Maple Leaf Foods Inc.

Debbie Simpson - CFO Gary Maksymetz - COO

Irene Nattel - RBC Capital Markets Mark Petrie - CIBC Derek Dley - Canaccord Genuity Michael Van Aelst - TD Securities Ken Zaslow - BMO Capital Markets

Good morning everyone and thank you for joining us. Unfortunately Michael McCain is unable to view us as on today’s call, but I’m pleased to be joined by Gary Maksymetz, Chief Operating Officer.

Today’s webcast will review Maple Leaf Foods' financial and operating results for the second quarter of 2015. The news release and today's webcast presentation are available at Mapleleaffoods.com under the investors section.

Some of the statements made on this call may constitute forward-looking information and future results may differ materially from what we discuss. Please refer to our 2014 annual MD&A and other information on our website for a broader description of the operations and risk factors that could affect the company's performance.

I will now turn the call over to Gary.

Thank you Debbie. Good morning everyone.

I will begin on page two of the presentation. So I start with; we are very pleased with the progress we’ve made this quarter.

The highlights include a continued progression in our EBITDA margin, now its 6% with a clear path forward to achieving our strategic goals. At 34 million improvements in earnings from last year which increased adjusted operating earnings from 222 million and adjusted EPS of $0.13.

closing our last legacy plant, bringing an end to our duplicative prepared meats supply network, strong commercial momentum and volume growth in prepared meats over the prior year and improved operating performance at our new startup plans, all in very pleased with the progress we’ve made this quarter. Turning to slide 3; slide 3 charts the financial improvement we have achieved which is reflected by the significant EBITDA margin growth from the end of 2013.

With an EBITDA margin now its 6% up 5.3% from year ago and 1.3% from last quarter, the trend line is clear and strong. Our adjusted EPS was $0.13 compared to a loss of 12 a year ago.

Slide 4 provides the details of the 34 million year-over-year improvement in our adjusted operating earnings from a loss of 12 million last year at this time to 22 million of earnings this year. The first bar represents 26 million in margin improvements in our prepared meats business as we return to more normalized market conditions and realize the reduction in duplicative overhead following the closure of our legacy plans.

As a reminder, last year we were faced with extraordinary market volatility as a result of the outbreak of the PED virus in the US hog production. While protein markets were largely flat we achieved a 2 million improvement compared with the second quarter year ago shown in the second green bar.

The next bar shows the 5 million improvements from higher fresh and prepared meats volume compared to last year, primarily in prepared meats. We have largely restored volumes to where they were prior to last year’s price increase something I will speak to a little later.

The final bar marked other represents improved earnings from fresh poultry reflecting favorable sales mix and improved operating efficiencies which were partially offset by lower earnings in our fresh pork business. Turning to slide 5' commercial momentum continue to strengthen in the quarter.

Volume growth in prepared meats has been particularly strong versus the prior year and we have largely restored volumes to where they were before we took the pricing action in response to high raw material costs. We are particularly pleased with the strong growth in our retail branded business.

Our poultry business benefited from favorable sales mix primarily driven by growth in our branded fresh business as well as from cost savings initiatives. We realize very strong momentum behind prime poultry, which is one of our flagship brands.

We spoke last quarter about shifting from fixing the business to growing it and we continue to look for opportunities to advance our leadership in key categories in the quarter for example we introduce several new products which expanded our ethnic offering and our protein snacking line. Slide 6 outlines the path to achieving our strategic margin targets and it's really important that we spent some time focusing on this.

To reach our near-term 10% target this year, we need to achieve what we’ve outlined in the column on the left. Each is related to plant optimization, which is focused on our new plant in Hamilton and all are very common to any new manufacturing startup.

They include dialing an equipment performance and training, achieving overall equipment effectiveness or OEE targets, a metric that essentially measures line speeds and utilization. Optimizing our formulations on the new processing equipment to improve yields to target levels and finally a reduction in overhead that will come and we eliminate all of the additional activity associated with our transformation.

Our plant in Hamilton is unlike any other. It is the largest prepared meats plant in Canada and it replaces six of our legacy facilities.

We have multiple production lines for Veiners, bologna and daily needs including 11 slicing and packaging lines. It houses some of the newest and most advanced technology in the industry.

Essentially it is really multiple plans within a plant. We continue to make progress but as always the case in complex startups like this one, near term predictions are difficult, frankly, gets rarely at straight line.

Having said that we have consistently said that we feel our strategic margin target of 10% should be a floor in our business, not a ceiling. We have all the fundamentals for that to be true.

Now that we have our new network operational, those new frontiers have becoming more visible. They include increasing the utilization of our assets by finding new ways to squeeze incremental capacity of the new lines, realizing new business development opportunities to utilize this footprint.

We are focusing our resources on high-return opportunities, beyond the ongoing steady pace of innovation. Certainly the current level of the Canadian dollars will benefit to us in this regard.

I will return to the gross story in a moment. We also see opportunities to improve our margins; do better sales mix, and innovation.

And finally, we believe there is more opportunity for cost reduction in our SG&A, which is something the entire food industry is focused on. Our focus on growth and relentlessly managing cost is why we are confident that a 10% will be a floor and not a ceiling over the next five years.

I’d like to spend a moment discussing our growth framework, as we’ve outlined on slide 7. Last quarter we spoke about developing a growth path and I would like to add some color on our process and thinking on priorities.

There are many growth opportunities in the market and as we work and identify the most meaningful ones, our decisions will be data driven with a lift to growing in ways which offer brand relevance higher growth segments that clearly are margin accretive and we will do this with a clear eye towards long term total shareholder return. We have also developed a robust sustainability platform which we see as supporting our growth agenda.

Our focus is in four key areas; advancing nutrition in health, our people and community involvement, treating animals well and environmental sustainability. It is clear to us that our vision for a sustainable protein company will be up cornerstone for growth well into the future.

I will now turn the call back to Debbie.

Thank you, Gary. Slide 8 provides further information on our cash flow and balance sheet.

In the second quarter, we had positive free cash flow of $30 million. Cash on hand at the end of the quarter was 410 million after investing 42 million in the purchase of 1.8 million shares under our normal course issuer bid.

Our share buyback has been continuing this month and as of yesterday, we had acquired a total of 2.7 million share for a cumulative investment of $64 million. Our capital expenditures were $44 million in the quarter compared to $78 million last year.

In the first six months capital expenditures were $70 million compared to $176 million in 2014. We still expect the capital spending for the year will be in line with our estimate of around $120 million.

Finally, for the quarter we saw a decrease in our restructuring costs to $7 million from $11 million in the first quarter, $4 million of which was in cash. Our year-to-date restructuring costs are $18 million of which 11 was cash and we now expect restructuring costs for the year to be in the range of $25 million to $30 million.

Turning to slide nine. In conclusion we have had a good quarter where we made meaningful progress on a number of fronts.

We reported significant quarter-over-quarter earnings growth, poised by both continued improvement in our manufacturing network and excellent commercial performance. Our volumes have largely been restored particularly in our retail branded business.

We are responsibly deploying capital as we focus on delivering our near-term financial target and developing broader growth plans. We have a clear run rate to achieving our 10% EBITDA margin and then building from there.

With that we would like to open the call for questions.

Thanks and good morning everybody. If I could please go back to slide number six, a very helpfully outlining the factors that are going to bridge the gap between 6% and 10%.

But if we focus on those four factors on the left side of that slide, could you talk us through, how important each one of those is in bridging that gap and when we can expect them to come through in the back half of the year?

Okay. Go Irene this is Garry.

Actually they all play a role obviously in getting to the end state of 10%. The key areas where we are focused on and that are driving the performance will be in yields, and getting yield improvements on the equipment, the productivity and finally and again the cost tied to overhead that are still tied to transformation and the resources we put to act on those two.

And should we assume that -- so the order in which they are presented is the relative ranking of importance in terms of getting from 6% to 10%.

Irene, I think if you look at it as the first three boxes, really deliver the improvement and productivity in yield, and then the fourth box which is the elimination or the reduction of the overhead really follows that. So you need to nail the first three and then the fourth follows.

Okay. That's great.

Thank you. That's very helpful Debbie.

The next question from your commentary Debbie, it would appear that clearly your intention is to continue to buy back stock. Should we therefore assume that we should see full execution of the improved MCIB through the balance of the year?

That would certainly be our plan, Irene.

Okay. That's great.

Thank you. And then just finally and again I would like to go back to slide number 4.

The $26 million improvement in prepared niche margin, part of that relates to normalizing market conditions. How much of that $26 million is the normalized market condition, versus if you will, for improved efficiency?

Well, the biggest portion of that is -- well there is two of the contributor that it's about last year's if you recall Irene we had runaway cost in the pork market tight at the CED. So we had margin compression last year, based on just the slope of the increase in the complex in our meat costs.

So the improvement that you are seeing is retied to those two things; a return to more normalized margins and improvements that we have made in the elimination of duplicative overheads.

And then Irene the biggest portion of the 26 is related to the reversal of the compression in margin and they are returning to more normalized margin and then a smaller piece of 26 million is the elimination of the duplicative overhead.

Hey, good morning. Just wondering if you could talk a bit more about the retail environment; clearly promotions have picked up following your price increases of last year and obviously how prices coming off just significantly.

But could you just talk about the environment, where you might still have some room to grow in terms of volumes or catch up. And then what you are seeing in terms of the relative level of competition from U.S.

competitors as it relates to obviously the big move in the Canadian dollar?

Okay, great question. I would say that the answer of that is in terms of our volume we are very satisfied with the progression that we have made in the recovery of our volume.

The impact of the shock actually of the pricing and the impact of that across the industry last year did translate into some, what we described as short-term volume impacts. So our approach was to be patient in terms of the volume recovery.

So what we'd seen in the second quarter is essentially a return to largely the volumes that we had a year ago. With respect to your question on the impact of the dollar, the impact of a weaker Canadian dollar for us is essentially is a good thing overtime.

What it does is, it creates opportunity for us in the U.S., and we do some business in the U.S. And also makes it much more difficult for U.S.

competitors here. So what we are seeing largely is opportunity.

Recovery to this point hasn’t been driven by the FX, but FX could have impact in the future which takes quarters. It's not the current scenario as we have seen the dollar decline pretty rapidly recently.

But improvements in volume or opportunity for volume is, if that's your question, will be more long-term as the market adjusts the differences in the FX between Canada and the U.S.

And do you feel like your market-share has moved dramatically from this point a year ago?

Well, our volume recovery is, we are satisfied with our level of volume recovery and our market-shares have largely recovered to where they were a year ago.

Okay. And then could you just comment on the export business?

I think there is a recovery there as well into Japan, where are you guys at with that?

Well, our margins to Japan have improved. That is a very volatile market, it is competitive.

There were some dynamics in the marketplace earlier in the year with the U.S. pork closures.

But for the most part, our margins have improved. But that's a fluid dynamic.

We managed to margin over -- we have been in that market for many years and we managed to do a margin that we expect in our business overtime.

So there is still room to improve?

Well, as I said our margins in export or part of our structural margin here and our approaches and this is something we have been in for many-many years is we manage to margins overtime. So I would say largely our margins in our pork business for export are above where we'd expect them to be.

Yeah. Hi.

Can you just comment on some of the pricing comments that you made in your MD&A? Did you guys take some of the pricing down in more price center of categories or was it sort of across the border products we did in the quarter?

Yeah. I think two things; largely the lower pork markets have been offset by FX.

But for example in the category of bacon which is a highly promoted category, we have had to make adjustments to be reflective of the market and that's showing in our volume recovery. So where there's been some the pork market moves in varying degrees by cut, so for the most part our margins have normalized to where we would expect them to be and we need to be responsive to market.

So in this case in the bacon category we have had to -- we responded according to the market conditions.

And I am assuming all of your competitors have certainly matched pricing?

Yes. It’s a very highly watched category with our customers and with our competitors, so we believe our market share and our margins reflect the fact that we’re competitive in the marketplace.

And can you just, if you can give us an update on the plan to distribute or deploy capital. Is there, can you just give us an update on the timeline or the sequence of things that need to happen before you look at to do that?

Derek, I think what we said is that there is no defined timeline. We’re working through this.

We have made some steps so once you know we increased our dividend and now we have some activity around the normal course issuer bid and buying shares back, and we’ve bought 2.7 million shares back to-date. But our job number one here is to finish the transformation work.

We are looking at growth opportunities beyond that and clearly there will be requirement for a capital for that. But beyond that, there is no defined timeframe.

The Board is working through it at a pace, somewhat slower pace as we complete job number one and then move towards our new platform of growth.

Few things or I guess, just to be clear, on the margin, I guess what you’re saying is that all the market factors are back in place. So I guess if your new plans were running at the proper specs you’d be at a 10% or above I guess right now given the current market?

That’s exactly spot on Michael.

When you talked about volumes being largely restored in Q2, was that throughout Q2 or is it just by the end of the second quarter? Like did you actually realize all of the recovery on average during the quarter or did you only hit that by the end of the quarter?

Well, I’d say the way to characterize that is, we got more momentum as the quarter went through. So, in aggregate were our volumes for the quarter is largely restored, but there were some momentum for that through the quarter.

And then in earlier calls, you’ve talked about the Raise Without Antibiotics and the opportunities maybe even to get those products into the U.S. Can you talk to us a a little bit of where you are with those products both in pork and in poultry and whether what kind of success you’ve had with those kind of types of products, both domestically and prospects into the U.S.?

RWA or Raise Without Antibiotics as is known in the U.S., are a fast growing meat segments both here and in the U.S. We have a number of RWA products in the market today and we will be increasing these over the coming months in both Canada and the U.S..

So do you have any shipment so these products and the U.S. yet at this point?

Yes, we do.

And when did those start?

Actually it started some was in the fall of last year and we’ve been adding to that through this year.

And then finally, can you just explain, you might have mentioned this earlier, but I missed part of it. You mentioned that fresh pork margins were down.

What was the reason for that?

Largely on by-products, the valuation of by-products, they're a significant part or can be a significant part of the total return and the valuations on by- products are down year-over-year.

So, let me just make sure I understand, so your release say you didn’t hit the 10% EBITDA margin, is it the market environment?

No.

No, not at all. The market environment is pretty flat, Ken.

I misunderstood the question for them, always I’m asking your suggestion, was that the only reason you missed before?

So we didn’t miss our 10%. We’re progressing towards it.

It's how I would frame it. Currently at 6% with four of GAAP to close and now what we talked about in our presentation was about 4% is purely driven by the efficiencies and our new plans.

So will you be able to achieve the 10% EBITDA margin third or fourth quarter?

Well, there is no, it’s Gary Maksymetz. There is no change in our outlook on that.

What we said is that we expect to deliver the 10% in year and that's still our plan.

Is that has been like a full quarter or is it just going to be like the last month of the year and you could say that you hit the 10%, how do you think about it? Like hitting it, what does that actually mean?

I think the way to characterize that Ken is, there are as we pointed out, I think as on slide 6. Right, there is a number of factors that will drive.

The remaining 4% is on getting our yield, the equipment running the way it’s capable of doing, delivering the yields in meat processing, there is a lot of factor that go into meat yields, the productivity and then ultimately the overhead on the cost that we’ve invested in transformation. So those come together.

Those are worth the remaining 4%. We fully expect that those will contribute to the 10%.

Startups of this complexity magnitude are never easy to predict, because it’s a combination of those four things coming together. So we fully expect that we will deliver that GAAP in the balance of the year.

And then just continue on this. You added saying that you’re shipping and I think the shipping is growing from fixing your business.

At 6% EBITDA margin, I trying to think that you’re still in the fixing mode. Unless you guys are close to the 10% margin, it sounds like the time before that your 10% margin maybe a little bit less or not -- I can’t -- your crossing is definitely going to be somewhere in the year, but how confident that you will be hitting the 10% this year and how do you shift from growing when you're kind of still in the fixing mode?

Ken sorry for the confusion, I think the way to look at it is, it’s a series of step. So I think what we said is, job number one is to complete hitting the target of the 10%.

And what we’ve outlined is that we expect to do that in the balance of this year and it all lies in driving in the efficiencies in our new plant. What we were talking about beyond that and clearly that is the fixing achieving job number one.

What we were talking about beyond that is moving from fix to grow. But your point is absolutely correct.

You got to fix before you go. But you have to arrive at these things in a sequence, but that does not mean that we haven’t been giving some thoughts to what that growth platform looks like and how we should be approaching it.

And then just two quick questions. One is what is the magnitude of price declines in each of the categories?

We wouldn’t share specific information by category, Ken.

Okay, I still have a IRI data in Canada, and I’m assuming it’s probably available with Nation, no?.

No.

And what is your full year tax rate expected to be?

So there is no shift there. It is around 27%.

You would've seen a bit of a bump in Q2 and that was a one-time issue around the favorable growing that we achieved actually. But I wouldn’t expect that to be our ongoing rate.

So it’s pretty much as you have it modeled.

Well, thank you everyone. In closing, I think the appropriate perspective I have as well as the team here is that we are very pleased with the progress we made this quarter.

We have a clear pass to what it takes to get to 10% and as well beyond. So thank you for your questions and for your participation.

And you know what; it’s a great long weekend. I would encourage everyone in the calls buy few packs of Hot Dogs and Burgers and continue with us.

Have a great long weekend.