Maple Leaf Foods Reports Second Quarter 2020 Financial Results

Company remains focused on the health and safety of its people, business continuity, and maintaining a secure food supply while executing against its business strategy

 

Source: Maple Leaf Foods Inc.

via PRNewswire - Jul 30, 2020  

 

MISSISSAUGA, ON, July 30, 2020 /PRNewswire/ - Maple Leaf Foods Inc. ("Maple Leaf Foods" or the "Company") (TSX: MFI) today reported its financial results for the second quarter ending June 30, 2020.

 

"The impact of COVID-19 to society in the past several months has been staggering, but our commitment to social purpose is steadfast," stated Michael H. McCain, the Company's President and CEO. "Consistent with our core values, we are focused on the health and safety of our employees, supporting critical initiatives including the fight against food insecurity in Canada, and maintaining the stability of our supply chains to ensure we continue to deliver on our responsibilities as an essential service. Our team has performed exceptionally well in challenging times.

 

"Despite the unprecedented environment, we continue to execute against our strategic priorities and financial framework, which are reflected in our second quarter results," concluded Mr. McCain.

 

Second Quarter 2020 Highlights

 

·         Total Company sales growth of 7.0% and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")(i) margin of 10.6% of sales, in-line with last year.

 

·         Meat Protein Group sales growth of 5.8% driven primarily by an increase in hogs processed, higher sales to Asian markets, favourable mix shift, and the impact of foreign exchange. Adjusted EBITDA margin at 13.3% compared to 11.5% last year.

 

·         Plant Protein Group sales growth of 41.4% (36.5% in constant currency) on higher volumes across its portfolio. Adjusted EBITDA in the Plant Protein Group was a loss of $22.6 million.

 

·         Adjusted Operating Earnings(i) of $66.7 million, in-line with last year, as strong commercial performance in Meat and Plant Protein Groups was offset by COVID-19 costs and strategic investment in Plant Protein to drive sales growth.

 

·         Net earnings for the quarter of $25.7 million, compared to net loss of $6.3 million last year, due to factors noted above as well as a smaller loss from non-cash fair value changes in biological assets and derivative contracts.

 

·         Gross costs associated with COVID-19 of approximately $19.0 million, in-line with expectations. This was partially offset by discretionary spending cuts in selling, general and administrative expenses ("SG&A"), resulting in a net impact of approximately $11.0 million to total Company Adjusted EBITDA.

 

·         Capital Expenditures were $102.0 million including Construction Capital(i) of $62.8 million primarily related to construction costs for the London, Ontario poultry facility.

 

·         For 2020, Maple Leaf Foods continues to focus on profitable growth in the Meat Protein Group, investing for growth in the Plant Protein Group, and executing against its strategic framework.

 

(i)

           

 

Refer to the section titled Non-IFRS Financial Measures in this news release.

 

Financial Highlights

 

Measure(i)

(Unaudited)

Three months ended June 30,

Six months ended June 30,

2020

2019

Change

2020

2019

Change

Sales

$

1,094.6

$

1,022.7

7.0

%

$

2,117.3

$

1,929.8

9.7

%

Net Earnings (Loss)

$

25.7

$

(6.3)

nm(ii)

$

21.9

$

43.8

(49.8)

%

Basic Earnings (Loss) per Share

$

0.21

$

(0.05)

nm(ii)

$

0.18

$

0.35

(48.6)

%

Adjusted Operating Earnings(iii)

$

66.7

$

65.2

2.2

%

$

111.8

$

107.3

4.2

%

Adjusted Earnings per Share(iii)

$

0.35

$

0.33

6.1

%

$

0.56

$

0.53

5.7

%

Free Cash Flow(iii)

$

55.5

$

7.8

611.5

%

$

(76.6)

$

(33.6)

128.0

%

(i)

All financial measures in millions of dollars except Basic and Adjusted Earnings per Share.

(ii)

Not material.

(iii)

Refer to the section titled Non-IFRS Financial Measures in this news release.

 

 

Sales for the second quarter of 2020 were $1,094.6 million compared to $1,022.7 million last year, an increase of 7.0%, driven by both Meat and Plant Protein Groups. Meat Protein Group sales growth is attributable primarily to increase in hog volumes, favourable mix from growth in sustainable meats, exports to Asian markets and the positive impact of foreign currency translation. Meat Protein Group sales also benefited from pricing action taken in the third quarter of 2019. Plant Protein Group sales growth of 41.4% reflects investments in new products in rapidly expanding categories.

 

Year-to-date sales for 2020 were $2,117.3 million compared to $1,929.8 million last year, an increase of 9.7%. Sales growth reflects ongoing progress in key strategic areas for the Meat Protein Group with increases of 9.0%, while the Plant Protein Group delivered growth of 34.3%.

 

Net earnings for the second quarter of 2020 were $25.7 million ($0.21 per basic share) compared to a net loss of $6.3 million (loss of $0.05 per basic share) last year. Strong commercial performance in the Meat and Plant Protein Groups was offset by strategic investment in the Plant Protein Group to drive sales growth and costs associated with COVID-19. Prior year results were also impacted by a higher loss from non-cash fair value changes in biological assets and derivative contracts, which are excluded in the calculation of Adjusted Operating Earnings below.

 

Year-to-date net earnings for 2020 were $21.9 million ($0.18 per basic share) compared to $43.8 million ($0.35 per basic share) last year. Strong commercial performance in the Meat and Plant Protein Groups was more than offset by strategic investment in the Plant Protein Group to drive sales growth, costs associated with COVID-19 and a higher loss from non-cash fair value changes in biological assets and derivative contracts, which are excluded in the calculation of Adjusted Operating Earnings below.

 

Adjusted Operating Earnings for the second quarter of 2020 were $66.7 million compared to $65.2 million last year, and Adjusted Earnings per Share for the second quarter of 2020 were $0.35 compared to $0.33 last year due to similar factors as noted above.

 

Year-to-date Adjusted Operating Earnings for 2020 were $111.8 million compared to $107.3 million last year, and Adjusted Earnings per Share for 2020 were $0.56 compared to $0.53 last year due to similar factors noted above.

 

For further discussion on key metrics and a discussion of results by operating segment, refer to the section titled Operating Review.

 

Note: Several items are excluded from the discussions of underlying earnings performance as they are not representative of ongoing operational activities. Refer to the section entitled Non-IFRS Financial Measures at the end of this news release for a description and reconciliation of all non-IFRS financial measures.

 

Operating Review

 

The Company has two reportable segments. These segments offer different products, with separate organizational structures, brands, financial and marketing strategies. The Company's chief operating decision makers regularly review internal reports for these businesses: performance of the Meat Protein Group is based on revenue growth, Adjusted Operating Earnings and Adjusted EBITDA, while the performance of the Plant Protein Group is based predominantly on revenue growth rates, managing gross margins and controlling SG&A, which generate high revenue growth rates.

 

The following table summarizes the Company's sales, gross profit, SG&A, Adjusted Operating Earnings, Adjusted EBITDA, and Adjusted EBITDA margin by operating segment for the three months ended June 30, 2020 and June 30, 2019.

 

Three months ended June 30, 2020

Three months ended June 30, 2019(i)

($ millions)(ii)

(Unaudited)

Meat
Protein
Group

Plant
Protein
Group

Non-
Allocated(iii)

Total

Meat
Protein
Group

Plant
Protein
Group

Non-
Allocated(iii)

Total

Sales

$

1,040.4

60.6

(6.4)

$

1,094.6

$

983.3

42.9

(3.5)

$

1,022.7

Gross profit

$

176.6

7.9

(17.2)

$

167.3

$

162.4

9.3

(60.7)

$

111.0

Selling, general and administrative expenses

$

83.7

34.1

$

117.8

$

89.5

16.9

$

106.4

Adjusted Operating Earnings(iv)

$

92.9

(26.3)

$

66.7

$

72.9

(7.6)

$

65.2

Adjusted EBITDA(iv)

$

138.2

(22.6)

$

115.7

$

112.7

(4.7)

$

108.0

Adjusted EBITDA margin(iv)

13.3

%

(37.2)

%

N/A

10.6

%

11.5

%

(10.9)

%

N/A

10.6

%

(i)

Comparative figures have been presented to align with current reportable segments.

(ii)

Totals may not add due to rounding.

(iii)

Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment's operating results.

(iv)

 

The following table summarizes the Company's sales, gross profit, SG&A, Adjusted Operating Earnings, Adjusted EBITDA, and Adjusted EBITDA margin by operating segment for the six months ended June 30, 2020 and June 30, 2019.

 

Six months ended June 30, 2020

Six months ended June 30, 2019(i)

($ millions)(ii)

(Unaudited)

Meat
Protein
Group

Plant
Protein
Group

Non-
Allocated(iii)

Total

Meat
Protein
Group

Plant
Protein
Group

Non-
Allocated(iii)

Total

Sales

$

2,021.7

107.0

(11.4)

$

2,117.3

$

1,854.4

79.7

(4.3)

$

1,929.8

Gross profit

$

333.9

14.6

(53.9)

$

294.7

$

294.2

17.8

(21.5)

$

290.5

Selling, general and administrative expenses

$

171.8

65.0

$

236.7

$

175.9

28.8

$

204.7

Adjusted Operating Earnings(iv)

$

162.1

(50.3)

$

111.8

$

118.3

(11.0)

$

107.3

Adjusted EBITDA(iv)

$

249.3

(43.1)

$

206.2

$

197.5

(5.1)

$

192.5

Adjusted EBITDA margin(iv)

12.3

%

(40.3)

%

N/A

9.7

%

10.7

%

(6.4)

%

N/A

10.0

%

(i)

Comparative figures have been presented to align with current reportable segments.

(ii)

Totals may not add due to rounding.

(iii)

Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment's operating results.

(iv)

Refer to the section titled Non-IFRS Financial Measures in this news release.

 

Meat Protein Group

 

The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, value-added fresh pork and poultry products that are sold to retail, foodservice and industrial channels, and agricultural operations in pork and poultry. The Meat Protein Group includes leading brands such as Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift® and many leading regional brands.

 

Sales for the second quarter of 2020 increased 5.8% to $1,040.4 million compared to $983.3 million last year, driven by an increase in hogs processed, a favourable mix-shift towards sustainable meats and branded products, growth in exports to Asian markets, and the positive impact of foreign currency translation. Pricing actions implemented during the third quarter of 2019 to mitigate higher input costs also contributed to sales performance. Increased demand in the retail channel was offset by lower demand in foodservice as a result of COVID-19.

 

Year-to-date sales for 2020 increased 9.0% to $2,021.7 million compared to $1,854.4 million last year, driven by favourable mix-shift towards sustainable meats and branded products, an increase in hogs processed, growth in exports to Asian markets, and strong volumes in the retail channel starting with a surge in demand in late March tied to COVID-19. Pricing actions implemented in the third quarter of 2019 to mitigate higher input costs also contributed to sales performance.

 

Gross profit for the second quarter of 2020 was $176.6 million (gross margin of 17.0%) compared to $162.4 million (gross margin of 16.5%) last year. Gross profit performance benefited from a favourable product and channel mix attributed to expansion of sustainable meats and other branded products, in addition to growth in exports to Asian markets. Partially offsetting strong commercial and plant operating performance were increased costs in response to COVID-19 to safeguard the Company's employees and maintain production. These included labour bonus payments, personal protective equipment, incremental sanitation, and other preventative measures.

 

Year-to-date gross profit for 2020 was $333.9 million (gross margin of 16.5%) compared to $294.2 million (gross margin of 15.9%) last year. The increase in gross profit is attributable to continued improvements in sales mix and in operational performance started in the fourth quarter of 2019. 

 

SG&A expenses for the second quarter of 2020 were $83.7 million (8.0% of sales), compared to $89.5 million (9.1% of sales) last year. Despite high expenses incurred as a result of the response to COVID-19, savings in discretionary spend such as travel, conferences and training, as well as in advertising and promotions, together with the positive impact of increased sales, reduced second quarter SG&A expenses as a percentage of sales.

 

Year-to-date SG&A expenses for 2020 were $171.8 million (8.5% of sales), compared to $175.9 million (9.5% of sales) last year. The change in SG&A is consistent with the factors noted above.

 

Adjusted Operating Earnings for the second quarter of 2020 were $92.9 million compared to $72.9 million last year, driven by factors noted above.

 

Year-to-date Adjusted Operating Earnings for 2020 were $162.1 million compared to $118.3 million last year. The change in Adjusted Operating Earnings is consistent with factors noted above.

 

Adjusted EBITDA margin was 13.3% compared to 11.5% last year, consistent with the factors noted above.

 

Year-to-date Adjusted EBITDA Margin was 12.3% compared to 10.7% last year, with the increase consistent with the factors noted above.

 

Plant Protein Group

 

The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein, and vegan cheese products sold to retail, foodservice and industrial channels. The Plant Protein Group includes the leading brands Lightlife® and Field Roast Grain Meat Co.™.

 

Sales for the second quarter of 2020 were $60.6 million compared to $42.9 million last year, representing growth of 41.4% or 36.5% after excluding the impacts of foreign exchange. Growth was driven by expanded distribution of new products and continued volume increases in its existing portfolio.

 

Year-to-date sales for 2020 were $107.0 million compared to $79.7 million last year, representing growth of 34.3% or 31.1% after excluding the impacts of foreign exchange. Drivers to growth are consistent with the factors noted above.

 

Gross profit for the second quarter of 2020 was $7.9 million (gross margin of 13.0%) compared to $9.3 million (gross margin of 21.6%) last year. The decrease in gross profit was attributed to higher supply chain costs, and expenses associated with COVID-19 including labour bonus payments and personal protective equipment.

 

Year-to-date gross profit for 2020 was $14.6 million (gross margin of 13.7%) compared to $17.8 million (gross margin of 22.4%) last year. The decrease in gross profit was attributed to the factors noted above and increased trade expenditures.

 

SG&A expenses for the second quarter of 2020 were $34.1 million (56.3% of sales), compared to $16.9 million (39.4% of sales) last year. The increase in SG&A expenses reflects the evolution of the Company's plant protein strategy to drive sales growth and secure market share in a rapidly growing market. Supporting this strategy, significant investment in advertising, promotion and marketing was incurred during the quarter to enhance brand awareness, support new product launches and expand distribution. In addition, the Company invested to broaden organizational capacity and its pipeline of new product innovation.

 

Year-to-date SG&A expenses for 2020 were $65.0 million (60.7% of sales), compared to $28.8 million (36.1% of sales) last year. The change in selling, general and administrative expenses is consistent with the factors noted above.

 

Adjusted Operating Earnings for the second quarter of 2020 were a loss of $26.3 million compared to a loss of $7.6 million last year. The decline in Adjusted Operating Earnings is consistent with the factors noted above.

 

Year-to-date Adjusted Operating Earnings for 2020 were a loss of $50.3 million compared to a loss of $11.0 million last year. The change in Adjusted Operating Earnings is consistent with factors noted above.

 

Other Matters

 

On July 16, 2020, the Company announced the sale of its poultry plant in Drummondville, Québec and associated supply to Giannone Poultry of St. Cuthbert, Québec.

 

On July 29, 2020, the Board of Directors approved a quarterly dividend of $0.16 per share, $0.64 per share on an annual basis, payable September 30, 2020 to shareholders of record at the close of business September 7, 2020. Unless indicated otherwise by the Company at 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".

 

Conference Call

 

A conference call will be held at 8:00 a.m. ET on July 30, 2020, to review Maple Leaf Foods' second quarter financial results. To participate in the call, please dial 416-764-8650 or 1-888-664-6383. For those unable to participate, playback will be made available an hour after the event at 416-764-8677 or 1-888-390-0541 (Passcode: 686480#).

 

A webcast of the second quarter conference call will also be available at:

 

https://www.mapleleaffoods.com/investors/events/

 

The Company's full unaudited condensed consolidated interim financial statements and related Management's Discussion and Analysis are available on the Company's website.

 

An investor presentation related to the Company's second quarter financial results is available at www.mapleleaffoods.com and can be found under Presentations and Webcasts on the Investors page.

 

2020 Outlook

 

The impact of the COVID-19 pandemic to people, communities, and organizations has been significant. By providing nutrition to people nationally and internationally, Maple Leaf Foods has been designated an essential service. This responsibility does mitigate some of the more significant financial and operational impacts experienced in many other industries, however, the current environment does increase operating costs and the potential for short-term processing shut downs required to protect the health and safety of plant personnel.

 

In the second quarter, gross costs associated with COVID-19 were approximately $19.0 million, in-line with expectations. This was partially offset by discretionary spending cuts in SG&A, resulting in a net impact of approximately $11.0 million to total Company Adjusted EBITDA. For the remainder of 2020, gross incremental costs associated with COVID-19 are expected to be approximately $25.0 million, with a higher portion incurred in the third quarter compared to the fourth quarter. These costs are primarily associated with increased personal protective equipment, sanitation, and other expenses associated with the pandemic. The Company expects to partially mitigate these expenses through SG&A savings.

 

Factoring in Maple Leaf Foods' financial performance year-to-date, as well as the Company's estimate for incremental COVID-19 costs through the remainder of the year, Maple Leaf Foods' expectations for 2020 are:

 

Meat Protein Group - Profitable Growth

 

·         Mid-to-high single digit revenue growth driven by sustainable meats and higher sales to Asian markets.

·         Gross margin expansion due to the continued mix-shift benefits in prepared meats resulting from growth in sustainable meats and brand renovation, coupled with pork complex conditions more in-line with the 5-year average, as well as contributions from higher sales to Asian markets. These factors are expected to more than offset incremental costs associated with COVID-19.

·         Expand Adjusted EBITDA margin, making significant progress towards the 2022 Adjusted EBITDA margin target of 14.0-16.0%, based on the factors noted above, cost efficiencies, and SG&A savings to mitigate costs associated with COVID-19.

 

Plant Protein Group - Investing for Growth

 

·         Revenue growth of approximately 30.0% from 2019 levels, which is in line with long-term strategic targets. This growth is driven by continued product innovation, brand awareness resulting in further demand generation, increased distribution points, and strong growth in the underlying market.

·         Gross margin consistent with 2019 levels, as product margins are expected to increase gradually, while being impacted by the inherent inefficiencies of a rapidly growing business as well as incremental costs associated with COVID-19.

·         SG&A expense is expected to be approximately $150.0 million (US$110.0 million). The Company will continue to invest in advertising, promotion and marketing to establish brand awareness, while scaling up talent and operations to develop the organizational structure required for this growing business.

 

Capital

 

    Construction capital is expected to comprise approximately 70.0% of capital expenditures this year, a significant portion of which is related to the construction of the London, Ontario poultry facility. Other projects include further capacity and efficiency improvements in our prepared meats business; and investments in plant protein capacity at the Walker Driver facility in Brampton, Ontario, as well as further design, engineering, and site work at the Shelbyville, Indiana location. Primarily due to the COVID-19 pandemic, which has impacted both the pace and timing of construction and facility improvements, Maple Leaf Foods now estimates that its total capital expenditures for the year will be in the range of $500.0 million to $600.0 million.

 

Factors that could have an impact on our business, which we cannot estimate or control due to the COVID-19 pandemic, include:

 

·         Volatility in the pork and poultry commodity and foreign exchange markets.

·         The balance between retail and foodservice demand.

·         Potential future production disruptions or shutdowns.

·         The duration of government measures, including social distancing.

 

In addition to financial and operational priorities, Maple Leaf Foods believes that shared value and operating its business for the benefit of all stakeholders is crucial. The Company's guiding pillars to be the "Most Sustainable Protein Company on Earth" include Better Food, Better Care, Better Communities, Better Planet and are core to how Maple Leaf Foods conducts itself. To that end, the Company's priorities include:

 

·         Commitment to carbon neutrality.

·         Better Food: leading the real food movement and transitioning key brands to 100.0% "raised without antibiotics".

·         Better Care: further advancement of animal care, including progress towards transitioning all sows under management to open housing systems by 2021.

·         Better Communities: investing approximately 1.0% of pre-tax profit to advance sustainable food security.

·         Better Planet: focus on eliminating waste in any resources the Company consumes, including food, energy, water, packaging and time.

 

COVID-19 Update

 

As an essential service, Maple Leaf Foods is focused on protecting the health and well-being of its people, maintaining business continuity, and broadening its social outreach. To manage through this unprecedented environment, the Company has taken a number of measures in its business and operating practices that include heightened safety policies and procedures and close communication and collaboration with public health authorities. These measures have the effect of increasing the Company's cost structure in the mid-term due to higher labour, personal protective equipment, sanitation and other expenses associated with the pandemic. In addition, Maple Leaf Foods donated $2.5 million to support front-line healthcare workers and launched the #ApartTogether campaign to support emergency food relief through the Maple Leaf Centre for Action on Food Security.

 

The health and safety of its people is paramount, while ensuring the security of the Company's food supply. To date, Maple Leaf Foods has seen minimal interruption to its overall production and expects some additional operational disruptions could occur. Overall, the Company believes its proactive and comprehensive efforts should mitigate operational impacts. As conditions and guidelines related to COVID-19 evolve, Maple Leaf Foods will continue to adapt and adopt best practices that prioritize the health and safety of its employees and the stability of the food supply.

 

While the mid-term impact of COVID-19 continues to be uncertain, Maple Leaf Foods' purpose and long-term strategy remain unchanged.

 

Non-IFRS Financial Measures

 

The Company uses the following non-IFRS measures: Adjusted Operating Earnings, Adjusted Earnings per Share, Adjusted EBITDA, Adjusted EBITDA Margin, Construction Capital, Net Debt, Free Cash Flow and Return on Net Assets. 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 EBITDA and Adjusted EBITDA Margin 

 

Adjusted Operating Earnings, Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS measures used by Management to evaluate financial operating results. Adjusted Operating Earnings is defined as earnings before income taxes adjusted for items that are not considered representative of ongoing 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. Adjusted EBITDA is defined as Adjusted Operating Earnings plus depreciation and intangible asset amortization, adjusted for items included in other expense that are not considered representative of ongoing operational activities of the business. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by sales.

 

The tables below provide a reconciliation of earnings (loss) before income taxes as reported under IFRS in the consolidated financial statements to Adjusted Operating Earnings and Adjusted EBITDA for the three and six months ended June 30, as indicated below. Management believes that these non-IFRS measures are useful in assessing the performance of the Company's ongoing operations and its ability to generate cash flows to fund its cash requirements, including the Company's capital investment program...

 

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