Maple Leaf Foods Inc.

Michael H. McCain - President and Chief Executive Officer, Maple Leaf Foods Inc.

Michael H. Vels - Chief Financial Officer, Maple Leaf Foods Inc.; Canada Bread Company, Limited

Christine Healy - Scotiabank GBM Irene Nattel - RBC Capital Markets Derek Dley - Canaccord Genuity Michael Van Aelst - TD Newcrest Mark Petrie - CIBC World Markets

Thank you, Melanie. Good afternoon everyone and thank you for joining us.

On today's webcast we will discuss Maple Leaf Foods' financial and operating results for the fourth quarter of 2013. The news release and today's webcast presentation are available at mapleleaffoods.com under the Investors section.

Some of the statements made in this call may constitute forward-looking information, and future results may differ materially from what we discuss. Please refer to our 2013 MD&A and other information on our website for a broader description of our operations and risk factors that could impact the Company's financial results.

I will begin today as usual by reviewing our operating results, then I'll turn it over to Michael Vels, our CFO, to provide other financial information. At the end of the presentation, we will open up the lines for questions.

If you could turn your attention to Page 2 please of the slide deck that's been distributed, under Q4 headlines, clearly the fourth quarter was anything but the normal quarter with very steep earnings declines accompanied by a number of material, strategic and transformational events. Our Bakery business posted solid results in the fourth quarter, although a slight decline from the same quarter last year as softer Bakery volumes more than offset gains in our U.K.

business. For the full year however, adjusted operating earnings in our Bakery business increased almost 18%.

The weaker financial results in the fourth quarter were concentrated in our Protein business and I would distil it down to two main themes. First, we are experiencing network transition costs in our prepared meats business as we complete the final and very intense phase of this strategy and transformation.

Secondly, we were impacted by margin erosion in our prepared meats business as our pricing actions didn't stay abreast of the higher raw material cost and inflation in the quarter. While some of these things, commodity markets impacts and the cost of change have shattered our results through 2013, certainly they were particularly intense this past quarter and for reasons that I will describe through this discussion.

On a parallel course, we announced and completed a number of very sizable transactions. Early this month we announced an agreement to sell our Bakery business to Grupo Bimbo for proceeds to Maple Leaf of $1.65 billion in cash.

We also completed the sale of our Rothsay and Olivieri pasta businesses for a very attractive net combined proceeds of $745 million. These transactions are transformational for the future of this organization.

Clearly 2013 and the fourth quarter were not business as usual. We were a company in the final phase of a dramatic change, a cost take-out strategy which will result in significant structural margin expansion.

The bumps in the road are significant and they demand all of our attention but they do not detract from the end game. We're keeping our eye on the prize, which is, delivering a 10% EBITDA margin in the Protein business in 2015, we are taking pricing to improve our prepared meats margins which will be implemented in the first half of 2014, we will be capturing the overhead reductions and productivity gains from the efficient scaled prepared meats network, we will continue to optimize our sales mix and margins powered by our market and brand leadership, and finally we will go forward with a strong balance sheet and many growth opportunities as a focused consumer packaged meats company.

Turning to Slide 3, adjusted operating earnings for the quarter were a loss of $22 million compared to earnings of $70 million last year, while adjusted EPS was a loss of $0.25 per share compared to earnings of $0.27 a share in the prior year. 2012 numbers have been restated to reflect changes in pension accounting required under IFRS as well as the classification of Rothsay and Olivieri as discontinued operations given that the sale of these businesses occurred in the fourth quarter.

All I can add is that the best thing about Q4 is that it's over. Slide 4, the net result was an adjusted EBITDA margin of 1.4% with strong Bakery margins of 12.7%, significantly pressured by our Protein results.

There's a steep-hill decline to get to our 2015 EBITDA margin target, but we see a task that is very clear. In fact I would say today we have a clear path of the runway to 2015 than ever and I hope that we can provide more information today to make that more apparent to our other stakeholders.

As you can see on Slide 5, 2013 was an outlier year that interrupted very solid earnings progression in our business. These poor results don't reflect the underlying health of our business, our markets or any structural industry shift.

What they do portray is a very significant, a transitory effect of both our commodity markets in 2013, conditions which are now normalizing, and the direct and collateral impact to earnings from an intense, changed and transitioned environment. Let's turn to Slide 6 where we can provide a detailed breakout of the earnings change in our business year-over-year.

The most significant factors were, starting on the left-hand side, number one, continued challenging Protein market conditions which impacted quarter-over-quarter results by $14 million. Approximately half of this amount relates to margin reduction in our sales to Japan.

The restriction on pork imports into Russia and China continue to increase the flow of pork to other international markets including Japan and impeding our ability to properly price in that market. The other half of the $14 million largely reflects lower poultry processing margins and lower contribution from hedging programs in our hog production business.

In our 2015 EBITDA margin target, we are assuming a return to long-term historical conditions in domestic and global pork markets as well as breakeven earnings in hog production. This will then result in a $90 million improvement in adjusted operating earnings.

Number two, we experienced in the quarter a $25 million margin compression in our prepared meats business, partially tied to Protein markets and higher input costs, partially attributed to change and transition. I will speak more on this in a moment.

Number three, the network transition cost in our prepared meats business were $15 million in the quarter, an increase of $12 million compared to Q4 last year, reflecting the increased level of activity. This includes start-up costs, incremental resources to support the transformation and higher overheads as we run plants in parallel.

We have entered a peak phase of executing our strategies as we bear the cost and inefficiencies of operating two parallel networks [indiscernible] as we gradually close down plants this coming year. Number four, we also incurred direct cost of approximately $13 million in our legacy prepared meats network, the older plants, primarily caused by disruptions to our manufacturing and distribution as production shifts and people transition to these new facilities.

We have introduced significant amounts of change into our supply chain in a very short period, we have responded with urgency to reduce the impact of the base business while we complete the prepared meats transition and we expect better performance going forward. Number five, the SG&A in the Protein Group increased $10 million although that was due to comparatively lower variable compensation expense versus last year.

This is strictly a quarter over quarter timing issue and did not have an impact on Protein Group results for the full year where variable compensation was flat to declining for the year in total. Number six, the most significant nonrecurring item was a $6 million reversal of a provision in the fourth quarter of 2012, and finally the other bucket of $9 million includes an array of smaller items including $3 million decrease due to the sale of our potato processing business in early 2013 and $2 million decline in adjusted operating earnings in the Bakery Group.

As you can see, there are a number of contributors to the quarter-over-quarter result. Turning to Slide 7, this was our most significant disappointment in the quarter.

Underpinning the higher cost of raw materials contributing to our prepared meats margin compression was a sharp and unexpected spike in raw materials cost in processed meats including the beginning of the decline in currency which in the very short term negatively affects the cost structure in our prepared meats business which most industry pundits would attribute to the emergence of the PED virus in the U.S. Having said that, this wasn't the bigger story.

The real issue is that our forward pricing in this market was uniformly overly protective of volume and market share in the second half of 2013, reflecting a level of conservatism as it relates to supply-chain issues. It is clear that we didn't adequately lean into pricing risk as a result of volume, share and customer concerns as we experienced material change in our supply-chain that touches our relationship with them.

In essence, the conditions were a compounding of supply-chain service issues, raw material spikes and added cost of duplicate plant networks, and frankly we underpriced forward in these conditions. In retrospect, we likely should have been more aggressive on that and leaned more into pricing risk.

Having said that, the good news is we were very positive in our volume and market share results for the quarter. This is clearly the effects of material transition like this, I call it collateral damage, but we are confident that we can recover this in due time.

We have pricing events that are taking place beginning in February 2014 and continuing through May. There will surely be small, short-term volume givebacks in the adjustments that we are obliged to make but we fully expect that we can normalize these prepared meats margin.

We are paying very careful attention to this and expect it not to be an ongoing issue after a few quarters. Turning to Slide 8, our focus going forward is clear and is directly tied to what is required to achieve the margin targets for 2015.

We are undertaking, as I mentioned a moment ago, pricing actions in our prepared meats business to manage these higher input costs, we expect to achieve the plant efficiencies in our new plants, close the old plants, and finally, we will continue to grow profitable volume which is being driven by a detailed innovation plan and sales execution strategies. On Slide 9, you can see the evolution of our parallel prepared meats network.

This is the key and most profoundly important financial story here. In December of 2013, at its very peak, Maple Leaf was the proud owner of a two-for-one plant network.

We spent three years building and investing which frankly added cost upon cost in the new supply-chain that we constructed over the last two to three years. That's the only way that this transition would be accomplished.

The task as of January 1 2014 changes. We go from building and investing to closing and shedding and you can see the overlap and the timelines on the charts on Page 9.

The result of this is duplicate overhead and inefficiencies which will be eliminated over the course of 2014. Of course the cost burden at its peak in the fourth quarter of 2013 was significant.

Turning to Slide 10, the most significant and well-placed question we often get is, how this progression will result in such a steep improvement in 2015, given where we are today. What you can see here is a progression through the last two years during that building and investing phase of just simply the addition of cost to our baseline plant network costing structure.

From its peak in 2014 moving into the closing and shedding phase that will carry us through the end of 2014, in its simplest form we have three things that we need to get done to deal with this two-for-one supply-chain that's now in place. Step one is making sure that the new plants operate at expected levels of efficiency.

Step two is move production from the old high-cost plants to the new low-cost plants, and that has to be done one item at a time. And number three and finally, close the old plants.

As you can see from this chart, and this is a very important takeaway, the biggest cost reduction in this progression from the peak in Q4 2013 to the 2015 full realization of the benefit, of that delta the biggest cost reduction is actually the closure on the old plants. In fact 65% of the change from peak to trough is simply closing the old plants which create something of a clip benefit.

It is a milestone for people to track and that's very important, people ask us often what are the milestones, it's just that, the closure dates on the plants in 2014 because when those closure dates occur, that means that step one and step two are largely in place. Turning to Page 11, I'll take you through the current state of our start-ups and the reality is that commissioning new plants takes time and is rarely smooth or predictable.

Of all of our expansions, our Brampton plant is the furthest along. All volume transfers have now been completed in the first quarter of 2014 which establishes this plant as the center of excellence for our fresh frozen sausage production.

Winnipeg Bacon and Ham plant is the second largest facility in our prepared meats network. All transfers of ham volume into this facility have completed in Q4 2013.

The bacon slicing capacity at this facility is over three times faster than our former plant in North Battleford. While the start-up of the new technology was challenging, we have made excellent headway recently and we will achieve our business case productivity improvements in this facility.

As of Q1 of this year, 100% of our bacon volume has now been transferred into that plant. Our Saskatoon plant has been most challenging in its start-up, primarily because we are configuring new unique different technologies together for the first time in a single facility.

As a result, production volumes have been slow to ramp up. Getting this plant to expected efficiency is a high priority for 2014.

Commissioning our new Hamilton plant, the largest in our network, began in late 2013. We will complete the transfer of wiener production and close our older Hamilton plant in early Q2.

Getting the new facility fully commissioned is currently the largest project in 2014 and we have a lot of dedicated resources and focus to support this. It's early days right now but so far we're on track.

We'll keep you updated through the year as that progresses. There are also significant savings to be realized to completing the consolidation and distribution into our new Eastern distribution centre.

We exited 12 third-party warehouses in 2013 and consolidated volume at our new facility. All volume will be transferred out of remaining legacy plants by the end of this quarter.

There are further savings attached to that realized through optimizing our shipping routes and strategies, including shipping direct to customer warehouses and eliminating direct store delivery in regional areas. This cost optimization will be completed by the third quarter of 2014.

As you can see on Slide 12, it is important to keep our eyes on the prize when we complete the final phase of that journey that began in 2010. The result is a very streamlined focused low-cost network producing wieners and sliced meats at three plants not eight, producing cooked sausages at one plant not six, producing smoked hams at one plant not four, producing fresh sausage at two plants not four, producing bacon at one plant not four.

We have transitioned from 22 meat plants down to 13, with 19 distribution centres down to two. Productivity per person is expected to increase 1.7 times.

We will also realize dramatic reduction in our overhead cost to operating fewer plants with far less people. With that, I'll turn it over to Michael Vels for a full financial review.

Michael?

Thanks Michael. On Slide 13, as couple of points on the balance sheet, our net debt at the end of the fourth quarter was $452 million.

The reason this is down significantly from $1.2 billion at the end of the third quarter is primarily due to the sales of the Rothsay and Olivieri pasta businesses in the fourth quarter. We realized $745 million in net proceeds, a portion of which was used to pay down revolving bank lines and the remainder is included in the cash balances on our balance sheet.

Cash flow from operations is $47 million compared to $66 million last year. For the full year, cash flow from operations was $260 million compared to $218 million last year, the increase primarily driven by active working capital management.

The net debt-to-EBITDA ratio in the fourth quarter decreased to 3.6x from 3.8x in the third quarter, primarily due to the proceeds from the aforementioned sales of Rothsay and Olivieri which more than offset continued earnings pressure. Turning to Slide 14, as noted, we announced the sale of our 90% share in Canada Bread to Grupo Bimbo for $72 a share on February 12, 2014.

After including the $8 per share special dividend, that was paid by Canada Bread to its shareholders on January 6, 2014, the sale price represents about 31% premium for the Canada Bread closing price on the TSX of $61.25 on October 18, 2013, a day before we announced that we were exploring strategic alternatives for the Bakery business. We are expecting the transaction to close in the second quarter.

At that time the gross proceeds to Maple Leaf from its 90% ownership, excluding any dividends received in the interim, will be approximately $1.65 billion. Maple Leaf expects cash cost related to the transaction to be about $160 million.

The Company's outstanding debt at this time comprises principally long-term notes payable and a bank operating facility. The terms of many of the notes payable require the Company to make an offer to prepay the notes in the case of substantial asset sales such as the Canada Bread transaction.

As such, we do expect that in the second quarter of 2014, we will make an offer on prepayment of the notes payable. Assuming a 100% prepayment, total debt retirement is estimated to be approximately $800 million including debt make-whole payments and related swap settlements of approximately $100 million, all of which is included – all of the $100 million that is – which is included in the estimated cash cost of $160 million.

This is based on current exchange – current U.S.-Canadian exchange rates and treasury yields. Prepayment of the debt will of course result in substantial savings in interest costs going forward.

Moving to Slide 15, a couple of comments on capital expenditures. We invested $112 million in the quarter compared to $109 million last year.

During the quarter, the spending of $75 million comprised spending on the prepared meats network. We are close to the end of this capital program now and therefore have a reasonably good visibility of capital required to complete it, mostly related to the new Hamilton meat facility.

So for 2013, we have spent $385 million on capital expenditures compared to $306 million in 2012. In the 2013 spend, was $282 million related to investments in strategic projects, again mostly the plant expansions and the new construction in the Hamilton plant.

Looking forward to 2014, the net capital expenditure forecast for 2014 is $255 million. That includes $140 million of strategic capital and it includes an estimate of $40 million in the Bakery business for the full year.

Clearly following the sale of the Bakery business, there will be a need there to revise our capital estimates which we'll do at that time. In 2015, subsequent to the completion of all the spending in the bidding that we are currently engaged in, we estimate that capital expenditures will be approximately $80 million.

On Slide 16, we have a couple of comments on a bit of a retrospective on our capital expenditures for the entire transformation period. On base, we are satisfied with the level of capital spending compared to our original estimates outlined in 2011.

Although the strategic capital spend is higher, our total capital spending for the period is actually $120 million lower than our initial estimates, reflecting our emphasis on disciplined capital management. On Page 17, I have a few comments on restructuring costs.

In 2013, restructuring costs for the prepared meats network transformation was $70 million, $44 million of which relate to future cash payments. Although these restructuring costs have been reported in earnings in 2013, the bulk of the cash payments will actually occur in 2014 when the remaining facilities in our prepared meats network are closed.

And then in 2014, our estimate at this stage is that we'll record an additional $43 million of restructuring costs related to the prepared meats network transformation. Of these, $28 million relate to cash payments.

I'll now turn the call over to Michael for summary remarks before we go to questions.

Thank you, Mike. I would add that recently there's been a number of questions from shareholders arising from the announcement of the sale of our Bakery business on February the 12th of this year.

These have all been very important and valid questions and I hope we can try and address them as best as we can and have been doing so. I want to be very clear that the Board of Directors has not made any decision in terms of the precise use of proceeds from the sale of our Bakery.

Rather the announcement two weeks ago, they sought to make it clear to shareholders what the priorities would be and how proceeds would be distributed in the absence of a specific plan that is yet to be developed. First requirement in those priorities is to pay down debt largely because we are required to do so, as Mike Vels discussed earlier.

Following this, the Board's intention is to assess the progress of the prepared meats network transformation. And finally, we need to assess the capital requirements for growth in the appropriate capital structure for the residual Protein business.

I can assure you that the Board of Directors is going to be disciplined and prudent in this undertaking. I want to reiterate that it is possible that the Board may decide to use more of than one share buyback during this period.

Turning to Slide 18, our focus in summary this year is clear and 100% tied to restoring our margin target and ROI to shareholders. We need to restore our prepared meats margin, get our new plants operating efficiently, close the older plants and grow profitable volume.

Transformation by the end of this year will be complete. Our SAP implementation is done now.

Simplification of our prepared meats portfolio will be 95% complete, rationalizing 800 SKUs and reducing formulation counts by 50% in key categories. We'll have a low-cost technology-enabled network and we will have streamlined our organizational structure post the sale of the Bakery business.

With our cost competitive on a North American basis, our focus would turn to accelerating profitable growth. With that, I'd like to turn the call over to your questions.

Melanie?

The first question I have is on the Agribusiness segment, you explained that the $10 million loss in the quarter was driven by lower contributions from hedging programs. Can you explain what that is, is that just temporary hedging losses on corn or hog prices and do you expect that that was largely isolated to the fourth quarter?

Yes, I think that's [indiscernible]. We do have ongoing hedging programs and when you are comparing quarter-over-quarter, the results of the hedging programs in one quarter compared to the mart-to-market results in the quarter one year later drive up a mathematical delta I guess.

So going forward in 2014, which is really what counts, as Michael mentioned, hog production is profitable currently and the Company has had an opportunity to walk in those profits for a fairly significant proportion of the year.

Okay, great. That's really helpful.

And then second, just the transitional cost $15 million in Q4, can you give us a sense of what we should expect for the first and second quarters, should it be somewhat similar given you're kind of in that peak stage right now?

Yes, I think directionally I think you could see that in the chart that we have on page – Christine to that chart on Page 10, I think you can see from there that directionally you should see similar in the next couple of quarters, but then by starting maybe end of Q2 or beginning Q3 you should start to see some improvements in that.

Okay. And then just lastly, what precautions…

Sorry, Christine, that's largely what the chart on Page 10 does.

Okay, great, I just wanted to confirm that. And then just lastly, what precautions are your hog operations taking in regards to the PED virus?

They are extensive. We have built something of a fortress around all of our facilities.

We have done everything from restrictive access to multiple different training and awareness programs to restrictions around truck movements. There is a longer list of hundreds of different restrictive actions that we have taken in our hog production operations, all designed to do our level best to stay PED-V free.

Having said that, I will put up the cautioning point that even the best operators and the most bio-secure operators in America have not been – if there's prevalence in the immediate region, have not been immune from the effects of that. Even in spite of that separates to some degree, I've seen research that has suggested that PED virus itself can travel just through air-borne medium by up to 16 kilometers.

So, we are doing everything I think humanly possible, we review it on a very regular basis, there's hundreds of steps we have taken to move into, as we describe internally, 'Code Red' in bio-security, but with best efforts yet I can't say that that guarantees a PED-V free environment, although as you know there's been I think Canada so far has done a pretty good job containing it.

Okay, thanks very much.

Thank you for that very comprehensive presentation, it was very helpful. If you had to identify what sort of the key points in time are to [indiscernible] in the periods of maximum risk, where would they be and how would we see those manifest as you go through the last stages of this process?

If I turn your attention to Page 10, that Irene I think I can tie and directionally answer that question. The key for us is timeline.

If you had to focus on the milestone and focus on the plant closure dates, and four of the five significant plant closures are scheduled to occur in the fourth quarter of this year, certainly the biggest ones are in the fourth quarter of this year, and that's why you see the clip coming into next year. The preconditions or the enablers for those plant closures are the appropriate production levels in the new plants, and specifically the biggest one of them all is the new plant in Hamilton.

The complexity behind that and the reason why this is not a one for one change is because when we close a plant like for example Moncton, we are not moving the production from Moncton to another single plant. We are moving, the bacon goes to Winnipeg, the sliced meats goes to the new Heritage facility, the sausage goes to [Bartor Road] (ph) and Saskatoon and so on and so forth.

So the Heritage plant is required to assume all of the production from these regional multipurpose plants in all of our sliced meats and hotdog production. So it's a complicated network shift and the culmination of that is – the in-milestone is the closure of those facilities in the fourth quarter.

So these will go to the risk point, which is your question, the risk point is really the biggest risk that we see today is the start-up curve on the new Heritage plant in Hamilton because that's the heavy hitter, that's the linchpin for our ability to close all those other facilities on schedule. It's a tight schedule, I would tell you that it's a very, very tight schedule.

One of the reasons why, and I'll give you some level of optimism in that though, is that while it's a tight schedule, if you look at that chart on Page 10, the journey to 10% EBITDA margins is predominantly following that chart down to the first quarter of 2015. If it's off, we would jog it by a quarter, not a year.

You see what I'm saying?

Yes.

You just jog that whole chart by a quarter if there's schedule slippage. Right now I would say we're on track, but it's very early days.

And plant start-ups I would tell you, I've been through many, many of them, they are wildly unpredictable. They could go better than we expected, they could go worse than we expected, they are just wildly unpredictable.

And that's what I think you're referring to as what's the risk factor and it's probably on this curve, the biggest swing factor in the curve would be the start-up path on that new Heritage facility in Hamilton through the course of 2015 which is the core driver of our ability to close those other four plants in the fourth quarter.

That's great. Thank you.

So Michael, from your commentary what I'm hearing you say is, you're not worried about your ability to get to 10%, the question is the timeline to get to the 10%?

We have a project plan for 2014, Irene, to get to this timeline, we're here – that's got at last calendar had like 134 tasks on it that are broken down into weekly buckets. So we're on the footrace of just basically closing and shedding costs, it's footrace of closing and shedding costs.

Interestingly the efficiencies on that curve, from the peak to the trough on Page 10, the efficiencies in the new plants is actually the smallest of those three steps. The biggest one, 65% of it, is just closing the duplicate overheads of those old plants, and so we are in the footrace of getting it done so that we maintain timeline.

The timelines are tight, they are very, very tight, but if they are off by a quarter, they are off by a quarter. We don't like it, sometimes things are just as crazy as regulatory process because every SKU that moves requires some degree of regulatory compliance all the way through to things like lever during start-up curves can have an impact on that by a few weeks, one way or the other.

So it's a bit of a footrace to get to that end in this closing and shedding phase. We've got a program in granular detail.

I personally have no lack of confidence in the end stage. I'd say there is risk in, is it those plant closures are going to happen a little bit early or a little bit late, that's where the risk is.

Okay. And just a couple of others if I may, I just want to make sure that I understood properly, $90 million of the upside in the plan really comes from normalization to some degree of market and breakeven in hog production, correct?

Yes, but I would tell you that the lion's share of that or the biggest piece of that is just normal hog markets. We lost $40 million in 2013 just in growing hogs.

And so normalizing that has a huge impact. Certainly the second largest factor is the Japanese market.

We have a long-term history in the Japanese market. I believe we will recover back to normal market conditions going forward.

Certainly the influence of both China and Russia on the global pork markets has an indirect consequential impact on competitiveness in Japan. It started out, the catalyst was – as we've been talking about all year, there's been a currency shift but it's not really a currency impact, Irene.

The currency impact is the cost change, that is our ability to price in the market, which is the real driver, and we have got some confidence that over the course of the next year, our pricing ability in more normal markets in the Japanese marketplace will become, will result in – and frankly if it doesn't, if that doesn't happen, then our backup would be to find other markets globally that would be equal or better in terms of its return. So if that doesn't materialize, then our obligation would be to find that someplace else.

That's the second largest of that. The third is the normalization of our primary pork processing margins, and frankly we are starting to see that coming into 2014.

That's great, and if I might, just one final mundane little question on how the discussions are going with your customers around the need to pass through price, to put through price increases, as you said the first one happened in February, what is the tone of these discussions as of course we see a great deal from your customers about consumer sensitivity to around pricing and real resistance to any price increases?

Those are very valid concerns. I think we are confident – we have no choice but we have to push these things through the economics, we just did that.

So we clearly didn't lean adequately into risk in the last quarter. Probably in retrospect we should have been more aggressive in that regard in the last quarter.

We weren't for other reasons, some of which are attached to the concerns around just our transition, and so we were maybe overly cautious in that regard, but we really are in a position where we have no choice but to do that. I have no doubt that there will be some level of volume giveback short-term, there always is.

Most of it is, Irene, as you will know, I mean you've been around the consumer packaged goods price point marketing domain for a long time, if you got a really, really hot well-selling item that is featured regularly at $1.99 on the front page of an ad and has significant lift as a result of that, there's a world of difference between moving from $1.79 to $1.99 than there is to $1.99 to $2.19. And sometimes when you start piercing through some of these price points and we have to allow consumers an opportunity to assimilate and adjust to the new value propositions and maybe there is some short term volume giveback, it doesn't mean there will be, that's just part of the normal pricing process.

We are doing it in three ways, and the first in February, then we have in March and then moving forward in the last week in May.

And in total, Michael, what…

Irene, can I come back to you? We've got a whole host of people waiting.

Absolutely.

Do you mind, because I don't want to be rude but would you mind?

Not at all.

I'll come back to you.

Just on the back of that last question, in terms of the pricing, is the pricing that you guys have implemented in February in line with some of your competitors?

You would believe so, we believe so. In some cases, because we are the brand leaders and in many cases don't have brand leaders, there's an element of brand ahs to take pricing leadership as well, and so you wait for the residual marketplace to catch up to them.

In some cases there is a lag, sometimes private label lag those price leadership positions. So I can't say universally that that's true but we expect that the whole market is feeling the same pressures in terms of the raw material markets inflation that has occurred over the last six months in particular, and certainly is projected – if you see the raw material market charts, it's projected to continue on in arising markets in the first half of 2014.

They are all feeling the same pressures. So we're confident that they will follow that leadership but we won't know that for sure until it's over.

Okay, thanks, that's helpful. And then just addressing the current hog price and hog supply situation, we've seen an increase here in hog prices on a futures going into summer, how comfortable are you guys with your current hog supply situation, how much of that is now internally supplied?

I think our internal supply, just let me get the statistics of this, about 37% in the quarter actually last fourth quarter, Derek, so 37%. Certainly there will be a significant delta in the possibility of hog production in all of North America in 2014.

If history is any predictor in that, I think that should bode well for supply in the latter half of 2014 and 2015, although the wildcard continues to be the effects of the PED virus.

Alright, okay. And then just finally for me, when you guys transfer all the production over into the new network or the new supply-chain, how much excess capacity will you have in that supply chain, call it at the end of 2015, beginning 2015?

Not significant. We didn't size the new facilities' supply chain at capacity.

So the answer is, not significant.

Okay, great. Thank you very much.

Just a follow-up on Irene's last question, can you give us a sense as to the size of the price increases that you're trying to achieve over that period on average, I know it's a whole bunch of different ones?

There's a bunch of smaller ones, and frankly, it's a combination of adjusting our pricing but also the level and frequency of our future pricing. So it's a combination of all of those levers together, Michael.

So I think the general price increase is in probably 4% range I think on average in the month of March.

Okay, thank you. And if I take a look at some of these conditions that you pointed out that were affecting Q4, and that was a pretty tough quarter as you started off saying, can you give us some kind of indication or feeling as to how much of that continued into Q1, whether it was the supply-chain inefficiencies?

I know that the transition cost you kind of line on Chart 10 but how about the other ones, the margin compression and the inefficiencies, to what degree are those continuing into Q1?

I think the answer is, all of them are continuing into Q1 to some degree. Our network transformation as you can see in the chart on Page 10, won't be – you see the progression throughout 2014, the margin compression in our processed meats business really is not affected until we execute pricing, and the biggest of those three raise is in late March and you would have to calibrate the offsetting volume giveback short-term, it's a short-term giveback.

So there is some effect of that that will definitely continue on in the first half of 2014. The supply-chain issues, there are – certainly our service levels have been better in some cases, although from a customer service perspective we had in some portions of our business we had a horrific service performance in the month of January largely connected to the very dramatic weather that we had throughout our key manufacturing areas that affected livestock production and livestock delivery and so on and so forth.

So there are some issues but I would tell you those are the smaller of those factors. The two most material ones that will continue is the margin compression in the packaged meats which we are dealing with through the pricing action in the first half, and then the network transformation.

And should we be expecting some of that margin compression to actually get worse given that the price of hog just continues to rise?

That's a good question. I don't think so, but it's a moving – right now I don't think so, it's a moving target.

As you see, just the hog price itself and hog production and raw material cost have gone up every day in the last 10 days in a row unexpectedly. So it is a bit of a moving target, Michael, and that's why the effects of this PED virus in the U.S., while I think it's maybe showing some signs of stabilizing, it's been quite unpredictable.

Okay, and just finally on the foreign exchange, can you give us a little bit more color as to how that – what's the timing that you usually see the shift from a negative immediate return potentially from a weaker Canadian dollar to better pricing or better margins domestically and internationally for you as the competition eases up?

So there's a really long answer to that, and I apologize, but the headline is, it's short-term negative for us, short-term within a quarter, but over time it's very positive for us. The reason that is true is because our hog production is immediately positive and primary processing for a window of about 30 to 60 days it's negative as you – because you're forward pricing depending on the customer is done in one currency and your purchasing is done in another, that arbitrage is usually short-term negative if it's material shift in the currency but then it converts to positive.

The biggest impact obviously is in processed meat, and in the short-term it's negative because your raw material cost go up in both the portions of the raw materials that are internally supplied and the externality supplied raw material cost go up, but that converts to a positive or neutral, it converts to neutral as you and all the competitors price for that in the marketplace, and as you can see there's typically a six-month pricing lag in these things, three to six-month pricing lag that I've stated, three to six-month pricing lag to get it from negative to neutral, but then it becomes very positive over time because you are subjected to less import pressure in volume and more opportunities to export open up. So for example, we at 0.90-to-dollar we're now in dialog with customers in the United States for new export for new business from Canada into United States.

We're in conversation today, conversation that just became relevant with the currency going to 90 cents but it will take some time before that business materializes and then depending on where the currency goes determines whether its' consistent business or not. So from hog production all the way through to finished packaged meat, over time it's positive even though very short-term cash flow basis it can be slightly negative.

Does that answer your question, Michael?

Yes, that's fine, thank you.

Just looking ahead to 2015 or the end of 2014, when the legacy plants close, what do you expect in terms of efficiencies at the new Hamilton facility, I mean do you expect it to be at the target sort of efficiency rate when that switchover happens or is there going to be a sort of subsequent ramp-up and improvement in efficiency through 2015?

We expect it to be running at efficiency in 2015 but it will be long, there could be an efficiency gap at the end. What I would tell you is that – and certainly this is illustrated back in the chart on Page 10, is that that's the smallest portion of the delta between here and the 10% EBITDA part.

So if we have a few extra people on the line in transition, because we're not achieving our efficiency targets, it's a cost and we will optimize it but it's not the biggest, it's not that material to the achievement of the overall target. The biggest component of it is getting the efficiencies up the curve prior that we even close the plants and get rid of that duplicate overhead, 65% of it has duplicate overhead.

Yes, well understood.

So, yes, it's possible, it's not our expectation, it is possible, but it's not – we don't think that's material to the overall transition.

Okay. And you touched on this a little bit maybe, but when you think sort of further into 2015 and maybe even further ahead than that, what sort of top line opportunities do think that this new manufacturing and distribution platform could afford you?

I mean is it possible that you are able to shift your business further into the branded and value-added products, does this manufacturing base give you that capability?

As I said earlier, we didn't build significant excess capacity into this network shift. So in the first instance we are not required to do that.

We have over the last couple of years shed some very unprofitable volume. In fact in many cases we've shed it or resigned it because it was unprofitable volume over the course of the last couple of years.

So there is the opportunity to kind of build back more profitable volume over the next two or three years on top of this, is certainly available to us. And once you hit your business case in these lines, my experience is that then our mission becomes how do we optimize them or refine them or fine-tune them or add to the platform over the course of the next five years in a very profitable way than bolt-on ways that we can add some measure of profit growth either by margining up our business or into a more profitable mix or finding opportunities to improve the efficiencies of particular lines in ways we didn't expect and translate that into top line growth.

So, I think we'll be in a period of refinement, but in the main, we didn't build the network with substantial excess capacity. I don't think that would've been either prudent or profitable to do that.

Okay, thanks. And then just lastly, you said that you were fairly confident that the margins in Japan or in export markets overall would return to more historical levels.

What gives you that confidence? I mean is it the ability to go to different markets and you feel reasonably sure that you'd be able to find that or do you just think that the dynamics in Japan will normalize?

A combination of both of those. I think we'll see better global markets over the course of next couple of years in both China and Russia which have an indirect impact on the pressure placed from the Japanese market.

I also think that post the PED virus that there will tend to be some downward pressure on hog price and therefore meat cost, but I don't think that the current levels are – at $4.30 corn, I don't think that current levels are long-term sustainable in meat cost. Certainly that's reflected in some of the most profitable hog production that I've seen in many, many years, and deservedly so because it's been pretty ugly in the last few years, but I don't think that that's necessarily sustainable and so that will help in the Japanese market.

And finally, if we are not able to replicate our historic margins in the Japanese market, we have other opportunities to try and find replacements for that that will recover those margins. So we've got a number of levers to pull.

I just think with the passage of time we'll nail one or the other.

And how difficult would it be to switch over to where your products are going, is there a significant lead time or investments to be able to do that or is it fairly straightforward?

No, there can be. I mean there could be a lead time attached to it, but it's you're not just switching over, it's typically measured, it's measured in quarters not in multiple years.

Thanks very much.

I think Irene had some questions that she wanted to ask. Irene, if you're still on the line, if you would like to ask those questions, we're here and available.

I gather the answer to that is, no. So I would like to thank everybody again for your patience.

We have a very committed management team today to building a future of the best protein company in the world. We've got people in the brands that we have built over the last 10 or 15 years, and when we complete this transition we'll have the best asset base I think in North America to match that.

So the foundations are set to build a great 2014 company right here in Canada and the management team is in place to accomplish that. So thanks for your patience.

It's a rocky road. I understand the frustration attached to that but we're very confident in the end state and I hope today's discussion was illuminating why we have that confidence, and we look forward to discussing progress as 2014 unfolds.

Thank you and have a wonderful day.