TORONTO – Maple Leaf Foods Inc.’s fiscal 2022 first-quarter financial results are a microcosm of the market for animal-based meat and plant-based meat alternatives. The company’s Meat Protein Group’s performance was strong while the Plant Protein Group’s business continued to struggle, and management is in the process of rightsizing its operations.
Pressuring earnings during the quarter was the “extraordinary instability” around the world, said Michael H. McCain, president and chief executive officer. Events forcing the company to adapt include the ongoing COVID-19 pandemic, inflation, supply chain disruptions and the conflict between Russia and Ukraine.
“We were really clear, and I hope you will agree we were very clear last quarter, that Q1 2022 would be rough, and it was,” McCain said during a May 4 conference call with securities analysts. “We experienced the full force of the unstable external environment in the first quarter. We experienced the extremely high rates of absenteeism due to the omicron variant. We experienced the global supply chain disruptions, the soaring inflation, and it was accentuated by one of the harshest winters in Manitoba weather that we’ve ever felt.”
Those events pushed earnings down for the quarter ended Dec. 31, 2021. Net income was C$13.6 million ($10.6 million), equal to C11¢ (8¢) per share on the common stock, and down from C$47.7 million, or C39¢ per share, the year prior.
Quarterly sales rose to C$1.13 billion ($883 million) from C$1 billion during the first quarter of fiscal 2021.
Meat Protein Group sales rose 7.5% during the quarter to $1.1 billion ($859 million) and was driven by price increases implemented during prior quarters and a favorable mix shift in product sales, according to the company.
Curtis Frank, president and chief operating officer, said the Meat Protein Group did not experience a “trade-down effect” due to the price increases.
“In fact, we grew our branded sales, and we increased our market share in both prepared meats and in fresh poultry,” he said. “We attribute this outcome to the strength of our leading brands and the competency of our revenue management team, who have been working to optimize the consumer response to inflation.”
Plant Protein Group sales rose 5% during the quarter to C$44.9 million ($35 million) on volume growth and price increases.
“While we made progress in growing sales, gross margins were disappointing at a negative 14% in the quarter,” Frank said. “We are spending the time necessary to design and execute a renewed strategic plan for our plant-based business, with a target of being adjusted EBITDA neutral or better in the latter half of 2023.
“We are designing the cost structure to breakeven at the current size of our business of about $150 million, a solid base from which we expect to grow further. We will plan to deliver a gross margin of 30%, which we remain confident is very achievable.”
A barrier to achieving the new strategy is excess processing capacity that was put in place ahead of growth that never materialized.
“As a result, the path to achieving a 30% margin is built on normalizing for this excess footprint,” Frank said. “We will do this by leveraging opportunities to repurpose the footprint into our meat business, along with some minor rightsizing activities at our legacy plant-based facilities.
“The only structural barrier to accomplishing this task is in the new facility in Indiana, which was built to support the tremendous high growth and high margin opportunity in the tempeh category where we continue to have very strong and leading market share positions. Once through the startup phase, which is well underway, we expect volume growth and lower operating costs at this facility will close the balance of the gap.”
McCain added that the company does not “plan on getting out of any material component of our business. So, there’s not top line or category or exit here in any way.”
For the rest of the year management is guiding that the Meat Protein Group will experience mid-to-high single digit sales growth and that adjusted EBITDA margin expansion will reach the lower end of the 14% to 16% target established by the company.