Maple Leaf Foods Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Maple Leaf's fourth quarter and full year 2022 Financial Results Conference Call. As a reminder, this conference call is being broadcast live on the internet and recorded. All lines have been placed on mute to prevent any background noise. Please note that there will be a question and answer session following the formal remarks. We will go over the instructions for the question and answer session following the conclusion of the formal presentation. I would now like to turn the conference call over to Hilda Marashlian, Investor Relations at Maple Leaf Foods. Please go ahead, Ms. Marashlian.

Thank you, Michelle, and good morning, everyone. Sitting on the call this morning will be Michael McCain, Executive Chair and Chief Executive Officer, Curtis Frank, President and Chief Operating Officer, and Hurt Verlin, Chief Financial Officer. Before we begin, I would like to remind you that some statements made on today's call may constitute forward-looking information and our future results may differ materially from what we discussed. Please refer to our 2022 MD&A and other information on our website for a broader description of operations and risk factors that could affect the company's performance. We have also uploaded our Q4 investor deck to our website, which includes support material for the quarter. As always, the investor relations team will be available after the call for any follow-up questions that you might have. And with that, I will turn the call over to Michael McCain. Michael.

Thank you, Hilda, and good morning, everybody. We achieved many critical milestones in our business in 2022, and we advanced very important initiatives, yet our fourth quarter capped off a challenging year with more of the same. Hyperinflation, inefficiencies in supply chain due to labor shortages, the worst market conditions in recent memory, all compounded by a cyber incident, which was extremely disruptive to our operations and more costly than we anticipated when we last spoke. All told, these factors negatively impacted our reported results by a challenging 730 basis points. None of this, however, belies the underlying fact that we are at an important inflection point in our business. So I won't bury the lead, Here are the key issues and challenges that we faced in Q4. First, this was clearly the cyber quarter. The cyber incident was insidious, impacting our business in multiple ways. In real time, we had to pivot the business from a highly efficient network of operations, one that is highly automated from orders to manufacturing planning to inventory picking, receipts and payment, to a business that had to run entirely on a manual basis. The cyber incident impacted our adjusted EBITDA by at least $23 million or 200 basis points and further knock-on effects in delaying the resolution of the many supply chain inefficiencies that we've been facing and are working to stabilize. Second, we are at 10-year lows in global pork market conditions. For those of you that have access to this, I'd turn your attention to the most relevant single chart in the deck that we circulated this morning, which shows that there's really only one profit in a pig. The chart illustrates the difference in the cost to raise that pig over the past 10 years, which is far back as we went, compared to the meat values over that same period of time. I would urge you to notice how unprecedented this is and how deep the disconnect is in the short term. Our industry is increasingly vertically integrated in primary processing, and this is the single chart that matters. Here are my takeaways from that chart. Number one, we have a clear view on what is taking place and the impact on not just us, but the entire industry. Number two, we have a hypothesis on why it has happened, and there are many broad factors, but you can distill it down to mostly a China story. And number three, while this is painful in the moment, I've been around long enough to know that markets correct. They always do. I repeat that they always do. And we are seeing the green shoots, the green shoots of this occur now. The outcome you see in this chart is simply nonsensical. And we can say with 100% certainty that these conditions while with us now, and certainly into the first quarter, will not last. The double impact here is in Japan, which compounds the effect to Maple Leaf since we over index in that Japanese market, but that's improving as we speak also. The green shoots are very important here. Everyone understands, of course, that we cannot predict future global markets. But we can identify the factors which do change markets in time. And they include things like it's a China story and China's rebounding. For example, China has increased pork imports by 44% in December 2022 compared to just one year ago. A Brandon plant, for example, has recently been relisted to ship to China, which is reflective of this China story. There's industry-wide poor performance continuing into the first quarter of 2023. I'd urge you to check any available data point and you will see these extreme outcomes. Paradoxically, this is actually a very good leading indicator. And there are many domestic and international data points of supply contractions that are taking place in both hogs and processing capacity. For example, Canadian industry contractions are in the news. And Eurostats is forecasting hog production to fall 7% in the second quarter compared to a year ago in the EU, And I would remind you that Europe has been the number one exporter to China. These factors are working in concert and will eventually reestablish demand and supply equilibrium in the market. But in the interim, we and our peers are certainly facing more challenging market headwinds than we have in over a decade. In pricing for inflation, we have been relentless in this regard, and we've made very strong progress. In poultry, however, the inflationary pressures in the fourth quarter were greater than we expected, resulting in a 70 point basis, 70 basis point margin impact in the quarter. And we are taking action to close that gap in April of 2023. I would highlight that while we have mostly caught up to inflation, the inflationary dynamic is not over. And in the course of normal business operations, we would expect to take accelerated pricing action in the first half of 2023. And finally, we did not make progress in our supply chain stabilization in Q4. singularly due to the cyber incident. But we are making progress now. We expect that that should show up in Q2 one quarter later than we originally thought. All this said, I think it's important to focus on the good things with an equal amount of intensity. This is what creates, in our view, the investment inflection point. First, our supply chain is improving, and we expect full normalization by the end of the first half of 2023. Second, the London poultry startup, a massive investment, is on track and actually going quite well. Our largest consolidation into that facility will take place in March. and April, and the other two major startups are going similarly well. Number three, we are on track in our plant-based business model shift to achieve adjusted EBITDA neutral or better in the latter half of 2023. We've already closed 50% of the gap towards that goal, and we have a clear path to close the remaining gap in the back half of this year. Number four, Brandon, as I said earlier, is now shipping to China once again. Number five, we've mostly caught up to inflation, although there is more to follow. Number six, we have exceptional brand performance and resilience in these market conditions within our prepared foods business. And finally, we have continued growth in sustainable meat. demonstrating that our vision to be the most sustainable protein company on earth is both appropriate and impactful for all our stakeholders.