Maple Leaf Foods Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Maple Leaf's second quarter 2023 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 Mike Rall, Investor Relations at Maple Leaf Foods. Please go ahead, Mr. Rall.

Thank you, Chris, and good morning, everyone. Speaking on the call this morning will be Curtis Frank, President and Chief Executive Officer, and Geert Varellen, 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 Q2 2023 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 Q2 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'll now turn the call over to Curtis Frank. Curtis.

Thank you, Mike, and good morning, everyone. As you know, this is my first official earnings call since stepping into the role of CEO of Maple Leaf Foods, and I can tell you I'm super energized and excited about leading our team into the next chapter of delivering shared value. With our leading portfolio of consumer packaged goods brands, world class assets, a values based culture grounded in extraordinary people, and a purpose that is creating both business and social value, we will build on Michael's remarkable legacy of establishing Maple Leaf Foods as an iconic Canadian food company. Today, we are closing in on the next inflection point in our journey as we take another step forward towards delivering on the 14 to 16% adjusted EBITDA meat margin target that we established back in 2017 while executing our playbook on our journey as a purpose driven, globally admired and brand led CPG company. Let me expand on this. As the balance of the year plays out, we are firmly focused on stabilizing and improving the financial performance of our business in this post pandemic economy. We are making excellent progress, which you will hear about as we unpack our Q2 results here today. and we expect to continue to make further progress in the second half of this year. At the same time, we are ready to realize the benefits of the multi-year capital investments we have made to build two world-class facilities, one at London Poultry and one at our Bacon Center of Excellence in Winnipeg. With the ramp up of these two facilities expected to be fully complete by the end of this year, They will contribute $130 million of incremental adjusted EBITDA on an annualized basis. And let's not forget, we're also on track in our plant protein business to meet our goal of achieving adjusted EBITDA neutral or better by the end of 2023 as we close out the pivot in our plant protein business from investing for growth to delivering profitable growth. And as we finish putting all of these building blocks together, that is, executing on our strategy to deliver financial results, completing the London poultry startup, and completing the Bacon Center of Excellence startup, as well as delivering adjusted EBITDA neutral or better in our plant protein business, we will naturally deleverage and demonstrate the strength and resilience of our balance sheet as well. Looking out beyond this year and into 2024 and the years that follow, we will turn our attention to capitalizing on the strength of the platform that we have built. To accomplish this, we will win with our leading brands via constant innovation and renovation, including continuous new product development and investing in our portfolio of brands. We will leverage our supply chain as a competitive advantage with a relentless focus on driving efficiency in our business, achieving operational excellence across our network, optimizing our capacity utilization, and driving out costs through technology and automation, all as a continued source of fuel for profitable growth. We will broaden our reach and continue our geographic expansion into the U.S., building on our success to date with our Greenfield Natural Meat Company brand, and our enviable position in sustainable meat production, as well as pursuing strategic tuck-in acquisitions with discipline and tactical precision to deliver value to our stakeholders. We will leverage and monetize our leadership and sustainability, which is embedded in everything that we do, including growing our sustainable meats portfolio, making simpler food with more natural ingredients, leading in animal welfare, reducing food insecurity in Canada, achieving 100% sustainable packaging and being a carbon neutral company. And of course, we will accomplish all of this with the engagement and collective strength of our values driven, diverse and purposeful people. As I trust you can tell, I'm excited about the future of Maple Leaf Foods And I look forward to sharing regular updates with you as we make progress on our journey in the months, quarters and years ahead. Our blueprint is clear and we have the right team and the right plan in place to achieve our ambitious agenda. So with that as context, I'll go ahead and turn to the details of our results for quarter two. This past quarter, we took another meaningful step forward. clearly demonstrating the strength of our brands, the agility of our teams, and the soundness of the execution of our strategy. In the quarter, we delivered growing revenues while expanding adjusted EBITDA margins in our meat protein business, and we executed the structural changes required to achieve adjusted EBITDA neutral or better later this year in our plant protein business. I'll start with meat protein, where we delivered revenue growth of 6.6% compared to last year, and the performance of our brands continues to be very resilient. Despite the inflationary environment and the broader market experiencing some level of trade down, our brands performed extremely well. As we grew branded sales, we grew branded volume, and we grew branded market share, this past quarter in our prepared meats business. To continue the momentum, we also launched new innovation in the Schneider's sliced meats and with Maple Leaf Natural Selection's simple ingredients, a new line of delicious sliced meats that are made with no more than five wholesome simple ingredients such as choice cups of meat, water, and sea salt. Meat protein adjusted EBITDA margins of 9.3%, also improved sequentially and also year over year. On our last call, we said that we were on track to eliminate supply chain headwinds by the end of the second quarter, and we have accomplished that task. At the end of Q2, we fully stabilized our supply chain with vacancies back to target, service levels back on track, and product cost variances back within normal ranges, which is evident and reflective of our margins improving. On our last call, we also said that we would be out in the market implementing price increases within Q2 for fresh poultry and prepared meats, and we have done that as well. We implemented a price increase in April and May, and as things stand today, I am comfortable that we are priced for today's inflation. Since the pricing actions were not in effect for the full quarter, Q2 was impacted by approximately $7 million or 60 basis points of pricing headwinds, which is half of what we faced in Q1, and we expect this variance will be mitigated in full in the third quarter. But of course, if inflation increases and more pricing is required, we will move to respond accordingly. We also made progress in our Japanese pork business, where margins improved as a result of pricing, along with freight cost reductions, which together enabled us to reduce the headwinds we felt in Japan to 5 million or 40 basis points of impact in the quarter, an improvement of $3 million or 30 basis points from Q1.