Maple Leaf Foods Inc.

Michael McCain - CEO Debbie Simpson - CFO

George Doumet - Scotiabank Irene Nattel - RBC Capital Markets Michael Van Aelst - TD Securities Derek Dley - Canaccord Genuity Matt Bank - CIBC World Markets Ken Zaslow - BMO Capital Markets

Thank you, Marie, and good afternoon everyone. Thank you for joining us on our Q3, 2016 conference call.

On today's call, we will review Maple Leaf Foods’ financial and operating results for the third quarter of 2016. 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 2015 annual MD&A and other information on our Web site for a broader description of operations and risk factors that could affect the Company's performance.

I will begin with an operations and business overview very briefly followed by, Debbie Simpson, our Chief Financial Officer, who will provide some key financial highlights. And then we'll open the call for your questions.

If you could turn your attention please to slide number two in the presentation deck. We delivered solid result this quarter and it's our third consecutive quarter of double-digits EBITDA margins, with consistency even as we address some headwinds in the quarter.

We again drove strong commercial performance in our value-added pork and poultry businesses. And our trend-lines in prepared meats continues to improve.

We’ve had material year-over-year improvements in our supply-chain costs and efficiencies. And we continue to focus on executing the pillars of our strategy, including leading and sustainability, driving innovation and growth, consistently reducing our costs, and expanding our geographic footprint.

I'll touch more on our operational highlights in a few minutes. But let me first review our financial highlights which include EBITDA margin of 10.3% and adjusted EPS of $0.32 per share doubling from last year’s $0.16 per share.

Turning to slide number three, as you can see, we continued our strong performance improvements versus the year ago. Sales were up 4% for the prior year to $852 million.

Adjusted operating earnings more than doubled to $62 million. Adjusted earnings per share also doubled from a year ago, and adjusted EBITDA was up 51% from the prior year to $88 million.

Turning to slide number four, we continued -- we delivered another solid quarter of financial results as shown in the charts on this page. This quarter represents our eighth consecutive quarter of adjusted operating income improvements, as you can see on the slide.

It demonstrates the performance that we expected from our many, many years of strategic transformation. Turning to slide number five, as I mentioned earlier, this represents our third consecutive quarter, exceeding our EBITDA margin target of 10% that we established in 2010.

As with the last quarter, we delivered an EBITDA margin of 10.3%. We see opportunity to grow that level over-time.

But it is important to mention that our structural margins will be subjective to normal fluctuations similar to our CPG peers. We believe that the proper way to look at our business is in a range of 200 basis-points or in this case 9% to 11% EBITDA margins, and that’s the best way to think about our structural margin level for the time being, a quarterly bandwidth which we believe and the data shows, is very much in line of all of our packaged goods peers.

Our longer term strategic thinking is purposed to expand that structural margin further towards the best-in-class goal. But this 200 basis-point quarterly bandwidth is a reasonable expectation even at the higher structural levels, again, which is in line with packaged goods peers.

We fundamentally shifted the profitability and trajectory of the business, and now we’re focused on the next space. Overtime we do expect our profitability to grow through a relentless focus on cost reductions, through leading an sustainability which really differentiates us in the industry, leading in our sustainable meat portfolio of products, investing in our brands, and expanding our geographic footprints.

Turning to slide number six, I will add some color to the operating highlights and focus. We driven materially better margins year-over-year to a persistent focus on taking out operating costs.

Commercially, we have strong performance in our value-added pork and poultry business. Poultry, we continue to drive growth in retail branded portfolio, supported by our flagship Prime brand.

In our value added fresh pork business, sales of our products have been strong in both retail and export channels. Our strength in value added fresh pork has benefited by the raise without antibiotics categories, which we invested-in over last five years.

We’ve also made continued progress in improving the trend-line in prepared meats throughout 2016. While our volumes were down compared to last-year in the quarter, we have gained ground over the last two quarters in closing gaps.

This was one of our headwinds in the quarter. On the operations front, we’ve made substantial year-over-year progress in eliminating ramp-up in efficiencies at Heritage, the new facility in Hamilton.

However, we did not make as much progress on those efficiency gains as we might have expected or have liked to have done quarter-over-quarter. But we also didn’t expect to move the needle significantly through the summer, because this is a peak season for volume in this facility and truly is not a good time for continuous improvement.

Something we did not call out but is very important is we’ve also achieved a material supply-chain cost improvements in efficiencies. This has been an important driver of the 1,500 basis-points improvement in our margin structure pre-transformation.

We’ve continually made cost improvements across our network. At our bacon facility in Winnipeg, Manitoba, which is exceeding our original expectations, we have now successfully completed additional capital enhancements to meet demand.

Finally, we continued to actively build our innovation pipeline across the portfolio. I spoke last quarter about the successful launch of Canadian Craft.

This quarter we launched a brand new product, an brand called Devour, in the jerky category. I’ll expand on that a little more shortly.

In addition, we continue to grow our Greenfield natural meat company business. Our investment in meeting the needs with responsible consumption consumers, we seek out sustainable meat of options.

After only a very short-time, the Greenfield brand is number one in the Canadian market in this space. Turning to slide number seven, I’ve spoken often before about the importance of sustainable meat, which we see as a competitive advantage for Maple Leaf, and makes us distinctive.

Significant and growing segment of consumers is looking for better meat from animals raised with care, continuous reductions in environmental impact with more nutrition and health benefits, and from companies that demonstrate a greater, societal conscious. Maple Leaf is uniquely positioned at the forefront of sustainable meat, and we’re deploying resources and market development strategies to leverage our advantages in these areas.

There is rapidly growing demand for meat raised without antibiotics. Maple Leaf is a North American leader in pork raised without antibiotics, and we are the largest source of poultry raised without antibiotics in Canada.

We are increasingly excited about sustainable meat as a core growth platform for Maple Leaf, and you will be hearing lots more about this as we ramp-up our differentiation and our growth in this expanding market. Turning to slide number eight, another future growth platform is in alternative snacking.

You heard me briefly speak to the new brand launch Devour on our last call. Our new product introduction aimed at helping us redefine the beef jerky category.

Protein snacking is one of our three primary growth platforms and beef jerky is currently outpacing the overall meat snacking category. Devour addresses this opportunity in a highly innovated way.

Its' early days, but we are very excited about participating in the category in such an important initiative. I'll now turn the call over to Debbie Simpson, our Chief Financial Officer to provide some additional financial information and color.

Debbie.

Thank you, Michael. I'll ask you to turn to slide nine, where you can see the significant year-over-year impact of transformation on our income statement.

I am going to highlight two things. We have increased our structural adjusted gross margin from 12% of sales in Q3 2015 to 16.4% in Q3 2016.

This reflects the successful completion of our prepared meat’s transformation. At the same time, selling, general and administrative expenses, increased this quarter to 9.2% of sales from 8.4% in Q3 2015.

SG&A in our third quarter of 2015 was lower due to downward adjustments in short-term expenses recognition. At Maple Leaf, short-term incentive programs are linked to financial results.

In 2015, we did not achieve our target, and accordingly, we reduced our variable compensation. This year, we are on track to hit our target.

I just want to pause and say, that as a Company, we are laser focused on reducing our non-strategic cost. And we expect that overtime we will continue to aggressively manage SG&A.

This focus in entrenched in our cost culture at Maple Leaf, and a key element to our ability to continue to invest in our brands and people. The net result of this is that adjusted operating earnings improved to 7.2% of sales and EBITDA margin improved to 10.3%.

Moving to slide 10, we generate significant cash flow during the quarter. Cash generated from our operations, operations rose to $176 million compared to $42 million in Q3 2015.

The increase was driven by improved operating earnings and an anticipated seasonal unwind of working capital. Approximately $37 million of the increase related to our open derivative position.

This resulted in an increase in free cash flow of $147 million in Q3 2016 versus $3 million in Q3 last year. Consequently, cash on hand at the end of the quarter improved to $444 million.

Our capital expenditures for the quarter were $30 million compared to $39 million last year. Due to changes in timing, we now anticipate our 2016 capital expenditures to be approximately $125 million for the year.

I will now turn the call back over to Michael to wrap up our remark.

Thank you, Debbie. In closing, we delivered a strong quarter in excess of our strategic 10% EBITDA margin target.

While our results were strong, we’re quite confident that they can get even better as we continue to focus on executing our strategies. We are now focused on the next horizon for Maple Leaf, building on the strategic pillars that we've identified, leading in sustainable meat, driving innovation and growth, relentlessly reducing our costs and expanding our footprint geographically.

With that, I would like to open-up the call for your questions.

You mentioned about 100 basis-points of improvement in structural EBITDA margins. I was hoping you could maybe give us a sense of what specific levers would be pushed there?

And is that something we can get in the next 12 to 18 months, assuming normalized operating environment?

George, you have to clarify for me. You’re saying with 100 basis-points structural increase in EBITDA margin...

I think above and beyond. You motioned a band of 200 basis-points, but you also mentioned I think some further improvements off of the 10% EBITDA margins we’re running out right now?

I think those are two isolated comments, George. So I think it’s -- we have tremendous consistency this year, 10%, 10.2%, 10.3%, that’s a tremendous consistency and the operating results this year and we’re very pleased and proud of that.

I don’t think that’s natural in our portfolio. I think there is -- in line with CPG peers completely the data sets in line with CPG peers.

But there is 152 to 200 basis-point bandwidth quarterly. I mean, it’s quarterly that is reasonable expectation.

And so when we say, we’re at structural 10%, that’s plus or minus, may be plus or minus 100 basis-points quarter-to-quarter. But obviously this year, we haven’t experienced that and there is nothing to suggest that we will in the immediate future.

But it’s important to make sure that everybody understands that in our shareholder communities. With respect to growing our margins, which is moving the structural level higher than 10%, we’re focused on strategies that we’ve identified.

We think over the course of next five years, they will deliver best-in-class margins in the industry. We’ve materially improved them over the last five years, but we have still mileage to go achieve to best-in-class margins in our industry.

And those strategies really are centered on. Number one, leading and sustainability, the benefits of that in the portfolio, particularly around our sustainable meat product offerings, is quite important to us in our portfolio, so that’s one.

By consistently reducing our cost, we think there are many more cost reduction opportunities. As Debbie described, we’re very diligent in our cost culture around SG&A and overheads.

But there is also other cost reduction opportunities from capital deployment in our supply chain. And number three, investing in our brands and innovation, there is many opportunities to both generate growth and margin improvement through leveraging our brands and innovation.

And then finally, expanding geographically, which we think will have the capacity to provide growth, which will expand our margin performance overtime. So those are the big themes George, and we would expect that those can move that 10% margin, structural margin, that we’ve achieved today to new higher level.

But even when we get that higher level, shareholders should expect that there is a natural CPG peer movement around the quarter-to-quarter of plus or minus 75 or 100 basis-points.

And one last one if I may. Can you maybe provide us some commentary on seed opportunities, maybe from a risk-reward standpoint?

So, I believe we’re the low cost producer versus Europe, right?

We don’t see that’s a big opportunity for Maple Leaf, it will be for other participants in the Canadian industry, but not so much for Maple Leaf. It's important to understand that our business -- we’re really not in the fresh pork business for the purpose of being in the fresh pork business.

We try not to participate in the commodity markets. We only sell in international markets to the extent that it’s a value-added sales disposes of surplus meat that can’t be utilized in our processed meat supply-chain.

And frankly, if there is an opportunity opens-up and see that it would have to be a better value-added margin sustainably than what we enjoy today. So, we’re not out walking around world trying to find commodity meat opportunity, that’s not who we are.

Michael, I was listening to your commentary today, and it's quite clear where your areas of focus are on a go-forward basis. And you did mention several times geographic expansion and want to get bigger on the sustained meat piece.

And I guess my question really is, as I look at that, and I look at the $444 million worth of cash on the balance sheet and no activity on the NCIB. I'm trying to understand how big these opportunities might be, or how much capital you think you might be prepared to or need to invest to get from where you are today to where you would like to be?

That’s a big, big, big question, with lots of scope to your question, Irene. So I will do my best to synthesize that into simplified answer.

First of all, I think it’s a mistake to look at our cash position, or strategic moves in M&A or capital deployment on a quarter-to-quarter basis. I think that’s just not how capital deployment should be.

I think manage in these situations. Windows open, they don’t open to your meat, there are sometimes long lead-times and developing opportunities, timing is often fragile, and so on and so forth.

So, I think quarter-to-quarter focus, it’s not an operational game when you’re dealing with business development of that nature. So, quarterly assessments, Irene, I think can lead down to lot of ravels.

Having said that, your questions are good, but we have no intentions of perpetually running a lazy balance sheet. We like certainly comfortable to be and work to have a fortress kind balance sheet, but that’s not what we would choose to be.

And our focus on deploying that capital isn’t in one initiative, it's in a suite of initiatives, and geographic expansion is one of them. I’ve said many, many times before, we are not elephant hunters.

We have a range of strategic initiatives that all have the ability to consume responsibly, which consume capital unless by responsibly, I mean, with a reasonable risk profile and very significant shareholder returns. Geographic expansion, which you highlighted certainly one of them, you certainly -- there’re lots of opportunities, for example, in other markets around the world to deploy capital and acquire assets.

We certainly are looking at all those opportunities. We’ve obviously not come to any conclusions.

But you know about it. But we continue to look.

We continue to evaluate and talk about, and pursue various options in that regard. With respect to the size of them, obviously that’s dependent on the market.

You go into the U.S. market, for example, what we would consider smaller share is just have to add a zero to it in the U.S.

marketplace. And so I think that would be something we would be interested in.

I am not going to quote a number for you. I think you can do that match yourself.

But, I don’t see, I certainly don’t see one -- any one event or action consuming the both of our available capital capacity. It will be likely a suite of actions that we engage in over the course of the next several years.

I am not sure, that's the color that you are looking for, Irene. I didn't specifically answer your question, I can't.

Obviously, I can't specifically answer your question, as you might desire in the world of M&A opportunities or capital deployment opportunities. But as a general theme, the strategies haven't changed.

The themes haven't changed. And I think that's how we're thinking about it, if you will.

No, and that is very helpful. Thank you, Michael.

Just on this subject, when it comes to going into new markets, is your preference to go via M&A? Or, for example, would you look at a Greenfield set up in the U.S., something involving sustainable meat?

Not asking you to commit to it. Just saying is that something you would consider?

Yes or no

The short answer is it’ll likely be both. We are increasing our business in the U.S.

marketplace around sustainable meat today. We have a sales force on the ground.

We have a broad customer distribution. We've got distribution of the Greenfield Natural Meat Company brand in some very significant retail outlets in America today.

I think in excess of 3,000 points of distribution in fact, a greater than the number of distribution points that we have in Canada today. So, we are continuing to do that.

But it's always important to recognize that Greenfield development in the U.S. marketplace like that it’s a very slow build.

Are we interested in platforms that would accelerate that? Absolutely, so I think the answer is both.

And then if I could just return to the quarter for a moment, please. You noted on the prepared meats side that the trend continues to improve, but that volumes are still down.

Do you still think, Michael, that what we are looking at is a typical three to four quarters of pass-through economics before we get back to where volumes were a year ago?

I can’t say that for certain, Irene, and we’re certainly contingency planning for that. I don’t think it’s structural in the sense that it will impair our ability to deliver our targeted or better results.

But I think we have to be prudent. We are looking at it in the context and most people in the call here would have access to publically available information that suggests that in the United States and in Canada, some of our key categories had more recently been down by, down in volume to a small degree, so just in term of consumer consumption.

But we think that that’s completely addressable. We’ve seen that in other situations, other market conditions before, and we’re certainly approaching it on the basis that that can be addressable through our marketing initiatives, addressing specifically consumer needs.

But it’s not a secret that in both United States and Canada some of our core categories in the last six months have been very mildly, very small amount have been down slightly.

And just one final one, housekeeping question on CapEx. The $50 million reduction in the MD&A, you noted that a lot of it is timing of projects.

So is it reasonable to assume that whatever the CapEx budget would have been for next year, it will go up by a similar amount?

I wouldn’t assume that, Irene. These things you saw in the one direction, when you time and manage to do a number of projects, there’s only so many things you can in a window.

So I wouldn’t assume that while we don’t get to this year necessarily gets added on to next year. It’s more a case of specific to that project and timing and capacity to do that project.

So it’s not an automatic add-on to the next year.

That’s very helpful Debbie, thank you.

I mean one other comment with respect to the market categories that I’d like to highlight is, notwithstanding some categories that you’ve referred to that have had volume challenges in the last six months we’ve had every bit of an offset to that in positive way in some of our value-added branded fresh portfolio. And we’re very -- more than happy about that.

In our branded poultry offering, Maple Leaf Prime, our Mina brand, have all been extraordinarily positive. Our RWA offerings in fresh, sustainable meat offerings in fresh meat, has been very positive.

So we’ve had actual volume, positive volume outcomes in other parts of the portfolio. So that gives me the confidence that.

We do have -- we’ve got a balanced portfolio, and the consumers will respond in different categories at different times.

So you mentioned some headwinds, but I'm not quite sure if you finished your thought on it or not. So in the headwinds, I think you touched on the fact that the prepared meat volumes are still below last year but improving.

And then I guess you are also probably commenting on some of the -- not getting all of the inefficiencies out of the plans still. Is there anything else that you didn't touch on?

No those are the two.

Okay.

But the reality is we were very happy with the results we delivered in the quarter. We’re also, I think, we are candid enough to say that we could maybe do even a little better than that in the quarter looking back, and those are a couple of things that great result, could have done better.

And then on the new products, Devour, Canadian Craft, and Greenfield, you gave us a little bit of details. But can you give us -- can you elaborate a bit more on how some of these product launches are performing?

And I guess the importance of them in your portfolio in terms of size?

Individually, they are not material to the overall performance of the portfolio, in their early days. It usually takes years to drive a meaningful successful portfolio.

But collectively, they are valuable. And innovation pipeline is about launching dozens of new initiatives, small and medium size and large and the collection of them, Michael, tends to drive a successful outcome.

The old metrics in branded packaged goods in the United States, in the U.S. marketplace most brand growers will tell you that if you’ve got a 100 -- if you hit a $100 million threshold, you got a clear win in your hands Canadian equivalent and that would be a $10 million win.

And you’ve got a clear win in your hands. But you can imagine it takes many different $10 million successes to move the needle for a company the size of Maple Leaf.

And on the bacon capacity expansion, have we started to see that in Q3? Or does that just get completed later in the quarter?

I think you saw portion of that in Q3, some portion. And you’ll see that continuing with the balance of the year and into next year.

And then, with the RWA, to what extent have you made more progress in selling a greater percentage of the hog as RWA finished product?

We’ve actually made excellent progress. And we’ve got a pipeline full of customer opportunities that will continue to move that metrics through till the end of next year.

And we’re going to work hard and are continuing to work hard at increasing our supply of raw materials. So, our supply is increasing and our utilization is increasing.

But how should we think about that as you increase your supply? Are we going to see some margin dilution initially until you can get the product out?

Or are you at the point now where -- until you can sell more of the hog from as RWA? Or are you at the point now where the demand is pulling it -- pulling you into, I guess, ramping up that supply?

No, I mean there’s -- in aggregate, our investments are profit accretive today, and will increasing this up. Important to note, and we are the number one supplier of sustainable meat and RWA pork in North America today, not just in Canada in North America.

And that today is contributing to our bottom-line and is going to continue to grow, and improve our profitability over the next five years.

And a question for Debbie. So in Q3 the SG&A had a tough comparison because of the reversals of the bonuses last year, short-term bonuses last year.

Is there anything in Q4 SG&A last year that we should be aware of?

Yes, so Q4 last year was an unusually low number, Michael. I think you might have spotted that.

So if you're looking for what you think we should be doing for the balance of this year, I would take it more on the basis of what we being run rating for this year versus comparing it to Q4 last year.

Okay, thank you.

Structurally we're in the 9.5% range, that's -- it will bounce around quarter-to-quarter, but structurally that's why we’re at.

Can you just comment on some of the marketing initiatives you guys are doing around your new brands? And is it safe to assume that some of the efficiency gains that you may get over the next couple of quarters will be invested back into SG&A to grow the new brands that you are launching?

Yes, we've done that this year, actually. Derek, that’s a great question.

We've as we -- our strategy and Debbie articulated this is that we're going to continue to grind down cost and eliminate all the inefficiencies and waste that we can find. And that's a continuous process, it's not an event.

And as we do that, our intention is to reinvest those savings in growth initiatives, primarily supporting our brands and our people. Some of the specific initiatives this year, we had a large fleet of new product launches this year, Canadian Craft in the second quarter, Devour in the third quarter, very important new launches.

Those are obviously costly, that was funded by that. But we also had some important promotional initiatives this year highlighted by our relationship with the Blue Jays, and more recently, on the Maple Leaf brand, the Raptors, two of our favorite teams.

We've also been -- we also are leaders, I think, in digital marketing Derek. So, we have, I think, a digital marketing team that is best-in-class, and they are migrating and increasing portion of our promo investment into the digital space.

It includes obviously social media, but also really managing search marketing tightly. And so whether it's videos in YouTube, various social media activities, we’re I think one of the largest or most frequently visited Facebook sites today in Canada.

In the food industry, we’ve got very active Instagram marketing, Twitter activity is strong, but also really working hard at -- in managing search engines to our benefit. So you know all those things combined, Derek, they support our premium brands and they support our premium margins, and we’ll continue to build on that.

And you mentioned at Hamilton Heritage facility, there is still some inefficiencies to go. You may not have realized them this quarter obviously being a heavy volume quarter.

Can you quantify the amount of inefficiencies left, or where you are at in that process and getting that to design capacity?

We discontinued identifying that when it became less, if not material to our results. And so I don’t want to open up that can of worms again, Derek.

This is a very -- there is a lot of artfrom that goes into the measurement variances and standard setting, and so and so forth. But suffice to say that there is still more room to improve in that facility.

We’ve made great year-over-year, fantastic year-over-year improvement. Didn’t make for the reasons you identified, it's very difficult to make continuous improvement when you’re on the heat of the summer moments.

Your volumes are really significant relative to the balance of the year, continuous improvement is not ideal in that environment. So we didn’t make as much quarter-over-quarter improvement as we’d like.

And then just on the reduction in CapEx, I believe, you guys had about 60 million or so, 60 million, 65 million in growth CapEx initiatives slated for 2016. Were some of those part of the deferrals that we’re going to see into next year and beyond?

In part, yes, Derek, you’re absolutely right. Some of the timing on some of those projects, it’s just been pushed back a bit.

Some of them resulted by picking the right timing and having the right options in place to make them happen. So they’re not off the list, they will actually happen, which is already.

With commodity costs volatile, but lower overall, in particular, bellies. How are you looking at the balance of pricing versus volume?

And have your retail partners looked to take advantage of lower costs to drive traffic?

Your question is how are current market conditions influencing volumes, is that your question, Matt?

Yes, and sort of with -- if lower costs are being used to push lower pricing to drive traffic at the retail level by the grocers and the other partners?

Well first of all, there is a lot of moving parts to your question. Let me start with, yes.

The commodity markets are lower today than they were, say a year ago. But there is also a Canadian dollar currency story offsetting that.

So the commodity markets influence in Canadian dollars to our customers is not exactly in line with what you might observe in movement of the commodity markets. So, we sell our customers in Canadian dollars, and the markets that you’re tracking are in U.S.

dollars. Number two is we have inflation in other areas of our business that obviously continues to -- we have to pass that on in responsible pricing in the marketplace.

So we have to price for that earlier in the year. Obviously, the most volatile of all them happens to be in the belly market.

Bellies, which is the core raw material for bacon, has been extraordinarily challenging this year because we’ve had tremendous volatility in the belly market, underlying bacon pricing in the marketplace. I can tell you that from peak to trough, it went from $40 a pound to $80 somewhat cents of pound back up to a $10 a pound, which is an interesting environment.

Obviously, because of our brands and our brand portfolio and the stability in our business, we insulate ourselves from that to the degree possible. But it makes this particular year for all the brands in North America, the premium value-added brands in the marketplace that kind of underlying raw material volatility has been -- is challenging.

And the last ingredient to that mix is the fact because we operate in brands in the branded space predominantly we end-up forward pricing. We end-up forward in these markets to a much larger degree than the commodity players or private labels, and we hedged that raw material cost in the forward pricing.

So, again, that insulates us from some of it. We have much less movement and are pricing in the marketplace.

Having said that, we are seeing more activity coming into the fourth quarter as we get passed all of that volatility into a more stable, lower area, specifically for -- in the belly and I think you will see more aggressive pricing in bacon in the fourth quarter. And we're hopeful that that will be a contributor to our volumes in the quarter, but recognizing as -- we’ve got a broad suite of products.

We've got the hot dog category and sliced meats and deli products, and we've got poultry and turkey. And so there is a total suite of products looking at the volatility of one small segment like bacon, sometimes can lead to inappropriate conclusions.

Long answer to a complicated question. But hopefully, that gives you some color.

How much capacity for volume growth is there in the refresh plant network overall as it sits now? And if you were to exceed that, what would be the lever to support growth?

When we built the new network, Matt, we built that network with the principle of sizing the chute to fit. AKA, we did not build material excess capacity.

Having said that, as very good operators, it's our job to find extra capacity as the market needs. Obviously, coming into this quarter and with volume being down a bit, that's not at the top of our -- that's not top of our needs list, if you will, right now.

But we are optimistic that over the next five years our growth will seek out more capacity in the existing network. And while we didn't engineer material excess capacity, we as responsible operators and we're pretty confident we can find -- squeeze extra capacity out of the assets that we have.

I don’t know that I could give you a number to model, however, in line with that. Good example of that is in the bacon facility.

If you look at one of our assets, Western Canada, the bacon facility in Winnipeg overachieving business case doing extraordinarily well. We've made very small investments to basically tweak the output of that facility, post realization of the business case results.

And then just one quick last one and I may have missed this in the prepared comments. But working capital was quite positive in the quarter.

How should we look at that in Q4?

Did you say was quite positive in the quarter?

That’s what I’m wondering...

Yes, so that could be expected. So Q3 and Q4 are quarters in the year where we spend two-three upward working capital so it was on a range where we would expected.

And then I wouldn't say it's unusually high or low, it's just where we are in the space in the season.

So just trying to think about it in terms of the margin structure, because you did say -- and from -- I think it was page five, that margins kind of got in that 10.3% range and it's been stable. Do you think of yourself as in an investment mode right now, that anything that you would get in excess of 10%, you would invest into the growth initiatives?

And is there a period of time that you think that that will start to pay-off and then get some favorable operating leverage? Is that the way you think about it?

Or is that kind of off-kilter?

I think we are in investment mode. But I don’t know that you should expect any compression of our margin structure to accomplish that.

No, I wasn't asking about compression. Because it kind of seems like it levelled off.

So it seems like if you are getting access margins, you are reinvesting that to eventually get the volume growth, which will get you operating leverage, which would then take the next step-up in margin structure. Is that so...

No, I am not sure I would think of it that way. I can't.

I don’t think that we necessarily have, in the moment, I am talking right now as we discussed this, have significant excess margins that we're reinvesting. I think today, we have significant excess margin that we wish we could tap into if we had full recovery of our volume and full expectation of our business case results in the Heritage facility.

And our number, by definition, would have been higher than 10.3% in the quarter. But that's not reinvesting in future growth.

I think our desired reinvestment future growth is going to be pay as you play in the sense that we're continuing to drive cost down in our SG&A structure, for example, and we intend to, as we did this year, we significantly increased our promotional investments in our brands and our investments in our people, and a few other areas sustainability in a few other areas. But that's a consequence of redeploying the savings in our SG&A structure that we can find.

So I am not sure how you’d label that or characterize it. But those are the moving parts.

Okay, well thank you very much. We’re very pleased with how 2016 is unfolding.

We fully expect to have a year of what we committed to many, many years ago, double-digits EBITDA margins and where we take great satisfaction from that. But we’re equally focused on the fact that there is a lot more to do and a lot more to accomplish, and bigger hills to climb over the next five years.

So, thank you for your support. And we look forward to updating you on the next quarter.