by volume growth in the U.K. and higher pricing in the fresh, frozen, and U.K. bakery businesses.

Sales for the first nine months decreased 1.5% to $1,158.8 million compared to $1,176.0 million last year or 0.8% after adjusting for discontinued categories in the U.K. and currency translation due to similar factors noted above.

Third quarter Adjusted Operating Earnings increased 28.9% to $38.5 million from $29.9 million last year, driven by higher earnings in the North American frozen and U.K. bakery businesses.

The North American frozen bakery business benefited from operational cost reductions and higher pricing, while the U.K. business earnings benefited from increased volumes in the bagel and croissant categories. Lower volumes and higher raw material and inflationary costs in the fresh bakery business were partly offset by operating efficiencies, driven by the closure of a third Toronto, Ontario bakery, higher pricing, and lower selling, general, and administrative expenses. Earnings in the fresh pasta business were consistent with the prior year.

For the first nine months, Adjusted Operating Earnings increased 34.4% to $85.4 million from $63.5 million last year. Earnings in the frozen bakery and U.K. bakery business improved due to similar factors noted above. In the fresh bakery business, earnings improved as a result of higher pricing, operational improvements, and lower selling, general, and administrative spend, partly offset by lower volumes and higher raw material and other inflationary costs. Earnings in the fresh pasta business increased mainly due to an inventory write-off in the first quarter of last year that did not re-occur.

Sale of Rothsay Business

The Company disposed of its Rothsay by-product recycling business during the fourth quarter, pursuant to an agreement to sell the business to Darling International Inc. The operating results of the Rothsay business have been classified as discontinued operations and 2012 amounts have been presented as discontinued operations on a comparable basis. The Rothsay business was previously reported in the Agribusiness Group. Earnings per share from discontinued operations were $0.11 for the third quarter (2012: $0.11) and $0.31 for the nine months ended September 30, 2013 (2012: $0.32).

Long-term EBITDA Margin Targets

As a result of the disposition of the Rothsay business, the Company has adjusted its 2015 EBITDA margin target to 10.8%, which reflects a revised EBITDA margin target of 10.0% for the Protein Group and an unchanged target of 12.3% for the Bakery Products Group.

Subsequent Events

On October 10, 2013, the Company repaid debentures originally due October 2016. The book value of the debentures as at December 31, 2012 was $26.3 million, with remaining principle payments as at September 30, 2013 of $24.9 million. The total amount paid was $28.2 million, including accrued interest of $0.9 million.

On October 21, 2013 the Company announced that it is exploring strategic alternatives for its Bakery business, including a potential sale of the Company's 90% ownership interest in Canada Bread Company, Limited. This process is expected to conclude in early 2014. Maple Leaf has established a committee of independent directors to oversee the process and recommend the use of proceeds in the event of a sale, which may include a combination of debt repayment, reinvestment in the business and returning capital to shareholders. There can be no assurance that the process being undertaken by Maple Leaf will result in the consummation of any transaction.

On October 24, 2013, the Company announced that it has signed a definitive agreement to sell substantially all of the net assets of its fresh pasta and sauce business, a component of the Bakery Products Group, for gross proceeds of approximately $120 million. Subject to Competition Bureau review, the transaction is expected to close by the end of 2013.

On October 28, 2013, the Company sold its Rothsay operations for gross proceeds of $644.5 million. The assets and liabilities associated with Rothsay are classified as held for sale as at September 30, 2013.

Other Matters

On October 29 2013, the Company declared a dividend of $0.04 per share payable December 31, 2013 to shareholders of record at the close of business on December 6, 2013. Unless indicated otherwise by the Company in writing on or before the time the dividend is paid, the dividend will be considered an Eligible Dividend for the purposes of the "Enhanced Dividend Tax Credit System".

An investor presentation related to the Company's third quarter financial results is available at www.mapleleaffoods.com and can be found under Investor Relations on the Quarterly Results page. A conference call will be held at 2:30 p.m. EDT on October 30, 2013 to review Maple Leaf Foods' third quarter financial results. To participate in the call, please dial 416-340-2216 or 866-226-1792. For those unable to participate, playback will be made available an hour after the event at 905-694-9451 / 800-408-3053 (Passcode 3231342).

A webcast presentation of the third quarter financial results will also be available at http://edge.media-server.com/m/p/p4cgamtu/lan/en

The Company's full financial statements and related Management's Discussion and Analysis are available for download on the Company's website.

Reconciliation of Non-IFRS Financial Measures

The Company uses the following non-IFRS measures: Adjusted Operating Earnings, Adjusted Earnings per Share, Adjusted EBITDA, Net Debt and Return on Net Assets ("RONA"). Management believes that these non-IFRS measures provide useful information to investors in measuring the financial performance of the Company for the reasons outlined below. These measures do not have a standardized meaning prescribed by IFRS and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies and should not be construed as an alternative to other financial measures determined in accordance with IFRS.

Adjusted Operating Earnings

Adjusted Operating Earnings, a non-IFRS measure, is used by Management to evaluate financial operating results. It is defined as earnings before income taxes adjusted for items that are not considered representative of on-going operational activities of the business and items where the economic impact of the transactions will be reflected in earnings in future periods when the underlying asset is sold or transferred. The table below provides a reconciliation of net earnings as reported under IFRS in the unaudited consolidated interim statements of earnings to Adjusted Operating Earnings for the three and nine months ended, as indicated below. Management believes that this basis is the most appropriate on which to evaluate operating results, as they are representative of the on-going operations of the Company.

Adjusted Earnings per Share

Adjusted Earnings per Share, a non-IFRS measure, is used by Management to evaluate on-going financial operating results. It is defined as basic earnings per share from continuing operations attributable to common shareholders, and is adjusted for items that are not considered representative of on-going operational activities of the business, and items where the economic impact of the transactions will be reflected in earnings in future periods when the underlying asset is sold or transferred. The table below provides a reconciliation of basic earnings per share from continuing operations as reported under IFRS in the unaudited consolidated interim statements of earnings to Adjusted Earnings per Share for the three and nine months ended, as indicated below. Management believes this basis is the most appropriate on which to evaluate financial results as they are representative of the on-going operations of the Company.

Forward-Looking Statements

This document contains, and the Company's oral and written public communications often contain, "forward-looking information" within the meaning of applicable securities law. These statements are based on current expectations, estimates, forecasts and projections about the industries in which the Company operates and beliefs and assumptions made by the Management of the Company. Such statements include, but are not limited to, statements with respect to objectives and goals, as well as statements with respect to beliefs, plans, objectives, expectations, anticipations, estimates and intentions. Specific forward-looking information in this document includes, but is not limited to, statements with respect to the anticipated benefits, timing, actions, costs and investments associated with the Company's Value Creation Plan, expectations regarding improving business trends, expectations regarding actions to reduce costs, restore and/or promote volumes and/or increase prices, improve efficiencies, expected duplicative overhead costs incurred due to the concurrent operation of the new Hamilton fresh bakery and existing bakeries, the expected use of cash balances, source of funds for ongoing business requirements, capital investments and debt repayment, and expectations regarding sufficiency of the allowance for uncollectible accounts. Words such as "expect", "anticipate", "intend", "attempt", "may", "will", "plan", "believe", "seek", "estimate", and variations of such words and similar expressions are intended to identify such forward-looking information. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict.

In addition, these statements and expectations concerning the performance of the Company's business in general are based on a number of factors and assumptions including, but not limited to: the condition of the Canadian, U.S., U.K. and Japanese economies; the rate of exchange of the Canadian dollar to the U.S. dollar, U.K. British pound and the Japanese yen; the availability and prices of raw materials, energy and supplies; product pricing; the availability of insurance; the competitive environment and related market conditions; improvement of operating efficiencies whether as a result of the Value Creation Plan or otherwise; continued access to capital; the cost of compliance with environmental and health standards; no adverse results from ongoing litigation; no unexpected actions of domestic and foreign governments; and the general assumption that none of the risks identified below or elsewhere in this document will materialize. All of these assumptions have been derived from information currently available to the Company including information obtained by the Company from third-party sources. These assumptions may prove to be incorrect in whole or in part. In addition, actual results may differ materially from those expressed, implied or forecasted in such forward-looking information, which reflect the Company's expectations only as of the date hereof.

Factors that could cause actual results or outcomes to differ materially from the results expressed, implied or forecasted by forward-looking information is discussed more fully in the Company's Annual Management's Discussion and Analysis for the period ended December 31, 2012 including the section entitled "Risk Factors", that are updated each quarter in the Management's Discussion and Analysis, and are available on SEDAR at www.sedar.com. The Company does not intend to, and the Company disclaims any obligation to, update any forward-looking information, whether written or oral, or whether as a result of new information, future events or otherwise except as required by law.

Maple Leaf Foods Inc. ("Maple Leaf" or the "Company") is a leading Canadian value-added meat, meals and bakery company committed to delivering quality food products to consumers around the world. Headquartered in Toronto, Canada, the Company employs approximately 20,000 people at its operations across Canada and in the United States, Europe and Asia.

Footnote Legend

1. Adjusted Operating Earnings, a non-IFRS measure, is used by Management to evaluate financial operating results. It is defined as earnings from operations adjusted for items that are not considered representative of on-going operational activities of the business, and items where the economic impact of the transactions will be reflected in earnings in future periods when the underlying asset is sold or transferred. Please refer to the section entitled Reconciliation of Non-IFRS Financial Measures in this news release.
2. 2012 figures have been restated for the impact of adopting the revised International Accounting Standard 19 Employee Benefits ("IAS 19"), as disclosed in Note 28 of the Company's unaudited condensed consolidated interim financial statements.
3. Figures exclude the results of the Rothsay business, which is reported as discontinued operations. Refer to Note 19 of the Company's third quarter unaudited condensed consolidated interim financial statements.
4. Adjusted Earnings per Share, a non-IFRS measure, is used by Management to evaluate on-going financial operating results. It is defined as basic earnings per share from continuing operations attributable to common shareholders, and is adjusted for all items that are not considered representative of on-going operational activities of the business, and items where the economic impact of the transactions will be reflected in earnings in future periods when the underlying asset is sold or transferred. Please refer to the section entitled Reconciliation of Non-IFRS Financial Measures in this news release.
5. Adjusted EBITDA, a non-IFRS measure, is used by Management to evaluate financial operating results. It is defined as earnings before interest and income taxes plus depreciation and intangible asset amortization, adjusted for items that are not considered representative of on-going operational activities of the business, and items where the economic impact of the transactions will be reflected in earnings in future periods when the underlying asset is sold or transferred.

Condensed Consolidated Interim Financial Statements
(Expressed in Canadian dollars)
(Unaudited)

MAPLE LEAF FOODS INC.

Three and nine months ended September 30, 2013 and 2012

Consolidated Balance Sheets

Consolidated Statements of Earnings (Loss)

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Changes in Total Equity

Consolidated Statements of Cash Flows

Segmented Financial Information

SOURCE Maple Leaf Foods Inc.