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.

So consider the inflection point.

I believe that 2023 as a year will mark the year where we go from COVID and supply chain instability rapidly rising inflation, sustained period of investing over a billion dollars, and global market conditions that are ending at 10-year lows. To 2023, supply chain stabilized by the end of the first half, stabilized inflation in the first half, harvesting investments fully by the end of the year, and global pork markets normalized when these green shoots show up throughout the year. In opening this call, I wanted to make sure that you had a very strong and clear sense of the market environment and the challenges that we faced in the fourth quarter. I wanted to affirm the continued strength of our underlying business and our operations, and I wanted to infirm the the material returns that we see as a result of our prudent capital investments. Bridging these terrible conditions to what our structural adjusted EBITDA margin expectations have been for over five years now is really clear to us and, in fact, gives us great comfort. The facts are illustrated clearly in the materials that we circulated. And with that, I'll turn it over to Curtis and Hert, who will unpack Our operational and financial performance in more detail. Curtis?

Thank you and good morning, everyone. As you heard from Michael, extraordinary market conditions, along with the impacts of a cyber attack, materially impacted our fourth quarter results and most certainly delayed the progress that we had expected to make relative to our quarter three. At the very same time, our confidence in the underlying health of the business remains unwavering. as we look forward to more normal market conditions in our future. Adjusted EBITDA margin, as reported for the fourth quarter, was 6.6% in the meat protein business, which is obviously below what we had set as an expectation for last together following our third quarter results. Heading into Q4, we had anticipated a sequential rebound in our margins, and we were, in fact, making good progress early in the quarter, with respect to executing on the actions that are within our control, when our progress stalled abruptly on November 4th, the day we were attacked by a group of cyber criminals. It is important to start by recognizing that we are immensely proud of how our team responded in the face of this crisis. In less than 48 hours, we were able to pivot our organization to operate in a fully manual process, basically going back to paper and pencils. With remarkable pace, in approximately one week, our information systems team cleaned, rebooted, and restored our systems, allowing us to start back on the road to recovery. All that said, as you heard from Michael, the consequences of the cyber attack were harsh, an impact of at least $23 million, or 200 basis points a quarter. On top of the economic impact, the fact that all of our attention was centered in on cyber meant that we did not make the progress in closing the efficiency gaps in our supply chain that we had identified in the third quarter. You will recall that at the end of the last quarter, we communicated that there were four transient external forces that were pressuring near term margins. And those four forces were standing between us and operating at the lower end of our 14 to 16% adjusted EBITDA target. Those were pricing, supply chain headlined by people, Japan pork market conditions, and overall pork market conditions. These very same factors played a role in Q4 and were obviously complicated by the cyber attack. Michael took you through most of the detail already, so maybe just a few key points here that I would like to add starting with pricing. We have and we will continue to manage price to reflect inflation in our business. In poultry, where we fell short within the quarter, we have already taken steps to initiate a price increase that is effective for the beginning of April. And we expect, based on everything that we know today, that this will be sufficient to close the remaining gap within poultry. In our prepared meats business, we did in fact get the pricing in place that we needed for Q4. But we know now that this will need more pricing in 2023 within prepared meets to address additional inflation that is in the horizon. And we have taken steps to price for that coming in May. The second item is inefficiencies in our supply chain. While we did make great progress on the people and hiring front, we continued to face inefficiencies in labor, excess overtime, contractor costs, and service penalties. This had an impact of approximately $16 million or 140 basis points within the quarter. With the cyber incident now behind us and the labor situation materially improving, we are making good progress through Q1 and we do expect to have the supply chain fully stabilized by the end of the second quarter this year. The third item is our Japanese pork business, which was a 17 million or 150 basis point headwind in the quarter relative to our five year average. While it may take some time for margins to fully stabilize, we are confident that they will. And I would point to the fact that we are encouraged by the sequential improvement that we've seen from Q3 to Q4 as demonstrated in a 60 basis point or $8 million pickup when improvement quarter over quarter. Final item is pork market conditions, where the pork complex continued to be challenged in the fourth quarter relative to five year average conditions, as you heard from Michael. And overall, this was a $20 million or 170 basis point headwind for us in the quarter. From a top line perspective, it's important to note that in the face of all of this disruption around us, Revenue results were once again very solid. Our meat protein segment grew revenue by 5.9%, driven by our consumer packaged goods portfolio in prepared meats and poultry, where our branded sales continue to grow. Our brands continue to perform extremely well in this inflationary environment, and the volume response that we have experienced following price increases is in line with, or even in some cases ahead of our expectation, as we continue to be satisfied with the relative stability of our market share performance. We continue to make inroads into the US, growing our prepared meat sales for the year by over 10%. And we remain very excited about our sustainable meats business, where we have grown sales each quarter for seven consecutive years, led by prepared meats, which continues to grow at double digits. We now have a sustainable meats business that generates over $730 million annually, is margin accretive and makes up approximately 17% of our meat protein business. In terms of an outlook for meat protein for 2023, we firstly see several positive indicators that will allow for a recovery in our adjusted EBITDA margin over time. As we continue to price for inflation in April and May, we improve our supply chain in efficiencies in the second quarter. We fully recover and put the cyber incident behind us and we see some signs of market conditions stabilizing, including our shipments to China restarting. Secondly, we expect that our first quarter margins will in fact remain challenged in the short term as we work through the transient factors we outlined in our comments and in our supporting materials. And finally, we remain confident that we will see margins improve throughout the balance of the year, As we see the execution of the initiatives within our control taking hold, and obviously as pork market conditions normalize, we will continue to see further expansion within our margins. Turning briefly to the plant protein business, the headline here is that we have made tremendous progress against our goal of achieving adjusted EBITDA breakeven by the latter half of this year. Our focus remains squarely on pivoting our plant protein business to profitable growth And we are well on our way. This is reflected in an improvement of adjusted EBITDA by 57% in US dollars within quarter four. A 57% improvement in quarter four. The decisive actions we have taken to date include a significant reduction in SG&A by reducing the size of our organization. And also in rightsizing our ad and promo investments. The remaining gap will be closed throughout this year. with improvements in gross margin and driven by five key initiatives. The first is right-sizing our manufacturing footprint and optimizing our plant operating costs. The second is product cost savings and formula optimization. The third is a redesign of our outbound distribution model. Fourth is continued revenue management discipline and pricing as required. And finally, through further reducing discretionary costs. Lastly, before I turn it over to Hirt, I'd like to offer a couple of very short comments with respect to the exciting inflection point we are at with our large scale capital projects. We are right on track at London Poultry, and when fully ramped up by the end of 2023, the London Poultry project will add an incremental $100 million of adjusted EBITDA on an annualized basis. The benefits will come from a more profitable product mix, Through improved bird utilization increased operating efficiency from technology and scale that lower costs and additional capacity to meet consumer demand for high margin value added poultry over the years ahead. we're also right on track at our bacon Center of excellence, where the startup is now in commercial production and continues to ramp up in line with our business plan. Facility will deliver an incremental adjusted EBITDA of $30 million annually once it is fully ramped up, primarily from improved operating efficiency and incremental capacity to meet the high demand for precooked bacon, which we expect will occur in the second half of 2023. With that, I'll now turn it over to Hirsch.

Thank you, Curtis, and good morning, everyone. I will begin by discussing the company's consolidated performance for the fourth quarter. I will then turn to a more detailed look at both our meat and plant protein groups. I will conclude by speaking to some key financial metrics, capital expenditures, and our outlook for 2023. Sales in the fourth quarter were $1.2 billion, an increase of 5.8% from last year, as favorable pricing and mix in the meat protein business were partially offset by lower volumes and lower plant protein sales. Pricing actions implemented to mitigate inflation more than offset lower volumes. Adjusted EBITDA was 55.3 million, a decrease of 21 million from last year. This decrease was driven by market headwinds in the poor complex and in Japan, supply chain inefficiencies predominantly due to people, and the cyber incident partly offset by price increases. The adjusted EBITDA margin was 4.7%, a decrease of 210 basis points from last year. Net earnings in the quarter were a loss of $41.5 million, or a loss of $0.34 per basic share, compared to earnings of $1.9 million or earnings of $0.02 per basic share last year. After removing the impact of the non-cash fair value changes in biological assets and derivative contracts, as well as startup expenses and restructuring costs from both periods, adjusted earnings were a loss of $0.28 per share for the quarter, compared to earnings of $0.09 a share last year. I'll now turn to a discussion of Maple Leaf's two operating segments. Sales in the meat protein segment increased 5.9% to $1.1 billion in the quarter. The increase was driven by pricing action implemented in prior quarters to mitigate inflation and structural cost increases and a favorable mix shift toward growth in sustainable meats partly offset by lower volumes, including the impact of the cyber incident. Meat protein adjusted EBITDA was $76.1 million compared to $120.7 million in the prior year, or a decrease of about $45 million. This decrease was driven by market headwinds, labor inefficiency, materials inflation and availability, higher feed costs and incremental costs related to the response to the cyber incident, partially offset by pricing action. Adjusted EBITDA margin in the meat segment was 6.6%, a 450 basis point decrease from last year. Turning to plant protein, sales were $40 million, a decrease of 18.2 in constant currency compared to the same quarter a year ago. The decrease was driven by lower volumes as the entire category has contracted, partially offset by pricing actions to offset inflation. Plant protein gross margin was a negative 25.8% in the quarter as a result of low sales volumes, low capacity utilization, and raw material inflation that was only partially offset by pricing action taken midway through the quarter. SG&A expenses in plant protein were $15.8 million, a decrease of approximately $24 million from a year ago, driven primarily by lower advertising and promotional expenses, as well as by lower people costs. Sequentially, SG&A decreased approximately $4.1 million from last quarter, also primarily due to lower advertising and promotional spend. Plant protein-adjusted EBITDA came in at a loss of about $20 million, a 54% improvement, or 57% in U.S. dollars from a year ago. In total, during the quarter, we invested 57 million in capital expenditures, and this investment included about 11 million in construction capital, primarily related to London poultry. For the full year, our capital expenditures were $312 million, lower than the expected 375, primarily due to a shift in timing of the spend. On the balance sheet, net debt increased to approximately $1.6 billion. This debt primarily relates to the over $1 billion in construction capital we have invested in the London Poultry Facility, our Bacon Center of Excellence, and the New Tempe Facility in Indianapolis. As we close the chapter on the construction of these large and lucrative long-term investments, we look forward to using the cash flow towards other capital allocation priorities, such as optimizing our debt level, investing in other growth opportunities, continuing to grow our dividend, and returning capital to shareholders. In the fourth quarter, we continue to repurchase shares under our NCIB program. We returned approximately 31 million to shareholders through the purchase of 1.3 million shares at an average price of $24 a share. We plan to continue purchasing the program as we believe current market valuations present a substantial return opportunity for shareholders. For the full year of 2022, we repurchased shares for a total amount of $59 million. I'll wrap up with an outlook for our business for 2023. In meat protein, we expect mid to high single-digit sales growth in 2023, driven by continued momentum in sustainable meats, brand leadership, and growth into the U.S. In normalized markets, we would expect to achieve adjusted EBITDA margin expansion in a 14% to 16% range based on the building blocks Curtis outlined earlier. In plant protein, we expect to achieve adjusted EBITDA neutral or better in the latter half of 2023. Furthermore, we expect at least 50% improvement in adjusted EBITDA losses in the first quarter of 2023 versus the same period last year, representing an obvious sequential improvement versus the fourth quarter of 2022. For 2023, the company expects total capital expenditures to be less than $250 million. Up to 120 million of this will be maintenance capital, with the remainder being growth capital. This growth capital includes, among others, an increase in process poultry capacity at a Walker Drive Brampton plant to meet a pipeline of demand that has attractive growth and margin. And capacity expansion in our high margin snack kits business. I will now turn the call back.

OK, well thank you Curtis and Hert. The post pandemic economy has been an unprecedented condition for Maple Leaf Foods and anybody in the food industry. It will pass. And I believe during this period of time, Maple Leaf continues to illustrate our resiliency as we operate within these unprecedented times. I'm extremely proud of our people. They've managed through the operations and complexities of the past few years and indeed the last quarter, highlighted by the cyber incident. We will continue to be guided by our sustainability agenda, including continuing the build out of our sustainable meats business that grows year after year after year. And we remain proud and focused investing in our portfolio of market leading brands. Most pandemic economy will pass.

But with that, I'd like to open up your questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift the handset before entering any keys. One moment please for your first question. Your first question today will come from Irene Nettel. Please go ahead.

Thanks and good morning, everyone. Listening to the commentary, certainly it looks good morning. It sounds like Q1 is going to be another challenged quarter. So how should we be thinking about the cadence of improved margins, improved profitability as we move through calendar 2023? Good morning.

Irene, and that is obviously the operative question and the question that we ask ourselves continuously. To address that question, I think I'm going to turn your attention to the single most important chart, I think, that illustrates the conditions we are in that was distributed this morning in our deck, and I hope you have that in front of you. Yes. What you see from that is the magnitude, the sheer magnitude of the disconnect between the orange line and how that has risen so rapidly and the blue line, which is the value of the meat. I cannot nor can anyone else in our industry predict exactly when that's going to change or what the cadence might be. All I can tell you is what I believe to be the green shoots that historically are the drivers of that change. Things like, for example, the fact that you can examine the results of any participant in the United States or Canada in this industry and you will see extreme outcomes. That sounds like bad news, but it's actually good news. That's one of the key drivers, paradoxically, that changes these outcomes. Number two is typically what changes these outcomes that you see here is more often than not contraction in supply. You're seeing that in Europe, for example, today with Eurostats estimating the European supply will contract by 7%. That's not a small number, 7%. in 2023. You juxtapose that fact with the observation that Europe has been for years the single largest supplier of imported meat to China at a time when China is going to need more meat. You look at the data points around us here domestically, and you see many examples in the news of dramatic supply constrictions. So those are the green shoots that I can observe factually, but I cannot tell you when that exactly is going to translate into a change in condition. But if history is any indicator, And the history is in here very clearly over the last 10 years. When it changes, when it changes, it will likely, if history is an indicator, it will likely occur at lightning speed. And you can see that in the 10-year history. So I don't know if that answers your question, Irene, or is helpful, but that's how we look at it.

Thank you. I think we would all love if we could have a clearer trajectory but understand, you know, that's not possible right now. So, follow-up question. We keep talking about the $130 million annual lift in EBITDA from the investments in the Bacon Center of Excellence and in poultry. Are those dependent or independent? of market conditions? In other words, if things don't get any better, do we still get that $130 million?

100%, yes. They're completely disconnected. They're not connected to this at all. The London Poultry Facility is rooted in, as you know, the key drivers are cost reduction and a change in the value-add mix, business mix, that exists inside the poultry business. They're completely disconnected to market conditions per se. The same thing is true in our bacon center of excellence, which is just a, it's a repatriation of volume and the addition of new volume of a very highly profitable skew in our business mix. And so they're completely disconnected. They're not connected to this dynamic at all.

That's great. Thank you. I'll let someone else take over from here.

Thanks.

Your next question comes from George Dumais. Please go ahead.

Yeah, good morning. Can you give us a little bit of a flavor on the mid to high single-digit revenue growth that you guys expect from me? Maybe how much of that is going to be pricing this year? And do you expect any material contraction to our hog volumes as a result of kind of what's going on?

Good morning, George. It's Curtis. Thank you for your question. I'll start with the mid to high single digit growth in the year and then come back to the hog question that you had. I'll maybe point you as a starting point to the fourth quarter and as a bit of an indicator for next year. Overall, our sales grew in the fourth quarter, as you saw, at 5.9%, and that was predominantly driven by pricing. Pricing was actually up 7% in the fourth quarter on a year-over-year basis. And I think what an important point is, that I don't want to get lost in this, is that our volumes were down at 2.7% in that environment. So when you think about the strength of our brands and our product portfolio holding up to pricing, we've continued to comment that our branded and consumer packaged goods portfolio has been quite resilient, and that's certainly been the case. I do expect that pricing will lead our growth into next year as well, to answer your question. As we said in our commentary here to start the warning, price increases in both our prepared meats business and our poultry business. Prepared meats is effective in May and poultry is effective in April, and those are in the kind of the three and a half to 4% range for both prepared meats and poultry. So you can expect to see that materialize in pricing throughout the year, which will drive a portion of our meat sales increases. And then, of course, We do continue to see growth in the US market as we've experienced over the last number of years, as well as in sustainable meats, which continues to be a key differentiator for us and is driving growth in our portfolio. So those would be the key areas. On the production side, your question was around hog production quantities being reduced within our operations. At this stage, we don't see that being any material impact or risk to our business at all in 2023.

Okay, thanks. And just more generally, how's the ramp ongoing in London from a hiring perspective? And should we think of that as being the biggest variable that could impact the EBITDA margin ramp there? Or are there other factors to perhaps contemplate?

George, I didn't understand your question. Could you repeat that?

Yeah, sure. I was just wondering how the ramp up in London is going from a hiring perspective. And is that the thing we should be looking at the most in terms of kind of getting that EBITDA margin wrapped throughout the year.

The good news here is, George, is that coming into Q1, as we speak, we would consider ourselves at normalized employment levels, hiring levels, which gives us some confidence that the improvements in the key drivers of our supply chain stability is currently and will continue to unfold over the course of the next few months. So we're now at what I would say is pretty much normal hiring levels today.

Okay.

Does that answer your question?

Maybe I have some color, George. It's Curtis, if I may. To add to your second kind of component of your question around London, the people ramp up in London is going extremely well. We had a discussion with our leadership team last night, and we're now in a situation where salaried and hourly combined, we're somewhere around 1,000 people in that facility. And when you think about end state is 1,600, this is a facility that started production on November the 28th, and we now have 1,000 people working inside of that building, which is a really remarkable feat. And I won't say it's been easy, but we have been very successful in onboarding the people that we need within the facility. And at this stage, we don't expect any material issues, but of course that can change over time. But the headline is the early view on ramping up people at London has been incredibly successful. And things are going really, really well within the plant to start I think you asked, is that the only thing that can go wrong? Of course, there are other startup barriers that we might face over the coming months, which is why we've continuously been consistent in our communication that you should expect us to be on a run rate by the end of the year to deliver $100 million in annualized benefits. Those can come in how the equipment operates and in transitioning from other facilities and all that good stuff. But at this stage, everything is right on track, and we're really, really pleased with the early news of London.

Okay, thanks. I'll get back in queue.

Your next question comes from Peter Sklar. Please go ahead.

Good morning. First, on the $23 million of cyber costs that you estimate that you incurred in Q4, is there any leakage in Q1, or should we think of all those costs going away?

Good morning, Peter.

This is here. The $23 million is really a combination of incremental costs that we incurred in the quarter, and those would go away. The second part is what I would call more the knock-on effects of lost sales volumes, lost margin, et cetera. Obviously, that was highly concentrated in Q4. So I do not expect any of those direct costs in that magnitude to continue in Q1. What you have Michael and Curtis refer to is the knock-on effect that we incurred in Q4, which was the, I would say, pushing out the momentum that we had in resolving some of the supply chain inefficiencies of 2023 as a result of the entire team shifting focus to fixing the cybersecurity event. And we will see that normalize by the end of the second quarter this year. So I would say direct costs, no. The knock-on effect of a delay in recovering those supply chain inefficiencies that we had in 2023, yes, that will linger on a little bit, but you'll see that abate as we continue this year.

Okay, got it. The other question I had is you're adjusting for the startup costs, I guess, related to London. And that amount was, I believe, $26 million in the quarter. From an accounting perspective, in your presentation, when are you going to stop adjusting?

We will stop adjusting for the startup expenses when the startup is declared done. And that means at the end of the ramp up period, Peter, and we expect that to be by the end of this year, early next year. But everything is going according to plan. So I would expect that we would not be talking about that anymore coming 2024.

Okay. Peter, the key drivers, Peter, it's Michael, the key drivers to just add a little color there that are really important to have insight to are The four big buckets would be duplicate of overheads because we're now running overheads in a duplicate supply chain. Number two is Curtis referred to 1,000 people on site. That's good news. We actually, for the amount of production in that facility, don't need 1,000 people today because we're not operating it fully. But there's a training period that goes with them, and we overhire as part of the startup. Number three is the, in manufacturing terms, the OEE or the efficiencies of the lines clearly are not at design level, and they never are in the early stages as you debug equipment, and there's variances attached to that. And finally, the yields. Obviously, in the early stages, while people are in training mode, et cetera, are not at the design level. So all of those things go into that bucket. And as it says, when, you know, by the time the last facilities closed and the startups declared done, we would expect those to be, you know, on, on or above our business case.

Okay. And then my last question, Michael, is the, uh, the chart you keep referring to in the slide deck on page 11, where you're showing the negative spread between the cost of the hog and the cutout. It's it's, um, It's really hard to see on the chart, but based on what you're seeing in Q1, because you've experienced two-thirds of the quarter at this point, is that spread going to be worse in Q1 than it was in Q4? It's kind of hard to see from the chart.

We're partially through the quarter, but it's continuing into the first quarter.

But at a worst level or improving or what's, how's overall?

I don't want to make a prediction on that, Peter, because the quarter's not done. I just don't want to make a prediction in that regard. Okay, got it. Thank you. It's continuing.

Okay. Thanks for all your comments.

Your next question comes from Derek DeLay.

Please go ahead.

Yeah, thanks. Here, maybe one for you, just on the cybersecurity impact, the 23 million you guys called out in the presentation, I believe it says you're considering you expect to get a reversal on that later in 2023. So why didn't you, why isn't that adjusted out of the EBITDA numbers if you're expecting to get it back? And are you expecting to get like all of it back at some quarter in 2023? And will you disclose that when you get it back?

Thank you for that question, Derek. It is true that we have cyber security or cyber insurance in place. We are working through that file now. We expect to get some recovery, not all, some recovery somewhere in 2023 as we work our way through the discussions with the insurance company. We could not recognize that yet because That is not what we're supposed to do. You saw all the players in the market having gone through a similar incident make that same comment. We'll recognize that when everything is signed, sealed, and delivered with the insurance company, but we're very confident that we will get some of that back.

Okay. And again, will you disclose when you do? Because it's obviously going to add to the EBITDA in that quarter. Yes, we will. We will. Okay. Okay, good. Just as it relates to the pricing commentary, I mean, last call, you guys sounded very confident that you had pricing in place to sort of offset what at that point was, I believe, a 90 basis point impact on the margins in Q3. So I'm just curious, like, what happened within, it sounds like, namely within the poultry business that led to you not being able to implement those price increases or implement enough of a price increase to offset the incremental costs?

Yeah, that's a great question, Derek, and a good one and a very appropriate one. In the fourth quarter, we had all of our prepared meats pricing in place, and we fully expected our poultry pricing was in line as well, but it was grounded on assumptions of live poultry pricing. And the assumptions were wrong. The market went in the opposite direction. It went up when we expected it to seasonally and from a futures market perspective go down. And it didn't. It went up. And we experienced that in the latter half of the quarter. You know, it wasn't what we expected. It was not mainly poultry. It was all poultry. And obviously was the genesis of taking pricing action to offset that, as Curtis alluded to, for April.

Curtis, is there any additional color in that? Yeah, maybe just a little bit more color, Derek. We last took pricing in August and September last year. And in prepared meats, it was in and around 4.5%. and in poultry was in and around 2%. So that gives you some grounding for what Michael's talking about. We thought that that 2% in poultry was adequate because we expected some of our costs to come off, and obviously we got that wrong, bluntly, and we've taken the appropriate steps to adjust that and reflect it coming up here in the spring. Prepared meats for the fourth quarter turned out that we got it right, and we know we're going to need a little bit more in 2023 to cover for the 2023 inflation that's coming. So again, we feel like we're in the right place, but we'll see how things play out in the spring. But at this point, from my point of view, there's no reason to believe that we won't be caught up to inflation in the second quarter based on what we know today.

And is there like a structural reason, like is it annual pricing typically why you can't increase the pricing in poultry until April?

No, it's mostly timed with the cost of live regulated price changes in poultry. So we try to time that to a grower period, number one. And number two, as we talked about before, the retail environment is such that we can't take pricing until we feel inflation. There's typically, depending on the type of pricing action that's taken, a six to 12 week lag in the time we feel the inflation. between the time we can pass on the inflation in the retail environment. So it's just, it's simply that lag time, Derek, in feeling the inflation to passing it on. And we moved it as quickly as we possibly could, including through a seasonal timeframe at the holiday season.

Okay, got it. Thank you very much.

Your next question comes from Mark Petrie.

Please go ahead.

Yeah, good morning. I wanted to ask about the brand performance, particularly in this environment where trade-down is so prevalent. Obviously, the brands are performing well, but you did change your language a little bit in terms of what you're seeing with regard to trade-down, and I was hoping you can expand on that. Is that broad-based across brands and categories, or anything specific you can call out?

Good morning. I don't think we might have changed our a language with respect to performance. If we did, it wasn't entirely intentional. So maybe just start with that. What we are seeing on the brand side or particularly within our prepared meats business is strong sales growth, mixed favorability. We're seeing U.S. growth. We're growing sustainable meats, prepared meats, double digit, and the brands are healthy. And the way I describe health is our volumetric performance relative to what we expect following price increases. I said earlier in our total portfolio, our sales were up 7%, our volume was down 2.7 overall. And we don't carve out the prepared meats numbers specifically, but they're relatively close to in line with that same type of performance. So we've been pleased. The other thing I would point to from a brand health point of view, is what you see in the market share performance data. There has been some trade down in our categories to be blunt, but it's mostly come from competitive brands to private label, not from our brands to private label. And that's something we've been, you know, I think that speaks to the health of our brands overall. Our share performance has been mixed and that's not uncommon following price increases. We've got categories where our market share is increased. Places like Wieners and Ham and Lunch Kits And our poultry business has gained more than half a share point in the fourth quarter. And then we have some more price sensitive categories like, say, canned meats would be an example, maybe, where we've given up a little bit of market share in the short term, just given the price sensitivity in the quarter. So overall, we continue to be pleased with our share performance. The volume declines are in line with our expectations, given the inflationary environment we're in. And any trade down we're seeing to this point has predominantly come from from our competitors in brands, not so much our brands. The last thing I would say maybe is, you know, teasing apart that data, particularly in the fourth quarter is really difficult because you're dealing with a cyber impact. You're dealing with service level implications that ultimately affect the volume and market share. And then, of course, there's a price inflation in the marketplace. So, you know, there's a number of factors, but overall, we feel really comfortable. And I don't think we've materially changed our position from my perspective.

The other color to that, Mark, that I would add, it's Michael. The qualification here is that these comparisons can be challenging, but it is something to take a look at. For the most part, we're dramatically outperforming what the leading brands in the United States are accomplishing in terms of year-over-year volume. impacts as a result of the pricing that they're taking. And I think, again, that speaks to the resilience of our brands and our brand effort.

Yeah. Thanks. Those are helpful comments. Thank you, guys. I guess two more. One, just on sustainable meats, I mean, you know, the growth continues. How much of the growth today, or I guess maybe in 2022, was your capacity and the number of doors that you're selling kind of your core portfolio into versus the consumer accepting a broader range of products in the sustainable sort of subcategory?

Yeah, so there's a number of contributing factors to the growth that we're seeing in sustainable meats. Pricing obviously plays a role. We are gaining distribution, particularly in the United States. And we're also adding new items that are being well accepted by the consumer. We have now, I think last quarter, we claimed within the sustainable meat segment in the United States, we had the number one selling SKU, which was antibiotic-free bacon in our Greenfield brand. And we now have three number one selling items, maybe as a point to support our perspective on growth, which It includes our lunch kits portfolio and smoked ham as well. So between smoked ham, lunch kits, and bacon, we have three of the number one selling skews in the sustainable meats or raised without antibiotic segment in the United States. So it's a combination of all of those things, a price-led growth, volumetric growth tied mostly to distribution and new retailer acceptance in terms of distribution, adding new products, and the velocity expansion that comes with that.

Okay, thanks. And then last one, just any comment you can share with regards to the expectations for the impact of the China reopening? You know, it was a material revenue business and attractive margins at one point, but how have the dynamics changed? So how should we be thinking about that? Thanks.

I would draw two conclusions, Mark. Number one, obviously, being back in China is accretive to our earnings. I know you would like to know how much it's accretive, but we resist itemizing individual country or segment or customer profitability. So we'll avoid that, but it is decently accretive. I think the overarching concern observation is that Maple Leaf and other Canadian processors expanding their listings into China I think is indicative of the macro situation that is going on in the pork, in the world pork global markets where their demand is increasing at a time when European supply is declining.

Yeah, understood. Okay. Appreciate all the comments, guys. All the best.

Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 at this time. Your next question will come from Michael Van Elst. Please go ahead.

Thank you. Just following on that commentary on China demand increasing as supply is decreasing in Europe, is that also starting to show some benefits in Japan?

I think it's too early to connect those dots, but inevitably the macro environment would suggest, predict, but it would suggest that would be true. And I would say our situation in Japan is showing signs of improvement. So whether you can connect those dots or not, Michael, it's hard to make a direct causal conclusion relationship, but the situation in Japan is improving and this is occurring. So. Okay.

Um, on the poultry margins or part poultry pricing, I guess you said that the, the hit to margins came later in the latter part of Q4. So are we to assume that the poultry margin hit, um, is going to be greater in Q1 than it was in Q4?

No, no, I wouldn't. I wouldn't. I would not arrive at that conclusion. The impact didn't come so much later in Q4 as I would more describe it as the percentage increase that we took that we expected to cover the inflation we would experience in the fourth quarter. didn't materialize the way we expected. You saw the impact of that. We won't get it again in the first quarter, but we will in the second quarter. So I would not expect it to get worse. I don't think that would be an appropriate tip. Okay.

And then historically, when you've taken a bigger price increase, like 7%, what kind of volume reactions is there usually initially?

um you know bar all other things considered you know holding constant let's call it uh historically uh michael that's that's there's so many so many influences um historically you know if we if in the initial response to a price increase if we see trade downs in the small single digits on a temporary basis, that would be probably indicative of the norm. A good outcome would be no impact. A normal outcome would be small volumetric declines immediately after a price increase while the competitive set catches up, assuming they do. OK.

And then on the plant-based side, not sure if you said this earlier i missed the start of the call but um are is there any signs of that the volume erosion is nearing an end like are there any pockets of strength and are you seeing other part the weaknesses stabilize uh the way i would characterize this growth situation in in plant protein is maybe from a couple of dimensions you know number one

The category, to your point, does continue to decline. It's most certainly facing headwinds. Much of the demand in the burger game has moved from refrigerated to frozen. That would be a burger comment, has moved from refrigerated to frozen. In the refrigerated category, which is predominantly where we participate, if you remember, we have a broad range of assortment in the refrigerated category. We're actually gaining share in that part of the category. We've been, if you looked at our POS sales, you would see we're down somewhere in and around like 9%, categories down about 18. We're basically picking up almost two share points in refrigerated plant protein. That doesn't mean in a category that's declining, which is cold comfort, I understand. I think what's important is at this stage, we've right-sized our organizational design and ad and promo investments. to reflect the current size of the business. And if we continue to see declines, we will have to take further steps to ensure that we're on track and we're prepared to do that. I, for one, just given the consumer a sentiment here, I feel, and we've continued given the research we've done, feel confident that the category will at some stage return to moderating growth. We've said over a long-term horizon, that would be likely in the 10 to 12% range, which is what the category was growing at. you know, well before the COVID situation. But at this stage, we continue to see declines. We've right-sized the business to reflect that. If we need to make further moves, we will. And at the same time, we do expect that there'll be some growth returns to the category in the future. When is... Answering the when question is a bit elusive at this stage, but the sentiment from the consumer continues to be that there's interest in this category. I'm sure there needs to be met.

Okay, like your OpEx or SG&A for plant-based was actually... a bit better than what I expected. I was just wondering if you had cut it more than you had originally planned because you were originally planning to right-size it to a revenue base of, I think, $150 million U.S., if I remember correctly. It doesn't seem like you're going to be at that level this year. Are you cutting SG&A more than originally expected at this point?

No, not materially. We're right around where we expect it to be. All right. Thank you. At this time, there are no further questions.

Thank you. I think that concludes our call. So with that, we will look forward to updating you as the progress that we make unfolds into the next quarter. So we'll look forward to speaking with you after our AGM in May. So thank you and have a wonderful, wonderful week.

Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your