Maple Leaf Foods
Annual Report 2019

Plain-text annual report

Our Purposeful Journey 2019 ANNUAL REPORT Sales(i) (In millions of Canadian dollars) 2017 2018 ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. 3,522 3,496 Sales(i) (In millions of Canadian dollars) 2019 2017 2019 Consolidated Financial Highlights 3,496 2018 3,942 3,522 Sales(i) (In millions of Canadian dollars) Sales(i) (In millions of Adjusted Canadian dollars) EBITDA Margin(ii) (iii) (As a % of sales) Adjusted EBITDA Margin(ii) (iii) (As a % of sales) Adjusted EBITDA Margin(ii) (iii) (As a % of sales) Adjusted EBITDA Margin(ii) (iii) Capital Expenditure (As a % of sales) (In millions of Canadian dollars) Capital Expenditure (In millions of Canadian dollars) Capital Expenditure (In millions of Canadian dollars) Capital Expenditure (In millions of Dividends per Share Canadian dollars) (In Canadian dollars) Dividends per Share (In Canadian dollars) 2019 2017 2018 2019 2017 2017 2018 2018 2019 2019 2017 2018 2019 2017 2018 2019 2017 2017 2018 2018 2019 2019 2017 2018 2019 2017 2018 2019 2017 2017 2018 2018 2019 2019 2017 2018 3,942 3,522 3,496 3,942 3,522 10.8 3,496 9.9 3,942 8.1 10.8 9.9 8.1 10.8 9.9 8.1 10.8 9.9 10 8.1 83 129 170 188 129 13 13 Base Capital Construction Capital(ii) 188 129 13 83 Base Capital Construction Capital(ii) 170 170 170 10 10 10 188 129 13 83 Base Capital Construction Capital(ii) 0.44 188 0.52 83 Base Capital Construction Capital(ii) 0.44 0.58 0.52 Execution of key strategies in meat and plant protein drove accelerated growth in 2019 Decline in margins due to intentional strategic investment in plant protein and unfavourable fresh market conditions Increased investment in strategic projects to gain efficiencies and build capacity, while base investment remains relatively stable Fifth consecutive year of dividend growth, underscoring commitment to shareholder return 2017 sales exclude the impact of the adoption of accounting standard International Financial Reporting (“IFRS”) 15 – Revenue from Contracts with Customers (“IFRS 15”). (i) Dividends per Share (In Canadian dollars) (ii) Refer to section 32 of the 2019 Management’s Discussion and Analysis for a definition of this Non-IFRS measure. (iii) 2019 Adjusted EBITDA Margin includes the impact of the adoption of the new accounting standard IFRS 16 – Leases (“IFRS 16”). Refer to Note 3(w) of the 2019 annual audited consolidated financial statements for further details on the impact of the adoption of new accounting standards. 2019 2017 2018 0.58 0.44 0.52 Dividends per Share (In Canadian dollars) 2019 2017 0.44 0.58 2018 0.52 2019 About Maple Leaf Foods Inc. Maple Leaf Foods Inc. is a producer of food products under leading brands including Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift®, Lightlife® and Field Roast Grain Meat Co.™ The Company’s portfolio includes prepared meats, ready-to-cook and ready-to-serve meals, value-added fresh pork and poultry, and plant protein products. The address of the Company’s registered office is 6985 Financial Dr., Mississauga, Ontario, L5N 0A1, Canada. The Company employs approximately 13,000 people and does business primarily in Canada, the U.S. and Asia. The Company’s shares trade on the Toronto Stock Exchange (MFI). 0.58 For more information, please visit mapleleaffoods.com i Sales (In millions of Canadian dollars) 2018 2019 ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. 139 176 Segmented Operating Results Sales 2018 (In millions of Meat Protein Group Canadian dollars) 2019 Sales (In millions of Canadian dollars) Gross Profit (In millions of Canadian dollars) 2018 2019 2018 2019 Adjusted EBITDA Margin(i) (ii) (As a % of sales) 2018 2019 Adjusted EBITDA Margin(i) (ii) Sales 2018 (As a % of sales) (In millions of 2019 Plant Protein Group Canadian dollars) 2019 2018 Sales (In millions of Canadian dollars) Gross Profit (In millions of Canadian dollars) Gross Profit (In millions of Canadian dollars) 2018 2019 2018 2019 2018 2019 3,357 3,778 3,357 3,778 35 9.9 10.4 9.9 10.4 176 176 139 139 Strong commercial performance and contributions from acquisitions driving 39 growth Strategies delivering structural margin improvement despite volatile fresh markets Accelerating growth driven by distribution gains for new products and strong velocities Stable underlying margins offset by short-term start-up inefficiencies to support higher growth 39 39 35 35 (i) (ii) Refer to section 32 of the 2019 Management’s Discussion and Analysis for a definition of this Non-IFRS measure. 2019 Adjusted EBITDA Margin includes the impact of the adoption of the new accounting standard IFRS 16. Refer to Note 3(w) of the 2019 annual audited consolidated financial statements for further details on the impact of the adoption of new accounting standards. Table of Contents 2019 Consolidated Financial Highlights i | Segmented Operating Results ii Message to Shareholders iv | Message from the Chairman viii Corporate Governance and Board of Directors ix | Senior Management and Officers x 2019 Financial Review xi | Management’s Discussion & Analysis 1 Independent Auditors’ Report 40 | Audited Consolidated Financial Statements and Notes 42 Corporate Information Last Page ii ii “ At Maple Leaf Foods, we have embraced the principle of shared value and are on a purposeful journey to become the most sustainable protein company on earth by Raising the Good in Food.” ii iii ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. Message to Shareholders ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. Michael H. McCain President and CEO Our Purposeful Journey Distinguished Harvard Professor and thought leader Michael Porter observed that “Shared value is not social responsibility, philanthropy, or sustainability, but a new way for companies to achieve economic success.” But, long before the concepts of inclusive capital became mainstream, Maple Leaf Foods was embracing this ethos as core to our business strategies. We began raising hogs without antibiotics nearly 15 years ago, committed to being leaders in open housing for sows over a decade ago, launched our aggressive sustainability emissions reduction plans six years ago and laid the framework for our leadership in food security five years ago. Our roots are embedded in the belief that the path of shared value finds opportunity in the intersection between the needs of society and the unique capabilities of the business to create value for all stakeholders. This transformational thinking highlights the imperative of integrating social performance into the fabric of business strategy to deliver long-term value for shareholders. At the same time, it challenges the conventional obsession with short-term financial results and seeks to displace a narrow model of value creation. At Maple Leaf Foods, we have embraced the principle of shared value and are on a purposeful journey to become the most sustainable protein company on earth by Raising the Good in Food. In 2019, we made purposeful and deliberate business decisions intended to create long-term value for our shareholders, for society and for our planet, all aimed at delivering shared value. We believe our Company’s financial health and competitiveness are intertwined with the health of local, national and global communities, and with the imperative of supporting a sustainable environment. Recognizing and leveraging this interdependence is a powerful means of creating progress for all stakeholders. We delivered strong results in an unusually eventful year of headwinds marked by trade disputes, China’s four-month suspension of pork imports and the spread of African swine fever. These headwinds contributed to unpredictable performance swings throughout the year, which are not typical in our business. In 2019, we reported sales of $3.9 billion, an increase of 13%, which demonstrates our pivot to a growth mindset as we delivered top-line performance in both our platforms: 12.5% in meat protein and 27.3% in plant protein. We have created growth vectors in each of these segments which are exciting and sustainable. In 2019, the most significant milestones on our purposeful journey included: • Becoming the first major food company in the world to be carbon neutral NOW! • Adopting science-based targets for emissions reductions • Continued growth in our sustainable meat portfolio • Pivoting to a long-term model of investment for revenue growth in plant protein • Advancing the impact of the Maple Leaf Centre for Action on Food Security iv ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. “ In 2019, we made purposeful and deliberate business decisions intended to create long-term value for our shareholders, for society and for our planet, all aimed at delivering shared value. We believe our Company’s financial health and competitiveness are intertwined with the health of local, national and global communities, and with the imperative of supporting a sustainable environment. Recognizing and leveraging this interdependence is a powerful means of creating progress for all stakeholders.” Financially, the pivot to “invest for growth” in plant protein was a conscious choice to sacrifice short-term profitability in favour of seizing on the opportunities we see in this category over time, together with our unique position to take advantage of those opportunities. We think of it as investment through the income statement rather than through the balance sheet, but investment nonetheless, and one with the prospect of very attractive returns. The opportunity is enormous as our analysis and industry experts predict this category will grow to exceed $25 billion by 2029. Our plant protein business is uniquely positioned in the category, with leading market shares and brands already in distribution throughout North America. We are leaders IN the space – not just “thinking about entering” the space! Brand and category development is in Maple Leaf’s “wheelhouse of skills” and we will leverage this expertise to build on our market position in this exciting new opportunity. Our goal is to organically create a highly profitable $3 billion plant protein business over the next decade! What a remarkable outcome that would be for all Maple Leaf stakeholders. Maple Leaf Foods is investing in the Darkwoods Forest Carbon Project, consisting of 135,400 acres of unique land features and species near Creston, British Columbia. v Now with two significant platforms, one focused on profitable growth in meat protein and one focused on investing for revenue growth in plant protein, we began reporting our results by segment. We believe segmented reporting provides our shareholders with greater understanding of the strategies and performance in each of these businesses. We encourage you to look at these two segments distinctively, with different financial metrics and unique business success factors. For the year, our meat protein segment delivered 10.4% Adjusted EBITDA margins, up 50 basis points (bps) over the prior year, while absorbing the impact of difficult and unnaturally volatile market conditions which produced headwinds of 110 bps. This speaks to the underlying strength of the business. Our goal is to expand these margins to 14%–16%, while simultaneously growing the top line. Our plant protein segment logged 27% sales growth for the year, against a long-term strategic target of 30% annually. Our category, brand, innovation and investment strategies are built to support this target. On a total company basis, we delivered an 8.1% Adjusted EBITDA margin for the year. However, we believe this is a less relevant financial metric today, given the increasing investment and strategy pivot in plant protein. The world of protein production and consumption faces a revolution, and one we are uniquely positioned to lead and leverage. While in some corners, meat production faces attacks for its environmental footprint, we see this as an opportunity to embrace change. Eating meat in moderation is a responsible position to adopt on every level, but fundamentally altering a dietary inclusion of animal protein in human consumption – a pattern that has existed through the millennia – is unrealistic. The better path is to “fix it!” Clearly, we face an environmental crisis that must be solved with urgency. The food system must pivot from being a material contributor to this crisis, to becoming one of the most significant solutions available. This is possible, we embrace it, and we are leading the change. ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. in 2017 and 2018: Lightlife Foods® and Field Roast Grain Meat Co.™ Building on the strong foundation that each of these businesses had when acquired, we have transitioned into hyper-growth. We are making focused and disciplined investments in innovation, brand development, organizational capacity to deliver growth, and supply chain infrastructure. These investments are as significant as they are deliberate and designed to fuel top-line business growth as the category expands exponentially and as product innovation occurs at an extraordinary pace. We are facing this with the organizational imperative for extreme agility. Of course, a business model based on these levels of investment and growth requires prudent risk management, and we constantly have our eye on that both in terms of brand investments and capital investments. To this end, in a world-leading step, Maple Leaf Foods last year became the first major food company in the world to be carbon neutral NOW! Overall, our carbon strategy follows the core principles of responsible management: avoid, reduce, replace, offset. Our first goal was set many years ago and brought us to our current position: a 50% reduction of our footprint by 2025. We are on track to meet that goal. In 2019, we upped our game, becoming one of only 290 companies in the world at that time to have science-based targets (Scope 1, 2 and 3) approved for greenhouse gas reductions by 2030. Science-based targets are globally administered and aligned with the goals of the Paris Agreement on climate change. Importantly, they require that we reduce our emissions even as we grow, and that’s where our journey will continue. Finally, in the progressive move to carbon neutrality and consistent with the carbon management hierarchy, we have committed to invest in 10 high-impact environmental projects to offset remaining emissions that we cannot yet eliminate. This brings us to carbon neutrality, a position we will maintain in perpetuity. These third-party verified projects are located throughout Canada and the U.S., many near locations where we operate. Over time, we believe these initiatives will be lucrative for the business as they force us to face the truth of waste, inefficiency and resource usage. The internal “price on carbon” we have established will guide all our capital decisions and operating practices moving forward. We are already realizing near-term benefits as we became the first company in Canada to secure sustainability-linked terms for our credit facilities that reduce the interest rate on the lending facility as we meet key sustainability targets. Additionally, we intend to aggressively market our carbon position in the belief that consumers will reward this behaviour in the marketplace. For clarity, we have committed NOT to raise our prices to cover our cost of carbon neutrality. Sustainable meat – a category that Maple Leaf has led in both defining and developing throughout North America – continues to deliver exciting market opportunity with our support. It includes the planetary benefits of carbon neutrality, but also leveraging growth in meat raised without antibiotics and supporting our commitments in world-leading animal care. This protein revolution is also appearing in consumer behaviour. At its core, consumers in North America want more protein in their diet, not less. But they want more choice, they want to be responsible about those choices and in choosing more, they tend to favour plant proteins as part of a flexitarian diet. This is not a rejection of meat, but rather reflects more balance in diets. We see it as “additive protein,” not “alternative protein.” We have participated in this trend for well over five years, culminating in two critical acquisitions vi Philanthropy and corporate social responsibility focus on “giving back.” By contrast, our pursuit of shared value creation means we seek a meaningful role in solving social problems where we have a unique capability to engage. Over four million Canadians struggle with food insecurity and our attempts to address this crisis both in terms of public policy and private sector engagement have been inadequate, at best. In late 2016, we launched the Maple Leaf Centre for Action on Food Security with the bold goal of working collaboratively to reduce food insecurity in Canada by 50% by 2030. Through the Centre, we work with partners in communities across the country, providing resources and expertise to support the most innovative and effective actions being taken at the ground level. The Centre is increasing its impact as a collaborator, a convenor and an advocate. This work is deeply integrated into our goal of building a sustainable and inclusive food system. I am proud of our Company at this critical point in history. We are unabashedly ambitious, resilient and ahead of the change curve. With a team filled with industry’s best people and a widely recognized culture of integrity with high performance, we are indeed on a purposeful journey to Raise the Good in Food. Trust is the currency of future generations. The voice of the next generation, led inspirationally by the likes of Greta Thunberg in her climate activism, rings true and loud to everyone at Maple Leaf Foods. We will be the most sustainable protein company on earth. How will investors feel about this commitment to shared value? Ask Larry Fink, CEO of BlackRock, head of the largest asset manager in the world. He wrote in his annual letter to CEOs: “Companies must be deliberate and committed to embracing purpose and serving all stakeholders – your shareholders, customers, employees, and the communities where you operate. In doing so, your company will enjoy greater long-term prosperity, as will investors, workers, and society as a whole.” Maple Leaf Foods is ALL IN! Michael H. McCain President and CEO February 2020 vii ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC.Message from the Chairman Maple Leaf Foods is driven by its purpose to ‘Raise the Good in Food’ With an ambitious vision to be the most sustainable protein company on earth, we pursue an integrated business strategy that reflects our social and environmental commitments, as well as our financial and growth objectives. Over the past year, the Board of Directors has continued to play an integral role in guiding the Company in this mission to deliver long-term value. Providing strategic direction has been one of the primary areas of Board focus. With game-changing developments in the hyper-growth plant protein space, the Company nimbly shifted its strategy to focus on top-line revenue growth, accelerated product innovation and market share expansion. The Board also maintained its focus on the Company’s capital investment strategy. Whether focusing on the construction of the state-of-the-art poultry facility in London, Ontario, the development of a plant protein facility in Shelbyville, Indiana, or additions to existing facilities, our disciplined investments are designed to optimize our network, add new capacity and contribute to future profitability. Maple Leaf, at its core, is a great food company – and the world needs more great food companies. Our business has withstood many challenges in our focus on delivering results, and these results fuel our efforts to improve our communities and ultimately the world. The Board has been closely engaged in a range of initiatives designed to reduce our environmental footprint, improve food and workplace safety, enhance animal care and develop our people. The Board takes pride in the fact that in 2019, Maple Leaf Foods achieved a landmark step on our journey to reduce our footprint by becoming the world’s first major carbon neutral food company. And this is a statement that bears repeating: we achieved this milestone because we are a great food company. ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC. Having been a part of the Board for many years, it has been my pleasure to begin my tenure as Chair this year. There is no doubt that 2019 was marked by many challenging external events, ranging from the troubling animal disease outbreak centred in Asia to the geopolitical instability that included a four-month trade disruption in Canadian pork exports to China. Through it all, Maple Leaf Foods demonstrated resilience in navigating these challenges, while continuing to advance its long-term, value creation goals. Maple Leaf Foods’ outlook is bright thanks to the dedication of its employees and leaders not just to business objectives, but to the values that underpin the Company. Thank you for your commitment to our purpose-driven business strategy. We value your confidence and remain committed to transparent and responsible governance. Geoff Beattie Chairman February 2020 viii Corporate Governance and Board of Directors Corporate Governance The Board of Directors and Management of the Company are committed to maintaining a high standard of corporate governance. The Board has responsibility for the overall stewardship of the Company and discharges such responsibility by reviewing, discussing and approving the Company’s strategic planning and organizational structure. The Board also supervises Management with a view to preserving and enhancing the underlying value of the Company. Management of the business within this process and structure is the responsibility of the Chief Executive Officer and Senior Management. The Board has adopted guidelines to assist meeting its corporate governance responsibilities. The roles of the Board, the Chief Executive Officer, the Chair and the individual committees are clearly delineated. Together with the Chair and the Corporate Governance Committee, the Board assesses its processes and practices regularly to ensure its governance objectives are met. Composition of the Board of Directors The Company’s directors are very experienced, high-calibre business leaders with diverse relevant skills and competencies. The Board of Directors has assessed each of the Company’s directors and determined that seven are independent. A more comprehensive analysis of the Company’s approach to corporate governance matters will be included in the Management Information Circular for the April 29, 2020 annual meeting of shareholders. Board of Directors William E. Aziz, CPA, CA President and Chief Executive Officer, BlueTree Advisors Inc. (Private management advisory firm) W. Geoffrey Beattie Chief Executive Officer, Generation Capital (Investment management firm) Standing Committees of the Board of Directors Audit Committee W.E. Aziz, Chair W.G. Beattie R.G. Close K.N. Lemon Ronald G. Close Corporate Director Jean M. Fraser Retired Partner, Osler, Hoskin & Harcourt John A. Lederer Executive Chairman, Staples North American companies Katherine N. Lemon Professor, Carroll School of Management, Boston College Jonathan W.F. McCain President, McCain Capital Inc. Michael H. McCain President and Chief Executive Officer, Maple Leaf Foods Inc. Carol M. Stephenson Corporate Director Corporate Governance Committee C.M. Stephenson, Chair R.G. Close J.M. Fraser J.A. Lederer Safety and Sustainability Committee R.G. Close, Chair W.G. Beattie K.N. Lemon J.W.F. McCain Human Resources and Compensation Committee J.M. Fraser, Chair W.E. Aziz J.A. Lederer C.M. Stephenson ix ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC.Senior Management and Officers Senior Leadership Team Michael H. McCain President and Chief Executive Officer Other Corporate Officers Stephen Elmer Vice-President and Corporate Controller Ben Brooks Senior Vice-President and General Manager, Poultry René McLean Vice-President, Business Finance Stephane Dubreuil Senior Vice-President, Strategy and Corporate Development Vivek Radhakrishnan Assistant Corporate Secretary Curtis Frank President, Chief Operating Officer Suzanne Hathaway Senior Vice-President, General Counsel and Corporate Secretary Michael Rawle Vice-President, Finance and Treasurer Jonathan Sawatzky Vice-President, Maple Leaf Agri-Farms Ian Henry Senior Vice-President, People Randall Huffman Chief Food Safety and Sustainability Officer Joshua Kuehnbaum Senior Vice-President, Foodservice Sales and Marketing Lynda Kuhn Senior Vice-President and Chair, Maple Leaf Centre for Action on Food Security Andreas Liris Chief Information Officer Scott Lorimer Senior Vice-President, Retail Sales Rory McAlpine Senior Vice-President, Government and Industry Relations Casey Richards Senior Vice-President, Marketing and Innovation Iain Stewart Senior Vice-President, Supply Chain and Purchasing Geert Verellen Chief Financial Officer x ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC.2019 Financial Review For years ended December 31 (In millions of Canadian dollars, except share information) Consolidated results Sales Adjusted Operating Earnings(iii) Adjusted EBITDA(iii) Adjusted EBITDA %(iii) (iv) Net earnings(v) Return on Net Assets(iii) Financial position Net Assets(vi) Shareholders’ equity Net Cash (Debt)(iii) Per share Adjusted Earnings per Share(iii) (v) Net earnings(v) Dividends Book value Stock price (MFI)(vii) Number of shares (millions) Weighted average Outstanding at December 31(viii) 2019 2018(i) 2017 2016 2015(ii) 3,942 145 321 8.1% 75 3.9% 2,757 1,950 (442) 0.68 0.60 0.58 15.74 25.88 123.6 123.9 3,496 216 344 9.9% 101 7.3% 2,445 2,007 (311) 1.22 0.81 0.52 16.13 27.33 125.0 124.4 3,522 264 381 10.8% 164 10.5% 1,938 2,052 194 1.54 1.28 0.44 16.11 35.82 128.6 127.3 3,332 239 343 10.3% 182 9.8% 1,717 2,088 394 1.23 1.35 0.36 15.73 28.12 134.2 132.7 3,293 110 220 6.7% 42 4.8% 1,705 2,041 282 0.58 0.30 0.32 15.10 23.76 140.2 135.2 (i) (ii) 2018 figures have been restated for finalized amounts recorded in business combinations. Refer to Note 29(a) of the Company’s 2019 audited consolidated financial statements for further information. 2015 figures have been restated for the impact of adopting a 2016 IFRIC clarification of International Accounting Standard 12 Income taxes (“IAS 12”). Refer to Note 3(v) of the Company’s 2016 audited consolidated financial statements for further information. (iii) Refer to the section entitled Non-IFRS Measures starting on page 33 of the Company’s 2019 Management’s Discussion & Analysis. (iv) Adjusted EBITDA % is calculated as Adjusted EBITDA divided by sales. (v) Attributable to common shareholders. (vi) Net Assets are defined as total assets (excluding cash and deferred tax assets) less non-interest bearing liabilities (excluding deferred tax liabilities). (vii) Closing share price as of the date closest to the Company’s fiscal year-end; source: Bloomberg. (viii) Outstanding number of shares has been restated for inclusion of the purchase of treasury stock for all years. xi ANNUAL REPORT | 2019 | MAPLE LEAF FOODS INC.Management’s Discussion and Analysis MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 The Business Financial Overview Selected Financial Information Company Vision and Strategic Plan Operating Review Other Expense Restructuring and Other Related Costs Interest Expense and Other Financing Costs Income Taxes Acquisitions and Divestitures Capital Resources Capital Expenditures Normal Course Issuer Bid Cash Flow and Financing Contractual Obligations Financial Instruments and Risk Employee Benefit Plans Transactions with Related Parties Share Capital Other Matters Maple Leaf Centre for Action on Food Security Summary of Quarterly Results Summary of 2019 Fourth Quarter Results Discussion of Factors Impacting the Company's Operations and Results Environment Carbon Management Strategy Risk Factors Critical Accounting Estimates Significant Accounting Policies Disclosure Controls and Internal Controls Over Financial Reporting 2020 Outlook and Long-term Targets Non-IFRS Financial Measures Forward-Looking Statements 1 1 2 2 3 5 5 5 5 5 6 7 7 8 8 9 13 13 14 14 14 15 16 17 18 19 19 26 29 31 31 33 36  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Management’s Discussion and Analysis All dollar amounts are presented in Canadian dollars unless otherwise noted. February 26, 2020 1. THE BUSINESS Maple Leaf Foods Inc. (“Maple Leaf Foods” or the "Company") is a producer of food products under leading brands including Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift®, Lightlife®, and Field Roast Grain Meat Co.™ The Company's portfolio includes prepared meats, ready-to-cook and ready-to-serve meals, valued-added fresh pork and poultry and plant protein products. The address of the Company's registered office is 6985 Financial Dr. Mississauga, Ontario, L5N 0A1, Canada. The Company employs approximately 13,000 people and does business primarily in Canada, the U.S. and Asia. The Company's shares trade on the Toronto Stock Exchange (MFI). 2. FINANCIAL OVERVIEW ($ millions except earnings per share) Sales Net Earnings Basic Earnings per Share Adjusted Operating Earnings(i) Adjusted Earnings per Share(i) Twelve months ended December 31, 2019 3,941.5 74.6 0.60 145.4 0.68 $ $ $ $ $ 2018 % Change $ $ $ $ $ 3,495.5 101.3 0.81 215.6 1.22 12.8 % (26.4)% (25.9)% (32.6)% (44.3)% (i) Refer to the section titled Non-IFRS Financial Measures starting on page 33 of this document for the definition of these non-IFRS measures. Sales for 2019 were $3,941.5 million compared to $3,495.5 million last year, an increase of 12.8%. Excluding acquisitions, sales increased 5.2%, driven by favourable pricing, mix and volume in meat protein and accelerated growth in plant protein of 23.6%. Net earnings for 2019 were $74.6 million ($0.60 per basic share) compared to $101.3 million ($0.81 per basic share) last year. Strong commercial performance and favourable resolution of income tax audits were more than offset by strategic investments in plant protein to drive top line growth and heightened volatility in hog prices. Net earnings were negatively impacted by $12.1 million due to non-cash fair value changes in biological assets and derivative contracts, which are excluded in the calculation of Adjusted Operating Earnings below. Adjusted Operating Earnings for 2019 were $145.4 million compared to $215.6 million last year, and Adjusted Earnings per Share for 2019 were $0.68 compared to $1.22 last year due to similar factors as noted above. For further discussion on key metrics and a discussion of results by operating segment, refer to the section titled Operating Review starting on page 3 of this document. 1  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. 3. SELECTED FINANCIAL INFORMATION The following table summarizes selected financial information for the three years ended December 31: ($ millions except earnings per share and RONA) Sales(i) Adjusted Operating Earnings(ii) Adjusted EBITDA(ii) Adjusted EBITDA margin(ii) Net earnings Adjusted Earnings per Share(ii) Basic earnings per share Diluted earnings per share Total assets(iii) Construction Capital(ii) Net (Debt) Cash(ii) Total long-term liabilities(iii) Return on Net Assets ("RONA")(ii) Cash provided by operating activities Cash dividends per share 2019 2018 2017 $ 3,941.5 $ 3,495.5 $ 3,522.2 $ $ $ $ $ $ 145.4 321.2 8.1% 74.6 0.68 0.60 0.60 $ $ $ $ $ $ 215.6 344.3 9.9% 101.3 1.22 0.81 0.79 $ 3,514.0 $ 105.2 $ 3,140.0 $ 22.4 $ (442.0) $ (310.8) $ 1,029.1 3.9% 270.2 0.58 $ $ $ $ $ 637.4 7.3% 299.7 0.52 $ $ $ $ $ $ 263.8 381.1 10.8% 164.1 1.54 1.28 1.24 $ 2,632.6 $ $ $ $ $ 13.0 194.2 230.7 10.5% 386.7 0.44 (i) 2019 and 2018 sales include the impact of the adoption of new accounting standard IFRS 15 Revenue from Contracts with Customers. (ii) Please refer to the section entitled Non-IFRS Financial Measures starting on page 33 of this document. (iii) 2018 figures restated, see Note 29(a) of the Company's 2019 audited consolidated financial statements. 4. COMPANY VISION AND STRATEGIC PLAN With a vision to become the most sustainable protein Company on earth, Maple Leaf Foods is committed to creating shared value by driving commercial and financial results and enhancing competitive advantage through addressing some of society’s most pressing issues. The Company believes that the pursuit of its purpose to 'Raise the Good in Food' is a significant differentiator that will build trust and confidence among stakeholders. The Company has created a blueprint to guide its drive for long-term value creation based on the following foundational strategies: • • • • • Leveraging leadership in sustainability - This year, in a milestone achievement, Maple Leaf Foods became the world’s first major carbon neutral food company. As part of its commitment to greenhouse gas ("GHG") emissions reductions, the Company also adopted globally recognized Science-Based Targets ("SBTs"). Eliminating waste and improving efficiency - Maple Leaf Foods has a history of executing initiatives designed to improve efficiencies and contribute to profitability. In 2019, the Company continued to pursue operating efficiencies in its plants and supply chain, and with construction starting on its new poultry plant in London, Ontario, it took another step forward in executing its plans to create more efficiencies in its poultry network. Broadening reach into new geographies, channels and protein alternatives - Throughout 2019, the Company continued to expand its plant protein business, by accelerating its investment in this hyper-growth space. By maximizing capacity in its existing network, investing in innovation and product development and ramping up marketing efforts throughout the year, the Company expanded its penetration in retail and foodservice. The Company also announced plans to construct a plant protein facility in Shelbyville, Indiana and continued to advance its design plans to align with anticipated trends in product demand and mix. Maple Leaf Foods also delivered growth in its sustainable meats business in the U.S. and Canada which contributed to both the Company's earnings and its sustainability goals. Embracing a digital future across the business - Maple Leaf Foods continues to deploy digital solutions throughout the Company that improve access to data and information capture. After a successful mobility solution pilot in 2018, the Company deployed a similar solution for Food Safety and Quality Assurance teams in the field, with more deployments planned. These mobile solutions provide ready access to critical information and enable plant associates to perform most of their tasks from the shop floor. Investing in brands to build demand and consumer loyalty - With a suite of newly-renovated brands, the Company has focused on executing its strategy to connect with consumers through authentic messaging that speaks to consumer needs and to deliver the quality products they desire. 2  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. • Investing in people so talent thrives - Developing people and enabling them to maximize their contributions continued over the course of the year as the Company leveraged relationships with universities and offered important courses to rising leaders. The Company also advanced multiple initiatives to foster a diverse and progressive workforce, including hiring its first Director of Diversity and Inclusion. Having set ambitious growth targets for both the Meat Protein Group and the Plant Protein Group, Maple Leaf Foods progressed towards these goals by leveraging initiatives aimed at delivering shareholder value. • • • • Sustainable Meat - Maple Leaf Food’s sustainable meat products deliver the key attributes many consumers are seeking: meat and poultry raised humanely and without antibiotics ("RWA") and produced and processed in ways that minimize environmental impact. Sustainable meat portfolio growth is expected to continue to be a key contributor as Maple Leaf Foods continues to execute its strategy. Poultry Network - Maple Leaf Foods' world class poultry plant is under construction in London, Ontario. Upon completion of construction and commissioning of the plant, the Company expects to be able to gain efficiencies in its poultry production network, further enhancing its ability to meet growing consumer demand for chicken. Food Renovation - With its sweeping brand renovation completed in 2018, Maple Leaf Foods shifted its focus in 2019 to executing campaigns to connect with people. The results of the brand renovation, contributed to margin expansion in 2019, and the Company expects this trend to continue. Plant Protein - In 2019 Maple Leaf Foods ramped up its investment in its plant protein business and its leading brands, Lightlife® and Field Roast Grain Meat Co.™ In addition to significantly investing in advertising, promotion and marketing, the Company is positioning itself for growth through the expansion of supply chain, organizational structure, talent and product innovation. • Cost Culture - The Company’s focus on cost and efficiency continues with zero-based budgeting as a foundational element of that culture. Maple Leaf Foods targets continuous improvement throughout the Company as a means of sustaining ongoing efficiencies. 5. OPERATING REVIEW During the year ended December 31, 2019, the Company completed a comprehensive analysis of the role of its rapidly expanding plant protein business in the Company's meat and plant protein portfolio, their respective financial profiles and long-term value creation opportunities. Based on the importance of these two distinct businesses and differing strategic and financial requirements to maximize their market leadership and long-term shareholder value, the Company has disaggregated its business into two operating segments. These segments offer different products, with separate organizational structures, brands, financial and marketing strategies. The Company's chief operating decision makers regularly review internal reports for these businesses; performance of the Meat Protein Group is based on revenue growth, Adjusted Operating Earnings and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), while the performance of the Plant Protein Group is based predominantly on revenue growth rates, managing gross margins and controlling investment levels which generate high revenue growth rates. 3  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. The following table summarizes the Company's sales, gross profit, selling, general and administrative expenses ("SG&A"), Adjusted Operating Earnings, Adjusted EBITDA, and Adjusted EBITDA margin by operating segment for the year ended December 31, 2019 and December 31, 2018. 2019 2018(i) ($ millions) Sales Gross profit Selling, general and administrative expenses Adjusted Operating Earnings(iii) Adjusted EBITDA(iii) Adjusted EBITDA margin(iii) Meat Protein Group 3,778.0 568.0 338.7 229.3 393.2 $ $ $ $ $ Plant Protein Group 176.4 35.0 119.0 (84.0) (71.6) Non- Allocated(ii) Total Meat Protein Group Plant Protein Group Non- Allocated(ii) Total (12.9) (12.1) $ $ 3,941.5 591.0 — $ 457.7 — $ 145.4 (0.4) $ 321.2 $ $ $ $ $ 3,357.0 138.6 — $ 3,495.5 518.3 305.5 212.8 331.6 38.8 36.0 2.8 12.7 (5.3) $ 551.8 — $ 341.5 — $ 215.6 — $ 344.3 10.4% (40.6)% N/A 8.1% 9.9% 9.2% N/A 9.9% (i) Comparative figures have been presented to align with current reportable segments. (ii) Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment’s operating results. (iii) Refer to the section titled Non-IFRS Financial Measures starting on page 33 of this document for the definition of these non-IFRS measures. Meat Protein Group The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, value-added fresh pork and poultry products that are sold to retail, foodservice and industrial channels and agricultural operations in pork and poultry. The Meat Protein Group includes leading brands such as Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift® and many leading regional brands. Sales for 2019 increased 12.5% to $3,778.0 million compared to $3,357.0 million last year. Excluding acquisitions, sales grew 4.9%, driven by favourable mix tied to food renovation supporting major brand strategies and pricing actions implemented during the third quarter and in late 2018 to mitigate higher raw material input costs. Continued expansion of sustainable meats, including double-digit growth in the U.S., also contributed to strong sales. Gross profit for 2019 was $568.0 million (gross margin of 15.0%) compared to $518.3 million (gross margin of 15.4%) last year. Stronger commercial performance, including favourable mix attributed to food renovation, expansion of sustainable meats and pricing actions taken to mitigate higher raw material costs, contributed to higher gross profit. Improvement in commercial performance was partially offset by the temporary import suspension of Canadian pork into China for the third quarter and part of the fourth quarter and capacity expansion costs in the lunch kits and pastry categories. SG&A expenses for 2019 were $338.7 million (9.0% of sales), compared to $305.5 million (9.1% of sales) last year. The increase in SG&A expenses is primarily related to increases in headcount due to acquisitions, variable compensation dependent on business performance and investments tied to growth in the U.S. and Asia. Adjusted Operating Earnings for 2019 were $229.3 million compared to $212.8 million last year. Improved commercial and operational performance was driven by favourable mix attributed to food renovation, higher sustainable meats sales and pricing action taken to mitigate higher raw material costs. This was partially offset by increased bio-security costs in the Company's hog barns, capacity expansion costs in protein kits and meat pies and increases in SG&A as noted above. Adjusted EBITDA margin was 10.4% compared to 9.9% last year, the increase is consistent with the factors noted above. Adjusted EBITDA margin was impacted by the adoption of International Financial Reporting Standards ("IFRS") 16 Leases. Upon the adoption of IFRS 16, leases previously classified as operating leases were capitalized on the Company's consolidated balance sheet. For 2019, an incremental increase of $34.1 million in depreciation and $8.3 million in interest were recorded on the Company's consolidated statement of earnings, not included in Adjusted EBITDA. Plant Protein Group The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein and vegan cheese products sold to retail, foodservice and industrial channels. The Plant Protein Group includes the leading brands Lightlife® and Field Roast Grain Meat Co.™ Sales for 2019 increased 27.3% to $176.4 million compared to $138.6 million last year. Excluding acquisitions, sales increased 23.6% driven by expanded distribution of new products and continued volume increases in its existing portfolio. 4  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Gross profit for 2019 was $35.0 million (gross margin of 19.8%) compared to $38.8 million (gross margin of 28.0%) last year. The decrease in gross profit was attributed to inefficiencies associated with start-up production and other costs related to supporting high growth. SG&A expenses for 2019 were $119.0 million (67.4% of sales), compared to $36.0 million (26.0% of sales) last year. The increase in SG&A expenses reflects the evolution of the Company's plant protein strategy to drive sales growth and secure market share in a rapidly growing market. Supporting this strategy, significant investment in advertising, promotion and marketing was incurred during the year to enhance brand awareness and support new product launches and expand distribution. In addition, the Company invested to broaden organizational capacity and its pipeline of new product innovation. Adjusted Operating Earnings for 2019 were a loss of $84.0 million compared to earnings of $2.8 million last year. The decline in Adjusted Operating Earnings is consistent with the factors noted above. 6. OTHER EXPENSE For the year ended December 31, 2019, other expense was $3.3 million compared to $13.0 million last year. The change is primarily due to higher expenses incurred in 2018 related to legal and other fees on transactions, loss on sale of property and equipment that were not repeated in 2019, and a higher gain on sale of investment properties in 2019. This was offset by income incurred in 2018 relating to recovery from insurance proceeds that were not repeated in 2019. Certain items in other expense are excluded from the calculation of Adjusted EBITDA and Adjusted Earnings per Share as they are not considered representative of ongoing operational activities of the business. Other expense used in the calculation of Adjusted EBITDA and Adjusted Earnings per Share for 2019 was an expense of $1.0 million compared to income of $2.7 million last year. 7. RESTRUCTURING AND OTHER RELATED COSTS For the year ended December 31, 2019, the Company recorded restructuring and other related costs of $11.0 million. Of this amount, $5.9 million related to accelerated depreciation and other asset write-offs, and $0.2 million related to severance and other employee related costs as a result of the announced closure of the poultry plants in St. Mary's, Brampton, and Toronto. The remaining $4.9 million related to employee related costs for other organizational restructuring initiatives. For the year ended December 31, 2018, the Company recorded restructuring and other related costs of $46.2 million. Of this amount, $40.7 million related to accelerated depreciation and severance and other employee costs as a result of the announced closure of the poultry plants in St. Mary's, Brampton, and Toronto, $2.4 million related to costs as a result of the St. Anselme plant closure, and $2.4 million related to costs as a result of the Thamesford turkey processing plant closure. The remaining $0.7 million related to other previously announced organizational restructuring initiatives. 8. INTEREST EXPENSE AND OTHER FINANCING COSTS Interest expense and other financing costs for 2019 were $32.0 million compared to $10.0 million in the prior year. The increase was mainly due to full year impact of higher borrowing levels from the Company's Credit Facility and reclassification of the interest portion of the lease payments driven by the adoption of IFRS 16. 9. INCOME TAXES The Company’s income tax expense for 2019 resulted in an effective tax rate of 14.2%. The effective tax rate in 2019 differs from the Canadian statutory tax rate of 26.7% primarily due to (i) the manufacturing and processing credit; (ii) a deferred income tax recovery recorded on the remeasurement of deferred tax liabilities at a lower tax rate; (iii) an adjustment to tax expense for prior periods; and (iv) the favourable resolution of an income tax audit. The effective tax rate in 2019 used in determining Adjusted Earnings per Share is 25.0%. The effective tax rate in determining the Adjusted Earnings per Share in 2019 differs from the Canadian statutory tax rate primarily due to non-deductible expenditures, the deferred income tax recovery, and an adjustment to tax expense for prior periods. In 2018, the Company's income tax expense resulted in an effective tax rate of 28.2%. The effective tax rate differs from the Canadian statutory tax rate of 26.8% primarily due to non-deductible acquisition-related transaction costs. The effective tax rate in determining Adjusted Earnings per Share in 2018 is 26.5%. 10. ACQUISITIONS AND DIVESTITURES On November 13, 2018, the Company acquired 100% of the outstanding shares of VIAU Food Products Inc. ("VIAU"), a privately held Canadian market leader in premium Italian cooked, dry-cured and charcuterie meats, for a purchase price of $215.0 million. The Company financed the transaction using a combination of drawings on existing credit facilities and equity. Recognized goodwill is attributable to VIAU's assembled workforce combined with its considerable expertise, product development knowledge and skills. The Company finalized the amounts recorded in the VIAU business combination during the second quarter of 2019. 5  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. On October 22, 2018, the Company acquired two poultry plants and associated supply from Cericola Farms Inc. ("Cericola"), a privately held Canadian company. The purchase price of the assets was $80.0 million, with a put/call option to purchase a third processing facility for a purchase price of $40.0 million, exercisable within three years. The Company financed the transaction using existing credit facilities. The Company finalized the amounts recorded in the Cericola business combination during the second quarter of 2019. On January 29, 2018, the Company acquired 100% of the outstanding shares of The Field Roast Grain Meat Company, SPC ("Field Roast Grain Meat Co."), a privately held U.S. based corporation engaged in the production and distribution of premium grain-based protein and vegan cheese products, for a purchase price of $140.2 million. The Company financed the transaction using a combination of cash-on-hand and drawings on existing credit facilities. Recognized goodwill is attributable to Field Roast Grain Meat Co.'s leadership position in the fast-growing plant protein market combined with its considerable expertise, product development knowledge and skills. The Company finalized the amounts recorded in the Field Roast Grain Meat Co. business combination during the fourth quarter of 2018. During the year ended December 31, 2019, the Company recorded legal and other transaction costs of $0.0 million (2018: $13.6 million) related to acquisition activities that have been recognized in other expense. For full details on all acquisitions refer to Note 29 of the Company's 2019 audited consolidated financial statements ("consolidated financial statements"). 11. CAPITAL RESOURCES The consumer foods industry in which the Company operates is generally characterized by high sales volume and high turnover of inventories and accounts receivable. In general, accounts receivable and inventories are readily convertible into cash. Investment in working capital is affected by fluctuations in the price of raw materials, seasonal and other market-related fluctuations. The Company has consistently generated a strong base level of operating cash flow, even in periods of higher commodity prices and during restructuring of its operations. These operating cash flows provide a base of underlying liquidity that the Company supplements with credit facilities and cash on hand to provide longer-term funding and to finance fluctuations in working capital levels. The Company's cash balance as at December 31, 2019 was $97.3 million (2018: $72.6 million). The cash is held in demand and short- term investment deposits with Canadian financial institutions having long-term debt ratings of A or higher. The composition of long-term debt as of the dates indicated are shown below: ($ thousands) Revolving line of credit U.S. term credit Canadian term credit Government loans Total long-term debt Current Non-current Total long-term debt Construction Capital(i) included in total long-term debt As at December 31, 2019 As at December 31, 2018 $ $ $ $ $ — $ 346,461 185,000 7,867 539,328 $ 899 $ 538,429 539,328 $ 105,211 $ 374,775 — — 8,646 383,421 80,897 302,524 383,421 22,422 (i) Refer to the section titled Non-IFRS Financial Measures starting on page 33 of this document for the definition of this non-IFRS measure. On April 30, 2019, the Company entered into a new syndicated credit facility (the "Credit Facility") consisting of a $1,300.0 million unsecured committed revolving line of credit maturing April 30, 2024 and two unsecured committed term credit facilities for US$265.0 million and $350.0 million maturing April 30, 2024 and April 30, 2023, respectively. The Credit Facility refinanced and replaced the Company's previous $250.0 million and $400.0 million unsecured committed revolving credit facilities, which were due to mature on November 7, 2019 and October 19, 2021, respectively. The Credit Facility can be drawn in Canadian or U.S. dollars and bears interest payable monthly, based on Banker's Acceptance and Prime rates for Canadian dollar loans and the London Inter-bank Offered Rate ("Libor") for U.S. dollar loans. The Credit Facility is intended to meet the Company's funding requirements for capital investments, including the construction of its two new manufacturing facilities in London, Ontario and Shelbyville, Indiana, in addition to providing appropriate levels of liquidity and for general corporate purposes. On December 11, 2019, the Company amended the Credit Facility to reduce interest paid upon achievement of certain sustainability targets. This reduction will not materialize until at least 2021, and there 6  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. is no penalty for not achieving the targets. In addition to loans, as at December 31, 2019 the Company had drawn letters of credit of $6.2 million on the Credit Facility (2018: $6.3 million on the previous facility). The Credit Facility requires the maintenance of certain covenants. As at December 31, 2019, the Company was in compliance with all of these covenants. The Company has additional uncommitted credit facilities for issuing letters of credit up to a maximum of $125.0 million (2018: $125.0 million). As at December 31, 2019, $79.5 million of letters of credit had been issued thereon (2018: $72.2 million). The Company has various government loans on specific projects, with contractual interest rates ranging from non-interest bearing to 2.9% per annum (2018: 2.9%). These facilities are repayable over various terms from 2022 to 2024. As at December 31, 2019, $7.9 million (2018: $8.6 million) was outstanding. All of these facilities are committed. On July 19, 2019, the Company amended its three-year accounts receivable securitization facility (the "Securitization Facility") by extending the maturity to July 19, 2022 and increasing the maximum cash advance available to the Company under the Securitization Facility to $120.0 million (2018: $110.0 million). The Securitization Facility provides cash funding with a proportion of the Company's receivables being sold, and provides the Company with competitively priced financing and further diversifies its funding sources. Under the Securitization Facility, the Company has sold certain of its trade accounts receivable, with very limited recourse, to an unconsolidated third-party trust financed by an international financial institution with a long-term AA- debt rating, for cash and short-term notes back to the Company. The receivables are sold at a discount to face value based on prevailing money market rates. The Company retains servicing responsibilities for these receivables. As at December 31, 2019, the Company had $133.3 million (2018: $127.4 million) of trade accounts receivable serviced under this facility. In return for the sale of its trade receivables, the Company will receive cash of $101.6 million (2018: $96.9 million) and notes receivable in the amount of $31.7 million (2018: $30.5 million). The notes receivable are non-interest bearing and are settled on the settlement dates of the securitized accounts receivable. Due to the timing of receipts and disbursements, the Company may, from time to time, also record a receivable or payable related to the securitization facility. As at December 31, 2019, the Company recorded a net payable in the amount of $10.1 million (2018: $32.5 million net payable) in accounts payable and accruals. The facility is accounted for as an off-balance sheet transaction in accordance with IFRS. The Securitization Facility is subject to certain restrictions, including the maintenance of covenants. The Company was in compliance with all of the requirements of this facility during 2019. If the Securitization Facility were to be terminated, the Company would recognize the related amounts on the consolidated balance sheet and consider alternative financing if required. 12. CAPITAL EXPENDITURES Capital expenditures for 2019 were $270.7 million compared to $179.9 million in 2018. The increase in spending from 2018 is primarily driven by the construction of two new facilities in London, Ontario and Shelbyville, Indiana as well as investments in support of the Company’s commitment to animal care. The expenditures are lower than previously forecast due to weather and other delays due to timing, and an intentional delay to assess near term plant protein demands compared to available capacity in the existing Maple Leaf network. The Company currently estimates its capital expenditures for the full year of 2020 will be in the range of $650 million to $700 million. Approximately 70% of this will be Construction Capital, which is mainly related to ongoing construction of the London, Ontario poultry facility; further capacity and efficiency improvements in our prepared meats business; and investments in plant protein capacity at an existing facility, as well as further design, engineering, and site work at the Shelbyville, Indiana location. The remaining balance is for continued profit enhancement, maintenance and sustainability projects. Construction is underway at our London, Ontario poultry processing facility. However, due to poor weather conditions last spring, along with a robust economy and highly competitive environment, some construction components have taken longer to source. As a result, construction completion is expected to be delayed and start-up of this new poultry facility is now planned for the second quarter of 2022. Maple Leaf Foods is continuing to advance engineering and design work on the Shelbyville, Indiana facility. Adapting its plans to provide the flexibility necessary to meet the demands of the rapidly evolving plant protein market, the Company is focused on ensuring that the new facility is designed to provide the right scalability to meet current and future consumer demand. While this additional engineering and design work means that completion of the Shelbyville, Indiana facility will be delayed until the end of 2022, the Company is able to expand capacity within its existing network to allow it to meet immediate demand. 13. NORMAL COURSE ISSUER BID On May 17, 2019, the Toronto Stock Exchange ("TSX") accepted the Company's notice of intention to commence a Normal Course Issuer Bid ("NCIB"), allowing the Company to repurchase, at its discretion, up to 7.5 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company are cancelled. The program commenced on May 24, 2019 and will terminate on May 23, 2020, or on such earlier date as the Company 7  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. completes its purchases pursuant to the notice of intention. Under this bid, during the year ended December 31, 2019, 0.8 million shares were purchased for cancellation for $20.3 million at a volume weighted average price paid of $24.21 per common share. On May 22, 2018, the TSX accepted the Company's notice of intention to commence an NCIB, which allows the Company to repurchase, at its discretion, up to 7.8 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on May 24, 2018 and was terminated on May 23, 2019 as the Company completed its purchase and cancellation of 4.0 million common shares for $126.6 million at a volume weighted average price of $31.82 per common share. Under this bid, during the year ended December 31, 2019, no shares were purchased for cancellation. Under this bid, during the year ended December 31, 2018, 4.0 million common shares were purchased for cancellation for $126.6 million at a volume weighted average price of $31.82 per common share. On May 17, 2017, the TSX accepted the Company's notice of intention to commence an NCIB, which allowed the Company to repurchase, at its discretion, up to 8.2 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on May 23, 2017 and was terminated on May 22, 2018 as the Company completed its purchase and cancellation of 3.6 million common shares for $117.3 million at a volume weighted average price of $32.51 per common share. Under this bid, during the year ended December 31, 2018, 1.3 million shares were purchased for cancellation for $39.9 million at a volume weighted average price paid of $31.17 per common share. 14. CASH FLOW AND FINANCING Cash and cash equivalents were $97.3 million at the end of 2019, compared to $72.6 million in 2018. The increase in cash and cash equivalents for the year ended December 31, 2019 is primarily due to cash flow generated from operations and loans drawn on the Credit Facility, partially offset by investments in property and equipment, quarterly dividend payments, interest payments, payments of lease obligations, payments of income taxes and share repurchases under the NCIB. Cash Flow from Operating Activities Cash provided by operations for 2019 was $270.2 million compared to $299.7 million in 2018. The decrease was primarily due to lower earnings, higher income taxes payments, higher interest payments, and lower margin received by the Company against its derivatives for its commodity hedging programs, partially offset by lower investment in working capital. Cash Flow from Financing Activities Cash provided by financing activities for 2019 was $29.8 million compared to $128.5 million in 2018. The decrease was primarily due to lower cash drawings against the Credit Facility, partially offset by fewer share repurchases under the NCIB programs. Cash Flow from Investing Activities Cash used in investing activities was $275.3 million for 2019 compared to $559.0 million in 2018. The reduction was primarily due to cash used for acquisitions in the prior year, partially offset by higher investment in property and equipment. 15. CONTRACTUAL OBLIGATIONS The following table provides information about certain of the Company's significant contractual obligations as at December 31, 2019. This table presents the undiscounted cash flows payable in respect of financial liabilities and commitments. Payments due by fiscal year: ($ thousands) Financial liabilities Due within 1 year Due between 1 and 3 years Due between 3 and 5 years Due after 5 years Accounts payable and accruals $ 445,774 $ — $ — $ Long-term debt Foreign exchange contracts Commodity futures contracts Lease obligations Other liabilities 1,083 3,043 991 40,769 36,515 6,292 532,387 — — — — 102,368 135 36,556 105,843 — — — — — — Total $ 445,774 539,762 3,043 991 285,536 36,650 The Company entered into a number of contracts related to the construction of new and expanded facilities. As at December 31, 2019 these contract commitments were approximately $634.0 million (2018: $0.0 million). $ 528,175 $ 108,795 $ 568,943 $ 105,843 $ 1,311,756 8  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Management believes its cash flow, cash on hand, and available sources of financing provide the Company with resources to finance ongoing business requirements and its planned capital expenditure program for at least the next 12 months. Additional details concerning financing are set out in Note 14 and Note 19 of the consolidated financial statements. 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES Through the normal course of business, the Company is exposed to financial and market risks that have the potential to affect its operating results. In order to manage these risks, the Company operates under risk management policies and guidelines which govern the hedging of price and market risk in the foreign exchange, interest rate, and commodity markets, as well as funding and investing activities. The Company engages in hedging to manage price and market risk associated with core operating exposures and does not engage in significant trading activity of a speculative nature. The Company’s Risk Management Committee meets frequently to discuss current market conditions, review current hedging programs and trading activity, and approve any new hedging or trading strategies. Financial Instruments The Company’s financial assets and liabilities are classified into the following categories: Cash and cash equivalents Accounts receivable Notes receivable Accounts payable and accruals Long-term debt Derivative instruments(i) Fair value through profit or loss Amortized cost Amortized cost Amortized cost Amortized cost Fair value through profit or loss (i) These derivative instruments may be designated as cash flow hedges, fair value hedges or net investments in foreign operations hedges as appropriate. The Company applies hedge accounting as appropriate and uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in foreign exchange rates, interest rates, and commodity prices. 9  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. The fair values and notional amounts of derivative financial instruments as at December 31 are shown below: Notional amount(i) 2019 Fair value Asset(ii) Liability(ii) 2018 Notional amount(i) Fair value Asset(ii) Liability(ii) Cash flow hedges Foreign exchange contracts Interest rate swaps Fair value hedges(iii) Foreign exchange contracts Commodity contracts Derivatives not designated in a formal hedging relationship Foreign exchange contracts Commodity contracts Total fair value Current(ii)(iv)(v) Non-current(ii) Total fair value $ 29,273 $ $ 479,129 $ $ 50,718 $ $ 54,725 $ $ 251,868 $ $ 242,711 $ $ $ $ 497 2,160 2,657 904 3,184 4,088 842 91 933 7,678 6,197 1,481 7,678 $ $ $ $ $ $ $ $ $ 40 $ 63,204 $ 130 $ 2,271 — $ — — — 40 $ 130 $ 2,271 — $ 58,156 $ — $ 1,837 — $ 59,570 2,148 — — $ 2,148 $ 1,837 3,003 $ 126,719 $ 3,472 $ 991 $ 135,941 3,994 4,034 4,034 — 4,034 $ $ $ $ 2,805 6,277 8,555 8,555 — $ $ $ 483 3,070 3,553 7,661 7,661 — 8,555 $ 7,661 (i) Unless otherwise stated, notional amounts are stated at the contractual Canadian dollar equivalent. (ii) The current portion of derivative assets and liabilities are recorded in prepaid expenses and other assets and other current liabilities, respectively, in the consolidated balance sheets. The non-current portion of derivative assets and liabilities are recorded in other long-term assets and other long- term liabilities, respectively, in the consolidated balance sheets. (iii) The carrying amount of the hedged items in the consolidated balance sheets are recorded at the inverse of the associated hedging instruments and are equal to the accumulated fair value hedge adjustments less hedge ineffectiveness. (iv) Derivatives are short-term and will impact profit or loss at various dates within the next 12 months. (v) As at December 31, 2019, the above fair value of current assets has been increased on the consolidated balance sheets by an amount of $1.1 million (2018: decreased by $1.1 million), which represents the excess or deficit of the fair market value of exchange traded commodities contracts over the initial margin requirements. The excess or deficit in maintenance margin requirements with the futures exchange is net settled in cash each day and is therefore presented as cash and cash equivalents. The Company's financial assets and liabilities include accounts receivable, notes receivable, and accounts payable and accruals for which fair value approximates the carrying value due to their short-term nature. The carrying value of long-term debt as at December 31, 2019 and 2018 approximates its fair value. The fair value of the Company’s long-term debt has been classified as Level 2 in the fair value hierarchy and was estimated based on discounted future cash flows using current rates for similar financial instruments subject to similar risks and maturities. The Company's cash and cash equivalents and derivative instruments are recorded at fair value. The fair value of cash and cash equivalents approximates carrying value due to the short-term nature of the assets and has been classified as Level 1 in the fair value hierarchy. The fair values of the Company’s interest rate and foreign exchange derivative instruments were estimated using current market measures for interest rates and foreign exchange rates. Commodity futures and commodity options contracts are exchange- traded and over-the-counter. Fair value is determined based on exchange prices and other observable market data. Net gains and losses on financial instruments recognized at fair value through profit or loss consist of realized and unrealized gains and losses on derivatives that were de-designated or were otherwise not in a formal hedging relationship. For the year ended December 31, 2019, the Company recorded a gain of $5.4 million (2018: gain of $10.6 million) on financial instruments recognized at fair value through profit or loss. The gain was mainly attributed to a gain in commodity exchange traded contracts which economically hedge and offset price risk volatility inherent in the hog operational business. 10  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. The table below sets out fair value measurements of certain financial instruments using the fair value hierarchy as at December 31, 2019: ($ thousands) Assets: Foreign exchange contracts Commodity contracts Interest rate swaps Liabilities: Foreign exchange contracts Commodity contracts Level 1 Level 2 Level 3 Total $ $ $ $ — $ 2,243 3,184 — 3,184 — 991 991 91 2,160 4,494 3,043 — 3,043 $ $ $ $ $ $ $ — — — — — — — $ $ $ $ 2,243 3,275 2,160 7,678 3,043 991 4,034 There were no transfers between levels for the year ended December 31, 2019. Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. For financial instruments that are recognized at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization at the end of each reporting period. Capital The Company’s objective is to maintain a robust, cost-effective capital structure that ensures resilience, supports its long-term growth strategy, and maximizes operating flexibility. In allocating capital to investments to support its earnings goals, the Company establishes internal hurdle return rates for capital initiatives. Capital projects are generally financed with internal cash flows and senior debt where required. The Company uses leverage in its capital structure to reduce the cost of capital. The Company’s goal is to maintain its primary credit ratios at levels that are designed to provide continued access to investment-grade credit pricing and terms. The Company measures its credit profile using a number of metrics, some of which are non-IFRS measures, primarily Net Debt to EBITDA. Refer to the section entitled Non-IFRS Financial Measures starting on page 33 of this document for more information on the non-IFRS measures. In addition to credit facilities and equity, the Company uses leases and a very limited recourse accounts receivable securitization program as additional sources of financing. The Company has maintained a stable dividend distribution that is based on a long-term sustainable net earnings base. From time to time, the Company has purchased shares for cancellation pursuant to normal course issuer bids and to satisfy awards under its Restricted Share Unit Plan described in Note 24 of the consolidated financial statements. Credit Risk Credit risk refers to the risk of losses due to failure of the Company’s customers and counterparties to meet their payment obligations. In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which are in the retail, food service, industrial, and convenience channels. The Company performs ongoing credit evaluations of new and existing customers’ financial condition and reviews the collectibility of its trade accounts receivable and other receivables in order to mitigate any possible credit losses. The Company records a loss allowance of expected credit losses for financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit risk on its financial assets has increased significantly since initial recognition. If credit risk has not significantly increased since initial recognition, the Company measures the loss allowance at an amount equal to the 12-month expected credit losses. Average accounts receivable days sales outstanding for the year is consistent with historic trends. Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, the large number and geographic dispersion of smaller customers, and the operation of the accounts receivable securitization facility as described in Note 27 of the consolidated financial statements. The Company does, however, conduct a significant amount of business with a small number of large grocery retailers. The Company's two largest customers as at December 31, 2019 comprise approximately 21.6% (2018: two largest customers representing 22.8%) of total sales. The Company is also exposed to credit risk on its notes receivable from an unconsolidated structured entity in respect of the accounts receivable securitization program as described in Note 27 of the consolidated financial statements. Management believes that this credit risk is limited by the long-term AA- debt rating held by the financial institution financing the third-party trust. The Company is exposed to credit risk on its cash and cash equivalents (comprising primarily of deposits with Canadian chartered banks) and non- exchange-traded derivative contracts. The Company mitigates this credit risk by transacting primarily with counterparties that are major 11  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. international financial institutions with long-term debt ratings of A or higher. The Company’s maximum exposure to credit risk at the balance sheet date consisted primarily of the carrying value of non-derivative financial assets and non-exchange-traded derivatives with positive fair values. Liquidity Risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company manages liquidity risk by monitoring forecasted and actual cash flows, minimizing reliance on any single source of credit, maintaining sufficient undrawn committed credit facilities and managing the maturity profiles of financial assets and financial liabilities to minimize re-financing risk. As at December 31, 2019, the Company had available undrawn committed credit of $1,465.0 million (2018: $268.9 million) under the terms of its principal banking arrangements as described in Note 14 of the consolidated financial statements. These banking arrangements are subject to certain covenants and other restrictions. Market Risk Interest Rate Risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Company’s interest rate risk arises from long-term borrowings issued at fixed rates that create fair value interest rate risk and variable-rate borrowings that create cash flow interest rate risk. In addition, the Company’s cash balances are typically invested in short-term interest-bearing assets. The Company manages its interest rate risk exposure by using a mix of fixed and variable-rate debt and periodically using interest rate derivatives to achieve the desired proportion of variable to fixed-rate debt. As at December 31, 2019, the Company had variable-rate debt of $531.5 million with a weighted average interest rate of 3.3% (2018: $374.8 million at a weighted average interest rate of 3.8%). The Company has converted $479.1 million of the variable-rate debt to fixed-rate debt using interest rate swaps with a weighted average interest rate of 3.0%. In addition, the Company was exposed to floating interest rates on its accounts receivable securitization program. As at December 31, 2019, the amount serviced pursuant to this program was $101.6 million at a weighted average interest rate of 1.6% (2018: $110.0 million at a weighted average interest rate of 2.0%). The maximum amount available to the Company under these programs is $120.0 million (2018: $110.0 million). As at December 31, 2019, 75.2% (2018: 1.8%) of the Company’s outstanding debt and revolving accounts receivable securitization program were not exposed to interest rate movements, after including the effect of interest rate swaps. As at December 31, 2019, the Company had fixed-rate debt of $7.9 million (2018: $8.6 million) with a weighted average effective interest rate of 4.5% (2018: 4.7%). Changes in market interest rates cause the fair value of long-term debt with fixed interest rates to fluctuate but do not affect net earnings, as the Company’s debt is carried at amortized cost and the carrying value does not change as interest rates change. Foreign Exchange Risk Foreign exchange risk refers to the risk that the value of financial instruments or cash flows will fluctuate due to changes in foreign exchange rates. The Company’s foreign exchange risk arises primarily from transactions in currencies other than Canadian dollars, U.S. dollar- denominated borrowings, and investments in foreign operations. The Company uses foreign exchange forward contracts to manage foreign exchange transaction exposures. The primary currencies to which the Company is exposed to are the U.S. dollar and the Japanese yen. Commodity Price Risk The Company is exposed to price risk related to commodities such as live hogs, fuel costs, and purchases of certain other agricultural commodities used as raw materials, including feed grains. The Company uses fixed price contracts with suppliers as well as exchange- traded and over-the-counter futures and options to manage its exposure to price fluctuations on operating results. Derivatives designated as a hedge of an anticipated or forecasted transaction are accounted for either as cash flow or fair value hedges and are managed within the Company’s hedge accounting portfolio. The Company applies the “own use exception” classification to certain contracts that are entered into for the purpose of procuring commodities to be used in production and are not recognized on the balance sheet until delivery. For a comprehensive discussion on the Company’s risk management practices and derivative exposures, please refer to Note 19 of the Company's 2019 audited consolidated financial statements. 12  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. 17. EMPLOYEE BENEFIT PLANS The cost of pensions and other post-retirement benefits earned by employees is actuarially determined using the projected unit credit method calculated on service and Management’s best estimate of salary escalation, retirement ages of employees and expected health care costs. Management employs external experts to advise it when deciding upon the appropriate estimates to use to value employee benefit plan obligations and expenses. These estimates are determined at the beginning of each year and re-evaluated if changes in estimates and market conditions indicate that there may be a significant effect on the Company’s consolidated financial statements. During 2019, the Company recorded a pre-tax loss of $13.4 million through other comprehensive income (loss) related to the re- measurement of plan assets and liabilities. This included a pre-tax loss of $97.3 million related to differences between plan experience compared to actuarial assumptions and a pre-tax gain of $84.8 million related to differences between plan assets compared to the discount rate. During 2018, the Company recorded a pre-tax gain of $15.6 million through other comprehensive income (loss) related to the re- measurement of plan assets and liabilities. This includes a pre-tax gain of $51.3 million related to differences between plan experience compared to actuarial assumptions and a pre-tax loss of $36.7 million related to differences between plan assets compared to the discount rates. The Company operates both defined contribution and defined benefit plans. The assets of the defined benefit plans are invested primarily in foreign and domestic fixed income and equity securities that are subject to fluctuations in market prices. Discount rates used to measure plan liabilities are based on long-term market interest rates. Fluctuations in these market prices and rates can impact pension expense and funding requirements. The investment return before expenses on the Company's defined benefit pension plan assets was a gain of 13.3% in 2019 compared to a loss of 0.1% in 2018. The Company's contributions are funded through cash flows generated from operations. Management anticipates that future cash flows from operations will be sufficient to fund expected future cash contributions. Contributions to defined benefit plans during 2019 were $12.0 million (2018: $11.1 million). The Company expects to contribute $32.4 million to the pension plans in 2020, inclusive of defined benefit, defined contribution and multi-employer plans. 18. TRANSACTIONS WITH RELATED PARTIES Transactions between the Company and its consolidated entities have been eliminated in the Company's 2019 audited consolidated financial statements. The Company sponsors a number of defined benefit and defined contribution plans. During the year ended December 31, 2019, the Company's contributions to these plans were $30.1 million (2018: $28.8 million). Key Management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the Company and/or its subsidiary, directly or indirectly, including any external director of the Company and/or its subsidiary. Remuneration of key Management personnel of the Company is comprised of the following expenses: ($ thousands) Short-term employee benefits Salaries, bonuses, and fees Company car allowances Other benefits Total short-term employee benefits Severance benefits Post-employment benefits Share-based compensation Total remuneration 2019 2018 $ 13,640 $ 9,304 326 137 291 111 $ 14,103 $ 9,706 110 805 7,700 — 732 10,636 $ 22,718 $ 21,074 During the year ended December 31, 2019, key Management personnel of the Company exercised 0.4 million share options (2018: 1.3 million share options) granted under the Maple Leaf Foods share option plans for an amount of $7.8 million (2018: $15.4 million). The Company’s largest shareholder is McCain Capital Inc. (“MCI”) which is beneficially owned or controlled by Mr. Michael H. McCain, Chief Executive Officer and President of the Company. For the year ended December 31, 2019, the Company received services from MCI in the amount of $0.4 million (2018: $0.6 million), which represented the market value of the transactions with MCI. As at December 31, 2019, $0.0 million (2018: $0.4 million) was owing to MCI relating to these transactions. 13  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. McCain Financial Advisory Services ("MFAS"), is an entity jointly controlled by individuals including Mr. Michael H. McCain. For the year ended December 31, 2019, the Company provided services to, and received from, MFAS for a nominal amount which represented the market value of the transactions. 19. SHARE CAPITAL As at December 31, 2019, there were 123,890,126 voting common shares issued and outstanding (December 31, 2018: 124,371,726). As at February 20, 2020, there were 123,890,126 common shares issued and outstanding. In each of the quarters of 2019, the Company declared and paid cash dividends of $0.145 (2018: $0.13) per voting common share, representing a total annual dividend of $0.58 (2018: $0.52) per voting common share and aggregate dividend payments of $71.8 million (2018: $65.1 million). 20. OTHER MATTERS On February 26, 2020, the Board of Directors approved a quarterly dividend of $0.16 per share (up from $0.145 per share in each quarter of 2019), $0.64 per share on an annual basis, payable March 31, 2020 to shareholders of record at the close of business March 13, 2020. Unless indicated otherwise by the Company at or before the time the dividend is paid, the dividend will be considered an Eligible Dividend for the purposes of the “Enhanced Dividend Tax Credit System”. 21. MAPLE LEAF CENTRE FOR ACTION ON FOOD SECURITY The Maple Leaf Centre for Action on Food Security (the “Centre”) is the primary expression of the Company's Sustainability strategy pillar of Better Communities. The Centre is a registered charity working to advance food security through collaboration with other organizations and individuals, through advocating for critical policies and investing in programs required to make sustainable improvements in food security. Additional information regarding the Centre is available on its website at: https://www.feedopportunity.com 14  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. 22. SUMMARY OF QUARTERLY RESULTS The following is a summary of unaudited quarterly financial information for each quarter in the last two fiscal years: ($ millions) Sales Meat Protein Group Plant Protein Group Unallocated(i) Total Sales Gross profit Meat Protein Group Plant Protein Group Unallocated(i) Total Gross profit Selling, general and administrative expenses Meat Protein Group Plant Protein Group Unallocated(i) Total Selling, general and administrative expenses Net Earnings Meat Protein Group Plant Protein Group Unallocated(i) Total Net Earnings Adjusted Operating Earnings(ii) Meat Protein Group Plant Protein Group Unallocated(i) Total Adjusted Operating Earnings Adjusted EBITDA(ii) Meat Protein Group Plant Protein Group Unallocated(i) Total Adjusted EBITDA $ $ $ $ $ $ $ $ $ $ $ $ 2019 2018 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter 871.1 $ 36.8 (0.8) 983.3 $ 42.9 (3.5) 953.3 $ 47.0 (4.5) 970.3 $ 49.7 (4.1) 907.1 $ 1,022.7 $ 995.8 $ 1,016.0 $ 131.8 $ 8.5 39.2 179.5 $ 162.4 $ 9.3 (60.7) 111.0 $ 123.4 $ 10.0 6.4 139.8 $ 150.5 $ 7.2 3.0 160.8 $ 789.3 $ 28.2 — 817.5 $ 129.9 $ 9.0 (6.7) 132.2 $ 872.8 $ 36.4 — 909.2 $ 135.7 $ 11.3 (7.7) 139.3 $ 838.7 $ 36.1 — 874.8 $ 119.3 $ 9.1 (9.8) 118.6 $ 856.1 37.8 — 893.9 133.2 9.5 19.1 161.8 86.4 $ 11.9 — 89.5 $ 16.9 — 78.8 $ 44.9 — 84.0 $ 45.3 — 78.5 $ 7.7 — 80.8 $ 8.4 — 68.8 $ 8.6 — 77.4 11.3 — 98.3 $ 106.4 $ 123.7 $ 129.3 $ 86.2 $ 89.2 $ 77.4 $ 88.7 42.3 $ (3.3) 11.1 50.1 $ 45.4 $ (3.3) — 42.1 $ 84.8 $ (0.4) — 84.4 $ 74.0 $ (7.7) (72.6) (6.3) $ 72.9 $ (7.7) — 65.2 $ 112.7 $ (4.7) — 108.0 $ 39.6 $ (34.9) 8.7 13.4 $ 44.6 $ (34.9) — 9.7 $ 85.4 $ (31.6) (0.4) 53.4 $ 62.1 $ (38.2) (6.4) 17.5 $ 66.5 $ (38.1) — 28.4 $ 110.2 $ (34.9) — 75.3 $ 49.2 $ 1.3 (22.6) 27.9 $ 56.6 $ 2.7 (24.4) 34.9 $ 50.3 $ 0.4 (24.1) 26.6 $ 51.5 $ 1.3 — 52.8 $ 79.5 $ 3.0 — 82.5 $ 54.9 $ 2.9 — 57.8 $ 87.0 $ 4.6 — 91.6 $ 50.6 $ 0.4 — 51.0 $ 79.1 $ 2.0 — 81.1 $ 13.3 (1.7) 0.3 11.9 55.8 (1.8) — 54.0 86.1 3.0 — 89.1 (i) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment’s operating results. (ii) Refer to Non-IFRS Financial Measures starting on page 33 of this document. (iii) Totals may not add due to rounding. Fluctuations in quarterly sales can be attributed to changes in pricing, volume, sales mix, acquisitions, foreign exchange and adoption of new accounting standards. Fluctuations in quarterly net earnings can be attributed to similar factors as noted above, pork and poultry industry processing margins, restructuring and other related costs, operating efficiencies, changes in the fair value of derivative and non-derivative financial instruments and biological assets, acquisitions, transitional costs incurred, provision estimate adjustments, gains/losses on disposal of assets and changes in tax regulations. For an explanation and analysis of quarterly results, please refer to the Company’s Management’s Discussion and Analysis for each of the respective quarterly periods which are filed on SEDAR and also available on the Company’s website at www.mapleleaffoods.com. 15  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. 23. SUMMARY OF 2019 FOURTH QUARTER RESULTS The following table summarizes the Company's sales, gross profit, SG&A expenses, Adjusted Operating Earnings, Adjusted EBITDA, and Adjusted EBITDA margin by operating segment for the fourth quarter ended December 31, 2019 and December 31, 2018: Three months ended December 31, 2019 Three months ended December 31, 2018(i) ($ millions) Sales Gross profit Selling, general and administrative expenses Adjusted Operating Earnings(iii) Adjusted EBITDA(iii) Adjusted EBITDA margin(iii) Meat Protein Group Plant Protein Group Non- Allocated(ii ) $ $ $ $ $ 970.3 150.5 84.0 66.5 110.2 49.7 7.2 45.3 (38.1) (34.9) (4.1) 3.0 $ $ — $ — $ — $ Total 1,016.0 160.8 129.3 28.4 75.3 $ $ $ $ $ Meat Protein Group 856.1 133.2 77.4 55.8 86.1 Plant Protein Group Non- Allocated(ii) 37.8 9.5 11.3 (1.8) 3.0 — $ 19.1 $ — $ — $ — $ Total 893.9 161.8 88.7 54.0 89.1 11.4% (70.3)% N/A 7.4% 10.1% 8.0% N/A 10.0% (i) Comparative figures have been presented to align with current reportable segments. (ii) Non-allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment’s operating results. (iii) Refer to the section titled Non-IFRS Financial Measures starting on page 33 of this document for the definition of these non-IFRS measures. Sales for the fourth quarter increased 13.7% to $1,016.0 million compared to $893.9 million last year, or increased 10.4% after adjusting for acquisitions. Sales growth was driven by meat protein, tied to higher meat values, favourable mix and volume supported by food renovation and growth in sustainable meats, coupled with accelerated growth in plant protein. SG&A expenses for the fourth quarter of 2019 were $129.3 million (12.7% of sales), compared to $88.7 million (9.9% of sales) last year. The increase is primarily related to investments in plant protein, acquisitions and variable compensation, tied to business performance. Adjusted Operating Earnings for the fourth quarter of 2019 were $28.4 million compared to $54.0 million last year. The decrease in Adjusted Operating Earnings reflects strategic investments in plant protein and the short term dilutive impact of acquisitions which more than offset strong commercial performance in meat protein, driven by favourable sales mix, pricing actions taken to mitigate impact of higher input costs, and continued growth in sustainable meats. Results also benefited from stronger pork markets compared to a year ago. Adjusted EBITDA margin for the fourth quarter decreased to 7.4% from 10.0% last year, consistent with the factors noted above. Net Earnings for the fourth quarter of 2019 were $17.5 million ($0.14 per basic share) compared to $11.9 million ($0.10 per basic share) last year.The increase is attributable to the same factors as noted above and lower restructuring and acquisition costs, which are excluded in calculating Adjusted Operating Earnings. Basic Earnings per Share was $0.14 for the fourth quarter of 2019 compared to $0.10 last year, due to the factors described above. Adjusted Earnings per Share in the fourth quarter of 2019 was $0.12 compared to $0.29 last year. Meat Protein Group Sales for the fourth quarter increased 13.3% to $970.3 million compared to $856.1 million last year, or increased 9.9% after adjusting for acquisitions. Sales growth was driven by stronger pork market prices, pricing actions implemented in the third quarter and in late 2018 to mitigate higher input costs and mix tied to food renovation supporting major brand strategies. Continued expansion of sustainable meats, including double-digit growth in the U.S., also contributed to strong sales. Gross profit for the fourth quarter of 2019 was $150.5 million (gross margin of 15.5%) compared to $133.2 million (gross margin of 15.6%) last year. Strong commercial and operational performance, including favourable mix attributed to food renovation, continued expansion of sustainable meats and pricing action taken to mitigate higher input costs, contributed to higher gross profit in the quarter. This improved performance was partially offset by bio-security costs in our hog growing operations and a temporary import suspension of Canadian pork into China. SG&A expenses for the fourth quarter of 2019 were $84.0 million (8.7% of sales), compared to $77.4 million (9.0% of sales) last year. The increase in SG&A expenses is primarily related to variable compensation dependent on business performance. On a percentage of sales basis, SG&A expenses for meat protein were 0.3% lower than last year. Adjusted Operating Earnings for the fourth quarter of 2019 were $66.5 million compared to $55.8 million last year. Improved commercial and operational performance was driven by favourable mix attributed to food renovation, higher sustainable meats sales and pricing 16  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. action taken to mitigate higher input costs. This was partially offset by increased bio-security costs in our hog barns and a temporary import suspension of Canadian pork into China. Increases in SG&A expenses, as noted above, also impacted earnings in the quarter. Adjusted EBITDA Margin for the fourth quarter was 11.4% compared to 10.1% last year. The increase is consistent with the factors noted above. Adjusted EBITDA Margin was impacted by the adoption of IFRS 16. Upon the adoption of IFRS 16, leases previously classified as operating leases were capitalized on the Company’s consolidated balance sheet. For the fourth quarter an incremental $8.8 million in depreciation and $2.1 million in interest was recorded on the Company's consolidated statement of earnings, not included in Adjusted EBITDA. Plant Protein Group Sales for the fourth quarter increased 31.5% to $49.7 million compared to $37.8 million last year. Sales growth was driven by expanded distribution of new products and continued volume increases in its existing portfolio. Gross profit for the fourth quarter of 2019 was $7.2 million (gross margin of 14.4%) compared to $9.5 million (gross margin of 25.0%) last year. The decrease in gross profit was attributed to inefficiencies associated with start-up production and other costs related to supporting high growth. SG&A expenses for the fourth quarter of 2019 were $45.3 million (91.1% of sales), compared to $11.3 million (29.8% of sales) last year. The increase in SG&A expenses reflects the evolution of the Company’s plant protein strategy to drive sales growth and secure market share in a rapidly growing market. Supporting this strategy, significant investment in advertising, promotion and marketing was incurred during the quarter to enhance brand awareness and support new product launches and expanded distribution. In addition, the Company invested to broaden organizational capacity and its innovation pipeline. Adjusted Operating Earnings for the fourth quarter of 2019 were a loss of $38.1 million compared to a loss of $1.8 million last year. The decline in Adjusted Operating Earnings reflects a deliberate focus on accelerating sales growth through increased investments in advertising, promotion and marketing, organizational capacity, product development and operational efficiency. 24. DISCUSSION OF FACTORS IMPACTING THE COMPANY'S OPERATIONS AND RESULTS Impact of Currency The following table outlines the changes in currency rates that have affected the Company’s business and financial results: (Unaudited) U.S. dollar / Canadian dollar(i) Canadian dollar / Japanese yen(i) (i) Source: Bloomberg. As at December 31, 2019 1.30 $ Annual Averages 2019 2018 2017 2016 2015 2014 $ 1.33 $ 1.30 $ 1.30 $ 1.32 $ 1.28 $ 1.10 ¥ 83.63 ¥ 82.18 ¥ 85.23 ¥ 86.48 ¥ 82.10 ¥ 94.66 ¥ 95.63 The Canadian dollar, on average weakened relative to the U.S. dollar by 2.4% in 2019. In the short term, a stronger Canadian dollar compresses export margins in the Company’s primary pork processing and hog production operations. Conversely, a stronger Canadian dollar decreases the cost of raw materials and ingredients in the domestic prepared meats business. The prepared meats business is able to react to changes in input costs over time through pricing, cost reduction, or investment in value-added products. However, over the longer-term, a stronger Canadian dollar reduces the relative competitiveness of the domestic Canadian packaged goods operation, as imports of competing products from the U.S. become more competitive. Conversely, a weaker Canadian dollar increases the Company's ability to export and expand into the U.S. market. During 2019, the Japanese yen, on average increased in value relative to the Canadian dollar by 3.6%. In general, a stronger Japanese yen expands export margins to Japan in the Company’s fresh pork business. The Company ultimately seeks to manage pricing to offset the impact of currency fluctuations. The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in foreign exchange rates. 17  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Market Influences for Pork Value Chain The following table outlines the change in key commodity prices that affected the Company’s business and financial results: (Unaudited) Pork cutout (US$ per cwt)(i)(ii) Hog market price per cwt (US$ per cwt)(i)(ii) Hog market price per cwt (CAD per cwt)(i)(ii) Corn (US$ per bushel)(iii) As at December 31, 2019 $ 73.02 Annual Averages 2019 2018 2017 2016 2015 2014 $ 77.04 $ 75.18 $ 84.13 $ 78.66 $ 79.13 $ 110.20 $ 57.93 $ 67.33 $ 65.12 $ 71.42 $ 65.09 $ 70.59 $ 105.14 $ 75.26 $ 89.38 $ 84.42 $ 92.72 $ 86.23 $ 90.28 $ 116.14 $ 3.88 $ 3.83 $ 3.68 $ 3.59 $ 3.58 $ 3.81 $ 4.18 (i) As at December 31, 2019, rate based on spot prices for the week ended December 31, 2019 based on CME (Source: USDA). (ii) Annual averages based on five-day average on CME (Source: USDA). (iii) Daily close prices (Sources: Bloomberg and CME). In aggregate for 2019, the market influences for the entire pork value chain were lower than the five year average. Market volatility within the year was very high due to the continuation of trade disputes between the U.S. and their major trade partners. Producer margins were well below the five-year average due to the continued large increase in the U.S. domestic pork supply. Pork industry processor margins were slightly below the five year average and 2018 levels. The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in commodity prices. Seasonality The Company is sufficiently large and diversified, with a balanced portfolio, that seasonal factors within various parts of its operations tend to offset each other; therefore, in isolation, they do not have a material impact on the Company’s consolidated earnings. For example, in general, margins on fresh pork products tend to be higher in the last half of the year when hog prices historically decline which in turn depresses earnings from raising hogs, maintaining balance within the Company's pork complex. Strong demand for grilled meat products positively affects categories such as wieners and fresh sausages in the summer, while back-to-school promotions support increased sales of sliced meats and lunch items in the fall. Higher demand for turkey and ham products occurs in the spring and fourth quarter holiday seasons. 25. ENVIRONMENT Maple Leaf Foods is committed to maintaining high standards of environmental responsibility and positive relationships in the communities where it operates. It operates within the framework of an environmental policy entitled “Our Environmental Sustainability Commitment” that is approved by the Board of Directors’ Safety and Sustainability Committee (the "Committee"). The Company’s environmental program is monitored on a regular basis by the Committee, including compliance with regulatory requirements and the use of internal environmental specialists and independent, external environmental experts. The Company continues to invest in environmental infrastructure related to water, waste, and air emissions to ensure that environmental standards continue to be met or exceeded, while implementing procedures to reduce the impact of operations on the environment. Expenditures related to current environmental requirements are not expected to have a material effect on the financial position or earnings of the Company. However, it is possible that events could occur causing environmental expenditure to be significant and have a material adverse effect on the Company’s financial condition or results of operations. Such events could include, but not be limited to, additional environmental regulation or the occurrence of an adverse event at one of the Company’s locations. The Company currently has a provision of $2.7 million related to expected environmental remediation costs. Please refer to Note 13 of the consolidated financial statements for additional information. As a large food company there are health, environmental, and social issues that go beyond short-term profitability that Management believes must shape its business if the Company is to realize a sustainable future. Increasingly, moving beyond compliance to materially reducing the Company's environmental footprint is critical to addressing mounting environmental issues and realizing increased operating efficiencies and cost reductions. The Company is committed to reducing its environmental footprint by 50.0% by 2025, encompassing the three areas where Maple Leaf Foods has the largest environmental impact: climate change (energy usage and emissions), water usage and solid waste. The Company has developed environmental sustainability action plans at every operation to deliver on its environmental goals. In 2019, the Company has made progress towards the implementation of these plans and reducing the Company’s environmental footprint. In the fourth quarter of 2019, the Company publicly announced the development of a comprehensive carbon management strategy that includes the setting and approval of SBTs for GHG emissions reduction, and the achievement of becoming a carbon neutral company. 18  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. 26. CARBON MANAGEMENT STRATEGY In 2019, Maple Leaf Foods completed a comprehensive carbon management strategy that includes two key components: SBTs for GHG emissions reduction, and carbon neutrality. Science-Based Targets SBTs provide companies with a clearly defined pathway to future-proof growth by specifying how much and how quickly companies need to reduce GHG emissions to meet the requirements of the global Paris Climate Accord. On September 9, 2019, the Science- Based Target Initiative ("SBTi") approved Maple Leaf Foods' SBTs for GHG emissions reduction. As part of this approval, the SBTi verified Maple Leaf Foods' comprehensive carbon inventory that was developed in accordance with the internationally accepted Greenhouse Gas Protocol - developed by the World Resources Institute and World Business Council for Sustainable Development. Carbon Neutral Maple Leaf Foods became carbon neutral by aggressively reducing GHG emissions and investing in high-impact third party environmental projects to neutralize remaining and currently unavoidable emissions. Using the carbon inventory that was validated by SBTi, Maple Leaf Foods sourced certified Renewable Energy Credits ("RECs") and Verified Emissions Reductions ("VERs") to offset the GHGs that the Company has currently not been able to avoid, reduce or otherwise eliminate. Maple Leaf Foods purchased RECs to offset the GHG emissions associated with the Company's electricity consumption from wind energy projects that have certified by the credible standard - Green-e. Maple Leaf Foods purchased VERs to offset the GHG emissions associated with all other operations from projects that have been certified by the following credible standards: Verified Carbon Standard; CSA Group5; American Carbon Registry; and the Gold Standard. Through the Company's partner, Schneider Electric, a world leader in renewable energy and carbon offset procurement, Maple Leaf Foods has purchased the equivalent amount of RECs and VERs equal to the Company's Scope 1, 2 and a portion of the Scope 3 GHG emissions to bring the Company’s net GHG emissions to zero. Maple Leaf Foods announced on November 7, 2019 it has become the first food company in Canada to set SBTs, and the first major food company in the world to be carbon neutral. 27. RISK FACTORS In carrying out its business and operations, the Company faces many risks. Many of these risks are described below, including those risks that the Company currently considers to be most material. These risk factors, along with other risks and uncertainties not currently known to the Company, or that the Company currently considers immaterial, could materially and adversely affect the Company’s performance, operating results and ability to pay dividends or return capital to shareholders. Such risks could cause actual events to differ materially from those described in any forward-looking statements, including any financial outlooks, targets or goals. Many of the risks are beyond the Company's control and, in spite of any efforts the Company may make to manage or mitigate its risk exposure, there is no guarantee that such risk management or mitigation activities will be successful. Readers should carefully consider the risk factors set out below, along with the other information contained in this document and the Company's other public filings before making an investment decision. Competition, Market Conditions and the Activities of Competitors and Customers The food industry is intensely competitive. In many product categories in which the Company operates there are low barriers to entry. Competition is based on factors such as product availability, product quality and taste, price, brand recognition, product variety, product packaging and design, shelf space, reputation, nutritional and other claims, effective promotions, and the ability to target changing consumer preferences. The Company may experience price pressure as a result of, among other things, competitors’ promotional effort and strategies to grab market share, as well as in product categories characterized by low capacity utilization. Competitive pressures from existing competitors as well as new entrants into various markets could result in reduced sales, margins, profits, and market share, all of which could have a material adverse effect on the Company’s financial condition and results of operations. The Company has seen intense competitive pressure in the plant protein space, as new entrants and more traditional food companies vie for market share in this rapidly evolving market. Given the rapidly evolving nature of the plant protein business there is inherent volatility. If the Company's assumptions about the potential growth of the plant protein sector do not materialize, or if its assumptions about its ability to maintain and gain market share are incorrect, it is unlikely that the Company will be able to reach its 2029 sales and gross margin growth targets. There is no guarantee that the investment that Company is making in marketing, advertising, and innovation will be successful in attracting market share or that it will deliver the anticipated long-term financial benefits underpinning the growth targets. The Company's ability to increase revenue and execute its business strategy depends in part on its ability to cost-effectively attract new customers and consumers and retain existing customers and consumers. If the Company is unable to do this, its business, financial condition and operating results may be materially adversely affected. Further, if customers or consumers do not perceive the Company's product offerings to be of sufficient value and quality, or if it fails to offer new and relevant product offerings, it may not be able to attract or retain customers or engage existing customers so that they continue to purchase products. For example, if growth in demand for sustainable meat does not materialize or if the expected benefits associated with brand renovation are not realized, the Company may not reach its Adjusted EBITDA targets in the Meat Protein Group or its consolidated growth targets. 19  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. The Company competes with other companies who may have greater financial and other resources, lower operating costs and lower cost of capital. In some instances, this could force the Company to lower prices, resulting in lower profitability or, in the alternative, cause it to lose market share if it fails to lower prices. In addition, some competitors may be more innovative, have more resources and/ or be able to bring new products to market faster. This could put the Company at a disadvantage in keeping up with the pace of innovation and ability to introduce new products that appeal to evolving consumer trends. Innovation, speed to market and brand identification have been particularly important drivers in the plant protein market over the past year. Overall, these competitive pressures could cause the Company to lose market share, which may require it to lower prices, increase marketing and advertising expenditures, and/or increase the use of discounting or promotional campaigns, each of which could adversely affect its margins, could result in a decrease in its operating results and profitability and cause it to miss the growth targets it has set. Availability and Access to Capital The ability of the Company to secure short-term and long-term financing on terms acceptable to the Company is critical to fund business growth and manage its liquidity. As a result of acquisitions and return of capital to shareholders through dividend increases and share buybacks, the Company is in a net debt position. Furthermore, the Company is embarking on a period of elevated capital expenditures as it invests in large scale and efficient processing capacity. The failure or inability of the Company to secure short-term and long-term financing in the future on terms that are commercially reasonable and acceptable to the Company could have a significant impact on the Company’s opportunity for growth. Even if the Company does successfully raise additional capital when needed, if it issues equity securities, investors will be diluted, and if it raises additional debt, it will be further leveraged and could be subject to restrictive covenants, such as restrictions on paying dividends or being required to pledge assets. Livestock Health and Risks Associated with Animal Disease The Company’s operations and the demand for the Company’s products can be significantly affected by outbreaks of disease among hogs and poultry (collectively "livestock") or attributed to livestock whether it occurs within the Company’s production operations or in the operations of third parties. Governments combat the spread of disease during outbreaks with measures that include among other things restrictions on the movement of meat and livestock between jurisdictions which results in supply excesses and shortages and price volatility which in some cases reaches extreme levels. In 2018, there was an outbreak of African Swine Fever in China which has continued to spread. While restrictions have been put in place by the foreign jurisdictions to contain the spread of the disease in hog populations, there can be no assurance the outbreak will be contained or that the outbreak will not spread to areas that supply the Company with live hogs or that additional restrictions will be put in place that will impede the Company’s access to other markets or create volatile market conditions. These could have a material adverse impact on the Company’s operations and financial condition. In the longer term, the availability of livestock in the relative proximity of the Company's processing facilities may be impacted by climate change if the availability of feed grains in the relative proximity of its processing facilities is altered. The Company monitors herd and flock health status and has strict bio-security procedures and employee training programs throughout its hog production system and ensures the animals receive veterinary medications as required. However, there is no guarantee these processes will not fail. In addition, not all livestock procured by the Company may be subject to these processes, as the majority of livestock processed by the Company is purchased from independent third parties. In addition to risks associated with maintaining the health of the Company’s livestock, any outbreak of disease elsewhere in the world could reduce consumer confidence in the meat products affected by the particular disease and generate adverse publicity. The Company has developed a comprehensive internal contingency plan for dealing with animal disease occurrences and/or a more broad-based pandemic. It has taken steps to support the Canadian government in enhancing both the country’s prevention measures and preparedness plans. There can be no assurance, however, that these prevention measures or plans will be successful in minimizing or containing the impact of an outbreak of animal disease . Accordingly, there can be no assurance that an outbreak of animal disease in Canada or elsewhere will not have a material adverse effect on the Company’s financial condition and results of operations. International Trade The Company exports significant amounts of its products to customers outside of Canada. In addition, the Company imports various inputs and ingredients from other jurisdiction. To the extent that the Company is dependent on imports or export for its business, it is subject to inherent risks associated with international trade, including: change in the free flow of food products between countries; fluctuations in currency values; discriminatory fiscal policies; unexpected changes in local regulations and laws; and the uncertainty of enforcement of remedies in foreign jurisdictions. In addition, trade agreements between Canada and foreign jurisdictions could change and foreign jurisdictions could impose tariffs, quotas, trade barriers, and other similar restrictions on the Company’s international sales, as well as subsidize competing agricultural products. International trade and the associated access to markets can be influenced by geopolitical events beyond the Company's control. As discussed under the subheading "Livestock Health and Risks Associated with Animal Disease," the threat of the spread of animal disease could result in significant disruption of international trade in the meat protein business, as governments use international trade barriers as a tool to help manage the spread of such diseases. All of these risks could result in increased costs or decreased revenues, either of which could have a material adverse effect on the Company’s financial condition and results of operations. For example, for a period of approximately four months in 2019, China 20  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. imposed a ban on all imports of pork to China which had an adverse effect on the Company's pork sales and as a result the Company's overall operating results. Food Safety, Customer and Consumer Liability and Product Recalls The Company is subject to risks that affect the food industry in general, including risks posed by food spoilage, accidental contamination, product tampering, consumer product liability, and the potential costs and disruptions of a product recall. The Company’s products are susceptible to contamination by organisms that can cause illness, or pathogens, such as certain strains of Escherichia coli (E. coli), Salmonella and Listeria. There is a risk that these pathogens could be present in certain products produced by the Company. The Company actively manages these risks by maintaining strict and rigorous controls and processes in its manufacturing facilities and distribution systems and by maintaining prudent levels of insurance. However, the Company cannot assure that such systems, even when working effectively, will eliminate the risks related to food safety. The Company could be required to recall certain of its products in the event of contamination or adverse test results or as a precautionary measure, similar to other recalls initiated in the past. There is also a risk that not all of the product subject to the recall will be properly identified, or that the recall will not be successful or not be enacted in a timely manner. Any product contamination could subject the Company to product liability claims, claims for economic losses by customers and others in the supply chain, adverse publicity and government scrutiny, investigation or intervention, resulting in increased costs and decreased sales. Many of these costs and losses are not covered by insurance. Any of these events could have a material adverse impact on the Company’s financial condition and results of operations. Execution of Capital Projects The Company has multiple capital projects in development and underway. The successful completion of these projects is dependent on a number of factors, many of which are outside the Company's control. The timing for completion and capital costs of these projects may change depending on many factors some of which include the availability and cost of labour, materials and equipment, contractor non-performance and weather conditions and cost of engineering, construction and other consulting services. The Company may incur financing costs during the planning and construction phases of its growth projects, but the expected cash flows from the projects will not materialize until after they are completed. To the extent projects are completed significantly behind schedule or over budget, its business operations and results may be adversely affected. Currently, the Company anticipates that completion of its new poultry plant in London, Ontario will be delayed until the second quarter of 2022. This delay will affect the timing of cash flows which could have an impact on the Company reaching the Adjusted EBITDA margin target that it set for its Meat Protein Group, plus it could impact the availability of previously secured government concessions for the project. In the Plant Protein Group, there is a delay in the construction of the new Shelbyville, Indiana facility. This delay could affect the Company's growth plans for this business, as well as its ability to access previously secured concessions for the project. Cyber Security and Overall Management of the Company's Information Systems The Company relies on information technology systems in all areas of operations. These systems are subject to an increasing number of sophisticated cyber threats. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving. Should a cyber-attack be successful and a breach of sensitive information occur or its systems and services be disrupted, Maple Leaf Foods' financial position, brand, and/or ability to achieve its strategic objectives may be negatively affected. The Company maintains policies, processes, and procedures to address capabilities, performance, security, and system availability including resiliency and disaster recovery for systems, infrastructure, and data. Security protocols, along with information technology security policies, address compliance with information technology security standards, including those relating to information belonging to the Company’s customers, employees and suppliers. The Company actively monitors, manages, and continues to enhance its ability to mitigate cyber risk through its enterprise wide programs. However, there is no assurance that any of these measures will be successful. The Company regularly implements process improvement initiatives to simplify and harmonize its systems and processes to optimize performance and reduce the risk of errors in financial reporting. There cannot be any guarantee that any such changes will improve current processes or operating results or reduce the risk of errors in financial reporting. Any of these failures could have a material adverse impact on the Company’s financial condition and results of operations. Return of Capital to Shareholders is Not Guaranteed In each of the years 2015 through 2019 the Company entered into normal course issuer bids and purchased during those periods a total of 22.6 million common shares at a cost of $621.8 million. These purchases included 0.8 million common shares in 2019 at a cost of $20.3 million. The Company also raised its dividend rate in each of those years. There can be no assurance that the Company will continue with share repurchases. The payment of dividends is at the discretion of the Board of Directors and there can be no assurance that the Company will maintain or increase its dividends. Failure to continue with share repurchases and/or failure to pay dividends or increase the rate at which dividends are paid may have a material adverse effect on the Company’s share price. Business Acquisitions and Divestitures The Company has made acquisitions over the last two years and continues to review opportunities for strategic growth through acquisitions. Any acquisitions may involve large transactions or realignment of existing investments, and present financial, managerial and operational challenges, which, if not successfully overcome, may reduce the Company’s profitability. These risks include: the 21  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. diversion of Management’s attention from existing core businesses; difficulties integrating or separating personnel, financial, and other systems; adverse effects on existing business relationships with suppliers and customers; inaccurate estimates of the rate of return on acquisitions or investments; inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets, which could reduce future reported earnings; potential loss of customers or key employees of acquired businesses; and indemnities and potential disputes with the buyers or sellers. Any of these items could materially adversely affect the Company’s financial condition and results of operations. The Company may, from time to time, determine that certain aspects of its operations are not required to be owned to support its core business operations and may seek to sell an operation if it believes it can realize sufficient value from its sale. Such a sale may divert Management’s attention from existing core businesses during the sale process, create difficulties in separating personnel, financial, and other systems, and cause adverse effects on existing business relationships with suppliers and customers. Any of these items could materially adversely affect the Company’s financial condition and result in a reduction of earnings beyond the earnings of any operation to be sold. Climate Change Maple Leaf Foods’ commitment to its purpose to Raise the Good in Food drives the Company to achieve its aspirational vision: To Become the Most Sustainable Protein Company on Earth. Reducing its environmental impact to sustainable levels is a core strategy supporting the Company’s vision. The potential effects of climate change could have a material impact on the Company and its operations. The Company has set environmental footprint reduction targets and has executed certain energy efficiency and GHG emission reduction projects which were at the time of implementation commercially economic. There can be no assurance the ongoing operating costs of those initiatives will continue to be financially beneficial. Over the long-term, the Company's products, processes and facilities may require significant restructuring to comply with laws and regulations enacted to combat climate change or to meet competitive industry standards for costs and efficiency. These costs may be material. In the short term, new laws or taxes may be imposed by governments, the cost of which may not be able to be passed on in the price of the Company’s products. To maintain its reputation with consumers and to support its sustainability strategy, the Company may consider it necessary to voluntarily adopt more aggressive GHG and carbon emission reduction initiatives, the cost of which may not be recovered in the selling price of its products. Pension Plan Assets and Liabilities In the normal course of business, the Company provides post-retirement pension benefits to its employees under both defined contribution and defined benefit pension plan arrangements. The funded status of the plans significantly affects the net periodic benefit costs of the Company’s pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, and the market value of plan assets can affect the level of plan funding required, increase the Company’s future funding requirements, and cause volatility in the net periodic pension cost as well as the Company’s financial results. Any increase in pension expense or funding requirements could have a material adverse impact on the Company’s financial condition and results of operations. Hog and Pork Market Cyclicality and Supply The Company’s results of operations and financial condition are partially dependent upon the cost and supply of hogs as well as the selling prices for fresh meat products, both of which are influenced by constantly changing market forces of supply and demand over which the Company has little or no control. These prices, for the most part, are denominated in or related to U.S. dollars, which adds further variability due to fluctuations in exchange rates. The North American primary pork processing markets are highly competitive, with major and regional companies competing in each market. The market prices for pork products regularly experience periods of supply and demand imbalance and are sensitive to changes in industry processing capacity. Other factors that can influence the supply and market price of live hogs include: fluctuations in the size of herds maintained by North American hog suppliers; environmental and conservation regulations; economic conditions; the relative cost of feed for hogs; weather; livestock diseases; and changes to foreign jurisdiction restrictions on drugs, vitamin and feed additives used in hogs raised in Canada. There can be no assurance that all or part of any such increased costs experienced by the Company from time to time can be passed along to consumers of the Company’s products directly or in a timely manner or that meat restricted from certain foreign markets can be sold at acceptable prices. The factors described above may also impact the supply of hogs available for processing at the Company’s pork processing plants by negatively impacting the financial strength of the various independent farming operations upon which the Company relies to meet its requirements for hogs. Any of these could have a material adverse effect on the Company's financial condition and results of operations. Over the long term, a reduction in the availability of livestock at the Company’s processing plant may result in higher transportation costs if livestock is sourced from more distant growing areas or result in higher capital costs if the Company is required to relocate processing facilities. There can be no assurance that those extra operating costs or capital costs can be passed on to customers which may have a material adverse effect on the Company’s financial condition and results of operations. The Company is increasing its sales of raised without antibiotic meat products and in turn expanding the portion of its hog supply raised without antibiotics. Animals raised without antibiotics have a higher cost of production and command higher prices. If the Company fails to find markets or buyers willing to pay the premium price for all the raised without antibiotic meat produced, a portion of the higher cost meat will be sold through lower price conventional channels. 22  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Furthermore, the Company’s supply of raised without antibiotic meats may be at a greater risk supply disruption in the event of an animal disease outbreak. Refer to the subheading "Livestock Health and Risks Associated with Animal Disease." Availability of Plant Protein Ingredients The Company's ability to secure a continuing supply of ingredients at competitive prices depends on many factors beyond its control, such as the number and size of farms that grow the source crops, the risks associated with farming businesses (including poor harvests impacting the quality of the crops), changes in national and world economic conditions and the Company's ability to forecast its ingredient requirements. The ingredients used in the Company's plant protein products are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilence. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of, or increase the price of, quality ingredients. In addition, the Company may purchase some ingredients outside of the U.S. or Canada, and the availability of such ingredients may be affected by events in other countries. The Company also competes with other food producers in the procurement of ingredients, and this competition may increase in the future if consumer demand for plant protein products increases. If supplies of quality ingredients are reduced or there is greater demand for such ingredients from the Company and others, it may not be able to obtain sufficient supply that meets the Company's quality standards on favorable terms, or at all, which could impact the Company's ability to supply products to distributors and retailers and may adversely affect its business, growth plans, results of operations and financial condition. Commodities and Hedging Strategies The Company is a purchaser of, and its business is dependent on, certain commodities in the course of normal operations, such as feed grains, livestock, plant protein ingredients, and energy, such as oil-based fuel, natural gas, and electricity. Commodity prices are subject to fluctuation and such fluctuations are sometimes severe. The Company may use commodity futures and options for hedging purposes to reduce the effect of changing prices in the short term, but such hedges may not be successful in mitigating this commodity price risk and may, in some circumstances, subject the Company to loss. On a longer-term basis, the Company attempts to manage the risk of increases in commodities and other input costs by increasing the prices it charges to its customers or switching to alternatives; however, no assurance can be given that customers will continue to purchase the Company’s products if prices rise or that alternatives may be available or less costly. Any fluctuations in commodity prices that the Company is unable to properly hedge or mitigate could have a material adverse effect on the Company’s financial condition and results of operations. Supply Management Under Canada’s system of supply management, the Company’s poultry operations are required to source substantially all live poultry for processing from Canadian farms which are collectively subject to restrictions on production under a quota system. Furthermore, the price at which the live poultry is available is also controlled. The supply management system may limit the availability of live poultry for processing impeding the Company’s growth in the market or could create a circumstance where excesses impact the price of poultry meat without a corresponding adjustment to the controlled live poultry price. Furthermore, any dismantling of the supply management system could have negative effect on individual producers and disrupt the availability of live poultry in Canada. In that event, the Company may not be able to find alternative sources of live supply which could have a material adverse effect on the Company’s financial condition and results of operations. Legal Matters In the normal course of its operations, the Company becomes involved in various legal actions including class actions, either as plaintiff or defendant, relating to its commercial activities and relationships, employment matters, product liabilities, in addition to other things. This includes a class action that was launched in respect of pricing practices at packaged bread manufacturers and retailers that are the subject of an ongoing investigation by the Competition Bureau. Maple Leaf Foods has been advised that it is not the subject of the investigation. It believes that it was added as a defendant to the class action as a result of the share ownership position it previously held in Canada Bread. The Company generally believes that the resolution of these various types of claims will not have a material effect on the Company. However, the final outcome with respect to any outstanding or actions or with respect to future claims cannot be predicted with certainty. The Company maintains typical insurance coverages for a company of its size and nature. As a result, insurance coverage may be available for some claims. In some circumstances, legal claims may not be covered by insurance or the insurance coverage may not be sufficient to cover the claimed losses. Further, even if any action is settled within insurance limits, this can result in increases to the Company’s insurance premiums. Therefore, there can be no assurance that their resolution will not have a material adverse effect on the Company’s financial condition or results of operations. Reliance on Other Manufacturers The Company relies on contract manufacturers for production of some of it products for reasons such as, seasonal peak demand, unavailability of specialized equipment, or efficiency in the case of low volume product lines. Acceptable contract manufacturers may not always be available which could result in higher production costs, additional capital requirements or lost sales. While the Company maintains a strict quality and food safety protocol and monitoring regime, any deficiencies could result in product liability, recalls or other 23  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. consequence that could negatively impact the Company’s reputation and could have a material adverse effect on the Company’s financial condition and results of operations. Regulation The Company’s operations are subject to extensive regulation by government agencies in the countries in which it operates, including: the Canadian Food Inspection Agency; the Ministry of Agriculture in Canada; provincial Ministries of the Environment in Canada; and the United States Department of Agriculture. These agencies regulate the processing, packaging, storage, distribution, advertising, and labeling of the Company’s products, including food safety standards. The Company’s manufacturing facilities and products are subject to inspection by federal, provincial, and local authorities. The Company strives to maintain compliance with all laws and regulations and maintains all permits and licenses relating to its operations. Nevertheless, there can be no assurance that the Company is in compliance with all such laws and regulations, has all necessary permits and licenses, and will be able to comply with such laws and regulations, permits and licenses in the future. Failure by the Company to comply with applicable laws and regulations and permits and licenses could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on the Company’s financial condition and results of operations. Various governments throughout the world are considering regulatory proposals relating to genetically modified organisms, drug residues in food ingredients, food safety, and market and environmental regulation that, if adopted, may increase the Company’s costs. There can be no assurance that additional regulation will not be enacted. In fact, new regulations and standards were enacted to address the risks associated with certain pathogens in response to the Company’s August 2008 recall of ready-to-eat meat products. If any of these or other proposals or regulations are enacted, the Company could experience a disruption in the supply or distribution of its products, increased operating costs, and significant additional cost for capital improvements. The Company may be unable to pass on the cost increases associated with such increased regulatory burden to its customers without incurring volume loss as a result of higher prices. Any of these events could have a material adverse effect on the Company’s financial condition and results of operations. Foreign Currencies A portion of the Company’s revenues and costs are either denominated in or directly linked to other currencies (primarily U.S. dollars and Japanese yen). In periods when the Canadian dollar has appreciated both rapidly and materially against these foreign currencies, revenues linked to U.S. dollars or Japanese yen are immediately reduced, while the Company’s ability to change prices or realize natural hedges may lag the immediate currency change. The effect of such sudden changes in exchange rates can have a significant immediate impact on the Company’s earnings. Due to the diversity of the Company’s operations, normal fluctuations in other currencies do not generally have a material impact on the Company’s profitability in the short term due to either natural hedges and offsetting currency exposures (for example, when revenues and costs are both linked to other currencies) or the ability in the near term to change prices of its products to offset adverse currency movements. However, as the Company competes in international markets, and faces competition in its domestic markets from U.S. competitors, significant changes in the Canadian to U.S. dollar exchange rate can have, and have had, significant effects on the Company’s relative competitiveness in its domestic and international markets, which can have, and have had, significant effects on the Company’s financial condition and results of operations. Reputation The Company is committed to its vision of becoming the most sustainable protein company on earth and by making meaningful progress on its sustainability commitments. The Company strongly values it's reputation as a credible, responsible corporate citizen with a track record of creating shareholder value. Maintaining a positive reputation in the eyes of its customers, consumers, communities, governments, regulatory bodies and the general public is important to its continued success. The potential for deterioration of the Company's reputation may arise in many contexts and for many different reasons. As a result reputational risk cannot be managed in isolation from other forms of risk. For example, any real or perceived quality or safety concerns, whether or not ultimately based on fact and whether or not involving the Company (such as incidents involving competitors, or the way in which products are handled by customers, consumers or others in the distribution chain after they leave the control of the Company), could cause negative publicity and reduced confidence in the Company, its brand or its products, which could in turn harm its reputation and operating results. Any loss of confidence on the part of consumers in the Company's products, brands, the ingredients it uses or in the safety and quality of it's products would be difficult and costly to overcome. The growing use of social and digital media by the Company, its consumers and third parties increases the speed and extent that information or misinformation and opinions can be shared. Negative publicity about the Company, its brands or its products on social or digital media could seriously damage it's reputation. If the Company does not maintain the favorable perception of its brands, the Company's sales and profits could be negatively impacted. Consumer Trends Success of the Company depends in part on the Company’s ability to respond to market trends and produce innovative products that anticipate and respond to the changing tastes and dietary habits of consumers. From time to time certain products can be deemed to be more or less healthy and this can impact consumer buying patterns. The Company’s failure to anticipate, identify, or react to these changes or to innovate could result in declining demand and prices for the Company’s products, which in turn could have a material adverse effect on the Company’s financial condition and results of operations. 24  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Environmental Regulation and Risks The Company’s operations are subject to extensive environmental laws and regulations pertaining to the discharge of materials into the environment (including GHGs) and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Failure to comply could have serious consequences, such as criminal as well as civil penalties, liability for damages, and negative publicity for the Company. No assurances can be given that additional environmental issues relating to presently known matters or identified sites or to other matters or sites will not require additional expenditures, or that requirements applicable to the Company or levies or taxes assessed against the Company will not be altered in ways that will require the Company to incur significant additional costs. In addition, certain facilities of the Company have been in operation for many years and, over time, the Company and other prior operators of such facilities may have generated and disposed of waste which is or may be considered to be hazardous. Future discovery of previously unknown contamination of property underlying or in the vicinity of the Company’s present or former properties or manufacturing facilities and/or waste disposal sites could require the Company to incur material unforeseen expenses. Occurrences of any such events could have a material adverse effect on the Company’s financial condition and results of operations. Consolidating Customer Environment As the retail grocery and foodservice trades continue to consolidate and customers grow larger and more sophisticated, the Company is required to adjust to changes in purchasing practices and changing customer requirements. Failure to do so could result in losing sales volumes and market share. The Company’s sales and profitability could also be affected by deterioration in the financial condition of, or other adverse developments in, the relationship with one or more of its major customers. Any of these events could have a material adverse effect on the Company’s financial condition and results of operations. Consolidation of Operations and Focus on Protein Over the last several years, the Company has increasingly consolidated its operations into fewer facilities. For example, it completed a consolidation and upgrade of its prepared meats manufacturing network in 2015 and has reconfigured its prepared meats distribution systems into two large distribution centers. Currently, the Company is advancing construction of a new large-scale poultry processing plant to replace three older smaller scale plants which will be closed. As a result of these consolidation initiatives, there is a risk that unforeseen disruption in such facilities could have a greater effect on the operations of the Company as a whole. In addition, the Company made the decision several years ago to focus on being a protein company and divested the Company's non- protein related business. As a result, the Company is less diversified than it would be if it was engaged in other food businesses, making it susceptible to the trends in protein markets. Weather Weather conditions and changes in climate and other long-term trends may have a material effect on the availability and prices of the commodities the Company uses. Adverse weather conditions can also impact crop health which has implications for the quality, cost for the inputs for the Company's plant protein products, as well as animal feed in its meat business. Weather conditions, including extreme heat and extreme cold, can also pose safety concerns for workers and animals which can affect the Company's operations. In addition, weather conditions may also influence the Company's ability to complete capital projects on time, potentially resulting in delays and increasing costs of such capital projects. Employees, Contractors and Labour Relations The Company and its subsidiaries have approximately 13,000 full-time and part-time employees, which include salaried and union employees, many of whom are covered by collective agreements. These employees are located in various jurisdictions, each such jurisdiction having differing employment laws. While the Company maintains systems and procedures to comply with the applicable requirements, there is a risk that failures or lapses by individual managers could result in a violation or cause of action that could have a material adverse effect on the Company’s financial condition and results of operations. Furthermore, if a collective agreement covering a significant number of employees or involving certain key employees were to expire or otherwise cease to have effect leading to a work stoppage, there can be no assurance that such work stoppage would not have a material adverse effect on the Company’s financial condition and results of operations. The Company’s success is also dependent on its ability to recruit and retain qualified personnel. The loss of one or more key personnel could have a material adverse effect on the Company’s financial condition and results of operations. Product Pricing The Company’s profitability is dependent, in large part, on the Company’s ability to make pricing decisions regarding its products that, on one hand encourage consumers to buy, yet on the other hand recoup development and other costs associated with those products. Products that are priced too high will not sell and products priced too low will not generate an adequate return. Accordingly, any failure by the Company to properly price its products could have a material adverse effect on the Company’s financial condition and results of operations. 25  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Supply Chain Management Successful management of the Company’s supply chain is critical to the Company’s success. Insufficient supply of products threatens the Company’s ability to meet customer demands while over capacity threatens the Company’s ability to generate competitive profit margins. Accordingly, any failure by the Company to properly manage the Company’s supply chain could have a material adverse effect on the Company’s financial condition and results of operations. Strategic Risk Management Successful identification and management of the strategic risks facing the Company from time to time is critical to the Company’s success. Among other things, these risks include changes in technology, the food industry, customers, consumers, and competitors. Failure to properly adapt to changes in strategic risks could have a material adverse effect on the Company’s financial condition and results of operations. 28. CRITICAL ACCOUNTING ESTIMATES The preparation of consolidated financial statements in accordance with IFRS requires Management to make judgements, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual amounts may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Judgements included in the consolidated financial statements are decisions made by Management, based on analysis of relevant information available at the time the decision is made. Judgements relate to the application of accounting policies and decisions related to the measurement, recognition, and disclosure of financial information. Information about areas of estimation uncertainty and critical judgements in applying accounting policies, that have the most significant effects on the amounts recognized in the consolidated financial statements, are included both below and in the financial statement notes relating to items subject to significant estimate uncertainty and critical judgements. Long-Lived Assets Valuation The Company performs impairment testing annually for goodwill and indefinite life intangible assets and, when circumstances indicate that there may be impairment, for other long-lived assets. Management judgement is involved in determining if there are circumstances indicating that testing for impairment is required, and in identifying Cash Generating Units (“CGUs”) for the purpose of impairment testing. The Company assesses impairment by comparing the recoverable amount of a long-lived asset, CGU, or CGU group to its carrying value. The recoverable amount is defined as the higher of: (i) value in use; or (ii) fair value less cost to sell. The determination of the recoverable amount involves significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates, and asset lives. These estimates and assumptions could affect the Company’s future results if the current estimates of future performance and fair values change. These determinations will affect the amount of amortization expense on definite life assets recognized in future periods. Measurement of Fair Values A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non- financial assets and liabilities. When the measurement of fair values cannot be determined based on quoted prices in active markets, fair value is measured using valuation techniques and models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Changes in assumptions about the inputs to these models could affect the reported fair value of the Company’s financial and non-financial assets and liabilities. When measuring fair value of an asset or liability, the Company uses market observable data to the extent that it is possible. To the extent that these estimates differ from those realized, the measured asset or liability, net earnings, and/or comprehensive income will be affected in future periods. Information about the valuation techniques and inputs used in determining the fair value of various assets and liabilities are disclosed in Notes 6, 10, 11, 12, 19, 24, and 29 of the consolidated financial statements. Nature of Interests in Other Entities Management applies significant judgement in assessing the nature of its interest in unconsolidated structured entities relating to its accounts receivable securitization facilities. The Company does not hold any equity interest in the structured entities and based on the terms of the agreements under which the entities are established, the Company does not receive the returns related to their operations and is exposed to limited recourse with respect to losses (refer to Note 27 of the consolidated financial statements). 26  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Valuation of Inventory Management makes estimates of the future customer demand for products when establishing appropriate provisions for inventory. In making these estimates, Management considers the product life of inventory and the profitability of recent sales of inventory. In many cases, product produced by the Company turns quickly and inventory on-hand values are low, thus reducing the risk of inventory obsolescence. However, code or “best before” dates are very important in the determination of net realizable value of inventory. Management ensures that systems are in place to highlight and properly value inventory that may be approaching code dates. To the extent that actual losses on inventory differ from those estimated, inventory, net earnings, and comprehensive income will be affected in future periods. Biological Assets Biological assets are measured at each reporting date, at fair value less costs to sell, except when fair value cannot be reliably measured. If fair value cannot be reliably measured, biological assets are measured at cost less depreciation and impairment losses. Although a reliable measure of fair value may not be available at the point of initial recognition, it may subsequently become available. In such circumstances, biological assets are measured at fair value less costs to sell from the point at which the reliable measure of fair value becomes available. Gains and losses that arise on measuring biological assets at fair value less costs to sell are recognized in the statement of net earnings in the period in which they arise. Costs to sell include all costs that would be necessary to sell the biological assets, including costs necessary to get the biological assets to market. Management uses estimates for some of the inputs into the determination of fair value. To the extent that actual values differ from estimates, biological assets, net earnings and comprehensive income will be affected in future periods. Trade Merchandise Allowances and Other Trade Discounts The Company provides for estimated payments to customers based on various trade programs and contracts that often include payments that are contingent upon attainment of specified sales volumes. Significant estimates used to determine these liabilities include: the projected level of sales volume for the relevant period, and customer contracted rates for allowances, discounts, and rebates. These arrangements are complex and there are a significant number of customers and products affected. Management has systems and processes in place to estimate and value these obligations. To the extent that payments on trade discounts differ from estimates of the related liability, accounts payable and accruals, net earnings, and comprehensive income will be affected in future periods. Employee Benefit Plans The cost of pensions and other post-retirement benefits earned by employees is actuarially determined using the projected unit credit method prorated on service, and Management’s best estimate of salary escalation and mortality rates. Discount rates used in actuarial calculations are based on long-term interest rates and can have a material effect on the amount of plan liabilities and expenses. Management employs external experts to advise the Company when deciding upon the appropriate estimates to use to value employee benefit plan obligations and expenses. To the extent that these estimates differ from those realized, employee benefit plan assets and liabilities and comprehensive income will be affected in future periods. The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations were as follows: Weighted average discount rate Rate of salary increase Medical cost trend rates 2019 3.10% 2.75% 5.00% 2018 3.80% 2.75% 5.00% 27  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Information about the sensitivity of the plan obligations to changes in assumptions is presented below: Increase (decrease) in defined benefit obligations ($ thousands) Actuarial Assumption Period end discount rate Rate of salary increase Mortality Income Taxes Total Sensitivity pensions 3.10% 0.25% decrease $ 35,958 0.25% increase $ (34,838) 0.50% increase $ Increase of 1 year in expected lifetime of plan participants 2,171 $ 35,714 2.75% 110% of 2014 Private Sector Canadian Pensioners' Mortality Table, projected generationally using scale MI-2017 Other post- retirement benefits $ $ $ 1,310 (1,191) N/A 743 Total $ 37,268 $ (36,029) 2,171 $ $ 36,457 Provisions for income taxes are based on domestic and international statutory income tax rates and the amount of income earned in the jurisdictions in which the Company operates. Significant judgement is required in determining income tax provisions and the recoverability of deferred tax assets. The calculation of current and deferred income tax balances requires Management to make estimates regarding the carrying values of assets and liabilities that include estimates of future cash flows and earnings related to such assets and liabilities, the interpretation of income tax legislation in the jurisdictions in which the Company operates, and the timing of reversal of temporary differences. The Company establishes additional provisions for income taxes when, despite Management’s opinion that the Company’s tax positions are fully supportable, there is sufficient complexity or uncertainty in the application of legislation that certain tax positions may be reassessed by tax authorities. The Company adjusts these additional accruals in light of changing facts and circumstances. To the extent that these adjustments differ from original estimates, deferred tax assets and liabilities, net earnings, and comprehensive income will be affected in future periods. Provisions The Company evaluates all provisions at each reporting date. These provisions can be significant and are prepared using estimates of the costs of future activities. In certain instances, Management may determine that these provisions are no longer required or that certain provisions are insufficient as new events occur or as additional information is obtained. Provisions are separately identified and disclosed in the consolidated financial statements. Changes to these estimates may affect the value of provisions, net earnings, and comprehensive income in future periods. Share-Based Compensation The Company uses estimates in the calculation of the liability and expenses for certain share-based incentive plans including, but not limited to, estimates of forfeitures, share price volatility, dividends, expected life of the award, risk-free interest rates, and Company performance. These estimates are based on previous experience and may change throughout the life of an incentive plan. Such changes could impact the carrying value of contributed surplus, liabilities, net earnings, and comprehensive income in future periods. Some of the Company’s share-based payment plans may be settled in either cash or equity instruments at the option of the Company. Management uses judgement in determining the appropriate accounting treatment for these plans, based on expectations and historical settlement decisions. Changes to accounting treatment based on Management’s judgement may impact contributed surplus, liabilities, net earnings, and comprehensive income in future periods. Depreciation and Amortization The Company’s property and equipment and definite life intangible assets are depreciated and amortized on a straight-line basis, considering the estimated useful lives of the assets and residual values. Right-of-use ("ROU") assets are depreciated on a straight-line basis, considering the shorter of the useful life of the underlying asset or the lease term. If it is reasonably certain at the commencement of the lease arrangement that the Company will exercise its purchase option or otherwise obtain ownership of the underlying asset at the end of the lease term, the ROU asset is depreciated over the useful life of the underlying asset. Changes to these estimates may affect the carrying value of these assets, inventories, net earnings, and comprehensive income in future periods. Leases The Company applies significant judgement in assessing whether a contract is or contains a lease. Such judgements include the determination of whether an asset or assets are specifically or implicitly identified in the contract, if the Company has the right to obtain substantially all the economic benefits from use of the asset or assets and whether the Company has the right to direct the use of the 28  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. asset or assets. These judgements are made at the inception of a contract and may change if there are material changes to the agreement. Estimates are used to determine the incremental borrowing rate of a lease when the interest rate implicit to the lease is not readily available. The Company's incremental borrowing rate is determined using a model which incorporates the Company's credit worthiness, the nature and quality of the underlying asset, geographic environments and the duration of the lease. The inputs used in determining the incremental borrowing rate are reviewed and updated quarterly. The Company also applies significant judgement in determining whether it is reasonably certain to exercise lease extension options or purchase options in a contract by considering all relevant factors and circumstances that may create an economic incentive for the Company to exercise the option considering such factors as past experience, the terms and conditions of the contract, and the importance of the underlying assets to the Company’s operations. 29. SIGNIFICANT ACCOUNTING POLICIES Accounting Standards Adopted During the Period During the year ended December 31, 2019, the Company adopted certain IFRS and amendments. As required by International Accounting Standard ("IAS") 8 Accounting Policies, Changes in Accounting Estimates and Errors, the nature and the effect of these changes are disclosed below: Leases Beginning on January 1, 2019, the Company adopted IFRS 16 Leases using the modified retrospective approach where prior periods are not restated. The new standard replaces IAS 17 Leases and provides a new framework for lessee accounting that requires most ROU assets obtained through operating leases to be capitalized and a related liability to be recorded. IFRS 16 substantially carries forward the accounting requirements for lessors. The adoption of IFRS 16 results in changes to property, equipment and vehicle lease contracts which were previously classified as operating leases under IAS 17. Upon adoption, lease obligations equal to the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate are recognized. An ROU asset, representing the Company's right-to-use the underlying leased asset, will generally be equal to the lease obligation at adoption and subsequently depreciated on a straight-line basis. Payments previously recognized in the consolidated statements of net earnings are replaced by a combination of depreciation on the ROU asset and interest expense on the lease obligations. Depreciation is classified as either SG&A expenses or cost of goods sold, depending on the leased asset’s intended use. Interest expense is classified as interest expense and other financing costs. On transition to IFRS 16, the Company elected to apply the following practical expedients: • • • The practical expedient to not include initial direct costs from the measurement of the ROU asset on transition; The practical expedient to rely on the Company's assessment of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review. ROU assets as at January 1, 2019 have been adjusted by the amount of any provisions for onerous leases recognized on the balance sheet as at December 31, 2018; and The practical expedient to not reassess whether a contract is, or contains, a lease at the date of initial application. Existing contracts that were not identified as leases under IAS 17 or International Financial Reporting Interpretations Committee ("IFRIC") 4 Determining Whether an Arrangement Contains a Lease, were not reassessed under IFRS 16 to determine if a lease exists. The definition of a lease under IFRS 16 has only been applied to contracts entered into or changed on or after January 1, 2019. 29  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. The increase (decrease) to opening balances from adopting IFRS 16 on the opening consolidated balance sheet is as follows: Prepaid expenses and other assets Property and equipment Right-of-use assets Other long-term assets Intangible assets Total assets Current portion of lease obligations(i)(ii) Current portion of provisions Other current liabilities Lease obligations(i)(ii) Provisions Other long-term liabilities Total liabilities As at January 1, 2019 720 (19,880) 240,815 1,548 (28,830) 194,373 39,164 (557) (3,783) 215,362 (3,653) (52,160) 194,373 $ $ $ $ (i) The difference between the net present value of the commitments disclosed in Note 24 of the Company's 2018 annual audited consolidated financial statements discounted using the weighted average incremental borrowing rate and the opening lease obligation as at January 1, 2019 is a result of the impact of lease extensions assumed in the calculation of the opening lease obligation and the effect of lease make good costs previously recorded in other liabilities. (ii) The weighted average incremental borrowing rate applied to the Company’s portfolio of leases as at January 1, 2019 was 3.7%. Uncertainty over Income Tax Treatments Beginning January 1, 2019, the Company adopted IFRIC 23 Uncertainty over Income Tax Treatments. The interpretations provide guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept a company's tax treatments. Current tax liabilities increased by $1.1 million as a result of the implementation of IFRIC 23, with a corresponding decrease of $1.1 million to opening retained earnings. Long-term Interests in Associates and Joint Ventures Beginning January 1, 2019, the Company adopted amendments to IAS 28 Investments in Associates and Joint Ventures. The amendments clarify that a company applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture. The Company adopted the amendments to IAS 28 retrospectively in its consolidated financial statements for the annual period beginning January 1, 2019. The adoption of the amendments to IAS 28 did not have a material impact on the consolidated financial statements. Annual Improvements to IFRS (2015-2017) Cycle Beginning January 1, 2019, the Company adopted narrow-scope amendments to a total of four standards as part of its annual improvement process. Amendments were made to clarify that a company must remeasure its previously held interest in a joint operation when it obtains control of the business in accordance with IFRS 3 Business Combinations but does not remeasure when it obtains joint control of the business under IFRS 11 Joint Arrangements. The amendments also include clarification that, all income tax consequences of dividend payments should be recognized consistently with the transactions that generated the distributable profits, under IAS 12 Income Taxes and that under IAS 23 Borrowing Costs, any specific borrowing that remains outstanding after the related asset is ready for its intended use or sale becomes part of general borrowings. The Company adopted these amendments prospectively in its consolidated financial statements for the annual period beginning January 1, 2019. The adoption of these standards did not have a material impact on the consolidated financial statements. Employee benefits (amendment) Beginning January 1, 2019, the Company adopted an amendment to IAS 19 Employee Benefits. The amendment clarifies the effect of a plan amendment, curtailment and settlement on the requirements regarding the asset ceiling. In addition, if a plan amendment, curtailment or settlement occurs, it is mandatory under the amended standard that the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for the remeasurement. The Company adopted the amendment to IAS 19 prospectively in its consolidated financial statements for the annual period beginning January 1, 2019. The amendment to IAS 19 did not have a material impact on the consolidated financial statements. 30  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Accounting Pronouncements Issued But Not Yet Effective Conceptual Framework On March 29, 2018, the International Accounting Standards Board ("IASB") issued its revised Conceptual Framework for Financial Reporting. The revised Conceptual Framework does not constitute a substantial revision from the previously effective guidance, but does provide additional guidance on topics not previously covered such as presentation and disclosure. This amendment is effective on January 1, 2020. The Company intends to adopt this amendment in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the revised Conceptual Framework for Financial Reporting is not expected to have a material impact on the consolidated financial statements. Definition of a Business On October 22, 2018, the IASB issued a narrow scope amendment to IFRS 3. This amendment narrowed and clarified the definition of a business, as well as permitted a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business. This amendment is effective on January 1, 2020 and is to be applied prospectively. The Company intends to adopt the amendment to IFRS 3 in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the amendment to IFRS 3 is not expected to have a material impact on the consolidated financial statements. Definition of Material On October 31, 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8. These amendments clarify and align the definition of material and provide guidance to help improve consistency in the application of materiality when used in other IFRS standards. These amendments are effective on January 1, 2020 and are to be applied prospectively. The Company intends to adopt the amendments to IAS 1 and IAS 8 in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the amendments to IAS 1 and IAS 8 are not expected to have a material impact on the consolidated financial statements. Interest Rate Benchmark Reform - Phase 1 On September 26, 2019, the IASB issued amendments to IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments Disclosures to address the potential effects Interbank Offered Rates ("IBOR") reform could have on financial reporting. The amendments modify specific hedge accounting requirements to allow entities to assume that the interest rate benchmark on which the hedged cash flows and the cash flows of which the hedging instrument are based on, are not altered as a result of IBOR reform. The Company intends to adopt the amendments to IFRS 9, IAS 39 and IFRS 7 in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the amendments to IFRS 9, IAS 39 and IFRS 7 are not expected to have a material impact on the consolidated financial statements. 30. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Management, under the direction and supervision of the Company’s Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures. These controls and procedures are designed to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is accumulated and communicated to Management in a timely manner so that information required to be disclosed by the Company under securities legislation is recorded, processed, summarized and reported within the time periods specified in applicable securities legislation. Management, under the direction and supervision of the Company’s Chief Executive Officer and Chief Financial Officer, is also responsible for establishing and maintaining internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. As required by National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, the Company’s Chief Executive Officer and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures as at December 31, 2019 and have concluded that such controls and procedures are effective. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. There have been no changes in the Company’s internal control over financial reporting that occurred during the period beginning on January 1, 2019, and ended on December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 31. 2020 OUTLOOK AND LONG-TERM TARGETS Maple Leaf is a leading consumer protein company, with the competitive advantages of a portfolio of leading brands, a robust pipeline of opportunities in attractive expanding markets and a proven-track record of execution. Combined with its solid balance sheet and capital structure that provide the financial flexibility to invest in future growth, Maple Leaf Foods is well-positioned to drive sustainable growth and create shareholder value. 31  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. A key part of Maple Leaf’s long-term growth includes its Plant Protein Group. In 2019, the Company articulated its ambitious goal, to achieve $3.0 billion in sales in the Plant Protein Group by 2029. This would assume a market size of approximately $25 billion. In that environment the Company would aspire to generate approximately 30.0% gross margin and SG&A expense (as a % of sales) in the low double-digit range. Long-term, achieving these targets is expected to result in Adjusted EBITDA margins that exceed those in the Meat Protein Group. This will be driven by: • Capitalizing on the high growth plant protein market, predominantly in the refrigerated space. • Leveraging Maple Leaf Foods’ established expertise in brand development and effective marketing. • Delivering on a pipeline of new product innovation to broaden and deepen its product portfolio. • Executing on a multi-tier supply capacity strategy including leverage of existing meat protein footprint, opportunistic utilization of co-packing services and development of new capacity starting with the highly modularized Shelbyville plant processing facility. In 2017, the Company established an Adjusted EBITDA margin target of 14.0-16.0% to be achieved in 2022. This target remains unchanged for the Meat Protein Group, and includes: • Low single-digit organic revenue growth and achieve an Adjusted EBITDA margin in the Meat Protein Group between 14.0-16.0% by 2022. This will be driven by: Growth in sustainable meats, including further establishing the business as a leading provider of Raised Without Antibiotics ("RWA") pork and poultry in North America. Continued benefits from brand renovation strategies to accelerate volume growth and product mix shift in branded prepared meats products. Focus on cost control through operational efficiencies. In 2018, the Company announced the construction of a London, Ontario poultry processing facility. Construction is underway, however, due to poor weather conditions last spring, along with a robust economy and highly competitive environment, some construction components have taken longer to source. As a result, construction completion is expected to be delayed and start-up of this new poultry facility is now planned for the second quarter of 2022. In 2019, the Company announced the construction of a Shelbyville, Indiana facility. Maple Leaf Foods is continuing to advance engineering and design work, adapting its plans to provide the flexibility necessary to meet the demands of the rapidly evolving plant protein market. The Company is focused on ensuring that the new facility is designed to provide the right scalability to meet current and future consumer demand. While this additional engineering and design work means that completion of the Shelbyville, Indiana facility will be delayed until the end of 2022, the Company is able to expand capacity within its existing network to allow it to meet immediate demand. 2020 Outlook For 2020, the Company expects to achieve the following: Meat Protein Group - Profitable Growth • Mid-to-high single digit revenue growth driven by sustainable meats and higher sales to Asian markets. • Gross margin expansion due to the continued mix-shift benefits in prepared meats resulting from growth in sustainable meats and brand renovation, coupled with pork complex conditions more in-line with the 5-year average, as well as contributions from higher sales to Asian markets. • Expand Adjusted EBITDA margin, making significant progress towards the 2022 Adjusted EBITDA margin target of 14.0-16.0%, based on the factors noted above as well cost efficiencies. Plant Protein Group - Investing for Growth • Revenue growth of approximately 30% from 2019 levels, which is in line with long-term strategic targets. This growth is driven by continued product innovation, brand awareness resulting in further demand generation, increased distribution points, and strong growth in the underlying market. • Gross margin expansion relative to 2019 levels, as product margins are expected to increase materially, while being impacted by the inherent inefficiencies of a rapidly growing business. • SG&A expense is expected to be approximately $150.0 million. The Company will continue to invest in advertising, promotion and marketing to establish brand, while scaling up talent and operations to develop the organizational structure required for this growing business. 32  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Capital • The Company currently estimates its capital expenditures for the full year of 2020 will be in a range of approximately $650.0 million to $700.0 million. • Approximately 70% of this will be Construction Capital, which is mainly related to ongoing construction of the London, Ontario poultry facility; further capacity and efficiency improvements in our prepared meats business; and investments in plant protein capacity at an existing facility, as well as further design, engineering, and site work at the Shelbyville, Indiana location. • The balance of capital is slated for continued profit enhancement, maintenance and sustainability projects. In addition to financial and operational priorities, Maple Leaf Foods believes that shared value and operating its business for the benefit of all stakeholders is crucial. The Company’s guiding pillars to be the “Most Sustainable Protein Company on Earth” include Better Food, Better Care, Better Communities, Better Planet, are core to how Maple Leaf Foods conducts itself. To that end, the Company’s priorities include: • Commitment to carbon neutrality. • Better Food: leading the real food movement and transitioning key brands to 100.0% “raised without antibiotics”. • Better Care: further advancement of animal care, including progress towards transitioning all sows under management to open housing systems by 2021. • Better Communities: Investing approximately 1.0% of pre-tax profit to advance sustainable food security. • Better Planet: Focus on eliminating waste in any resources the Company consumes, including food, energy, water, packaging and time. 32. NON-IFRS FINANCIAL MEASURES The Company uses the following non-IFRS measures: Adjusted Operating Earnings, Adjusted Earnings per Share, Adjusted EBITDA, Adjusted EBITDA Margin, Construction Capital, Net Debt, Free Cash Flow and Return on Net Assets. Management believes that these non-IFRS measures provide useful information to investors in measuring the financial performance of the Company for the reasons outlined below. These measures do not have a standardized meaning prescribed by IFRS and therefore they may not be comparable to similarly titled measures presented by other publicly traded companies and should not be construed as an alternative to other financial measures determined in accordance with IFRS. Adjusted Operating Earnings, Adjusted EBITDA and Adjusted EBITDA Margin Adjusted Operating Earnings, Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS measures used by Management to evaluate financial operating results. Adjusted Operating Earnings is defined as earnings before income taxes adjusted for items that are not considered representative of ongoing operational activities of the business and items where the economic impact of the transactions will be reflected in earnings in future periods when the underlying asset is sold or transferred. Adjusted EBITDA is defined as Adjusted Operating Earnings plus depreciation and intangible asset amortization, adjusted for items included in other expense that are not considered representative of ongoing operational activities of the business. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by sales. 33  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. The table below provides a reconciliation of earnings (loss) before income taxes as reported under IFRS in the consolidated financial statements to Adjusted Operating Earnings and Adjusted EBITDA for the years ended, as indicated below. Management believes that these non-IFRS measures are useful in assessing the performance of the Company’s ongoing operations and its ability to generate cash flows to fund its cash requirements, including the Company’s capital investment program. ($ millions) Meat Protein Group Plant Protein Group Non- Allocated(ii) Total Meat Protein Group Plant Protein Group 2019 2018(i) Earnings (loss) before income taxes $ 218.0 (84.2) (46.8) $ 87.0 $ 169.3 Interest expense and other financing costs Other expense (income) Restructuring and other related costs — 0.3 11.0 — 0.2 — 32.0 2.7 — 32.0 3.3 11.0 — (2.8) 46.2 Earnings (loss) from operations $ 229.3 (84.0) (12.1) $ 133.3 $ 212.8 Decrease in fair value of biological assets(iii) Unrealized loss (gain) on derivative contracts(iv) — — Adjusted Operating Earnings $ 229.3 Depreciation and amortization Items included in other (expense) income representative of ongoing operations Adjusted EBITDA 164.2 (0.3) $ 393.2 — — (84.0) 12.6 (0.2) (71.6) 5.5 6.5 5.5 6.5 — — — $ 145.4 $ 212.8 — 176.8 116.1 (0.4) (1.0) 2.8 (0.4) $ 321.2 $ 331.6 (0.1) 12.7 2.7 — 0.1 — 2.8 — — 2.8 9.9 Non- Allocated(ii) Total (31.0) $ 141.1 10.0 15.6 — 10.0 13.0 46.2 (5.3) $ 210.3 10.9 (5.6) 10.9 (5.6) — $ 215.6 — — 126.0 2.7 — $ 344.3 Adjusted EBITDA margin 10.4% (40.6)% N/A 8.1% 9.9% 9.2% N/A 9.9% (i) Comparative figures have been presented to align with current reportable segments. (ii) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment's operating results. (iii) Refer to Note 6 of the Company's 2019 consolidated financial statements for further details regarding biological assets. (iv) Unrealized gains/losses on derivative contracts are reported within cost of goods sold in the Company's 2019 consolidated financial statements. Adjusted Earnings per Share Adjusted Earnings per Share, a non-IFRS measure, is used by Management to evaluate financial operating results. It is defined as basic earnings per share and is adjusted on the same basis as Adjusted Operating Earnings. The table below provides a reconciliation of basic earnings per share as reported under IFRS in the audited consolidated statements of earnings to Adjusted Earnings per Share for the years ended, as indicated below. Management believes this basis is the most appropriate on which to evaluate financial results as they are representative of the ongoing operations of the Company. ($ per share) Basic earnings per share Restructuring and other related costs(i) Income tax recovery not considered representative of ongoing operations Items included in other expense not considered representative of ongoing operations(ii) Change in fair value of biological assets(iii) Unrealized loss (gain) on derivative contracts(iii) Adjusted Earnings per Share(iv) $ $ (i) Includes per share impact of restructuring and other related costs, net of tax. 2019 0.60 0.07 (0.08) 0.02 0.03 0.04 0.68 $ $ 2018 0.81 0.27 — 0.11 0.06 (0.03) 1.22 (ii) Primarily includes (gains) and losses on disposal of investment properties, acquisition related costs and interest income, net of tax. (iii) (iv) May not add due to rounding. Includes per share impact of the change in unrealized loss (gain) on derivative contracts and the change in fair value of biological assets, net of tax. 34  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. Construction Capital Construction Capital, a non-IFRS measure, is used by Management to evaluate the amount of capital resources invested in specific strategic development projects that have not yet entered commercial production. It is defined as investments in projects over $50.0 million that are related to longer-term strategic initiatives, with no returns expected for at least 12 months in the future and the asset will be re-categorized from Construction Capital once operational. Current strategic initiatives primarily include the investments in the London, Ontario poultry production facility, and the plant protein production facility in Shelbyville, Indiana. The following table is a summary of Construction Capital activity and debt financing for the periods indicated below. ($ thousands) Opening balance at January 1 Additions Balance at March 31 Additions Balance at June 30 Additions Balance at September 30 Additions Balance at December 31(i) Construction Capital debt financing(ii) 2019 2018 22,422 $ 12,950 18,100 1,925 40,522 $ 14,875 23,127 3,693 63,649 $ 18,568 15,832 2,014 79,481 $ 20,582 25,730 105,211 $ 105,211 $ 1,840 22,422 22,422 $ $ $ $ $ $ (i) Total Construction Capital additions in 2019 were $82.8 million (2018: $9.5 million). (ii) Assumed to be fully funded by debt to the extent that the Company has Net Debt outstanding. Net Debt The following table reconciles Net Debt to amounts reported under IFRS in the Company's consolidated financial statements as at December 31, as indicated below. The Company calculates Net Debt as cash and cash equivalents, less long-term debt and bank indebtedness. Management believes this measure is useful in assessing the amount of financial leverage employed. ($ thousands) Cash and cash equivalents Current portion of long-term debt Long-term debt Total debt Net Debt Free Cash Flow As at December 31, 2019 97,285 (899) (538,429) (539,328) (442,043) $ $ $ $ 2018 72,578 (80,897) (302,524) (383,421) (310,843) $ $ $ $ Free Cash Flow, a non-IFRS measure, is used by Management to evaluate cash flow after investing in the maintenance or expansion of the Company's asset base. It is defined as cash provided by operations, less additions to long-term assets. The following table calculates Free Cash Flow for the periods indicated below: ($ thousands) (Unaudited) Cash provided by operating activities Additions to long-term assets Free Cash Flow Return on Net Assets $ $ 2019 270,180 (270,745) (565) $ $ 2018 299,685 (179,865) 119,820 RONA is calculated by dividing tax effected earnings from operations (adjusted for items which are not considered representative of the underlying operations of the business) by average monthly net assets. Net assets are defined as total assets (excluding cash and 35  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. deferred tax assets) less non-interest bearing liabilities (excluding deferred tax liabilities). Management believes that RONA is an appropriate basis upon which to evaluate long-term financial performance. 33. FORWARD-LOOKING STATEMENTS This document contains, and the Company’s oral and written public communications often contain, “forward-looking information” within the meaning of applicable securities law. These statements are based on current expectations, estimates, projections, beliefs, judgments and assumptions based on information available at the time the applicable forward-looking statement was made and in light of the Company’s experience combined with its perception of historical trends. Such statements include, but are not limited to, statements with respect to objectives and goals, in addition to statements with respect to beliefs, plans, targets, goals, objectives, expectations, anticipations, estimates, and intentions. Forward-looking statements are typically identified by words such as "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "could", "would", "believe", "plan", "intend", "design", "target", "undertake", "view", "indicate", "maintain", "explore", "entail", "schedule", "objective", "strategy", "likely", "potential", "outlook", "aim", "propose", "goal", and similar expressions suggesting future events or future performance These statements are not guarantees of future performance and involve assumptions, risks, and uncertainties that are difficult to predict. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Specific forward-looking information in this document may include, but is not limited to, statements with respect to: • • • • • • • • • • • • • future performance, including future financial objectives, goals and targets, expected capital spend and expected SG&A expenditures for the Company and each of its operating segments; the execution of the Company's business strategy, including the development and expected timing of business initiatives, brand expansion and repositioning, and other growth opportunities, as well as the impact thereof; the impact of international trade conditions on the Company's business, including access to markets, implications associated with the spread of foreign animal disease (such as ASF), and other social, economic and political factors that affect trade; competitive conditions and the Company's ability to position itself competitively in the markets in which it competes; capital projects, including planning, construction, estimated expenditures, schedules, approvals, expected capacity, in-service dates and anticipated benefits of construction of new facilities and expansions of existing facilities; the Company's dividend policy, including future levels and sustainability of cash dividends, the tax treatment thereof and future dividend payment dates; the impact of commodity prices on the Company's operations and financial performance, including the use and effectiveness of hedging instruments; expected future cash flows and the sufficiency thereof, sources of capital at attractive rates, future contractual obligations, future financing options, renewal of credit facilities, and availability of capital to fund growth plans, operating obligations and dividends; operating risks, including the execution, monitoring and continuous improvement of the Company's food safety programs, animal health initiatives and cost reduction initiatives; the implementation, cost and impact of environmental sustainability initiatives, as well as the anticipated future cost of remediating environmental liabilities; the adoption of new accounting standards and the impact of such adoption on the financial position of the Company; expectations regarding pension plan performance, including future pension plan assets, liabilities and contributions; and developments and implications of actual or potential legal actions. Various factors or assumptions are typically applied by the Company in drawing conclusions or making the forecasts, projections, predictions or estimations set out in the forward-looking statements. These factors and assumptions are based on information currently available to the Company, including information obtained by the Company from third-party sources, and include but are not limited to the following: • • • the competitive environment, associated market conditions and market share metrics, the expected behaviour of competitors and customers and trends in consumer preferences; the success of the Company's business strategy, including execution of the strategy in each of the Meat Protein and Plant Protein Groups; prevailing commodity prices, interest rates, tax rates and exchange rates; 36  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. • • • • • • • • the economic condition of and the socio-political dynamics between Canada, the U.S., Japan and China, and the ability of the Company to access markets in these countries; the spread of foreign animal disease (including ASF), preparedness strategies to manage such spread, and implications for all protein markets; the availability of capital to fund future capital requirements associated with existing operations, assets and projects; expectations regarding participation in and funding of the Company's pension plans; the availability of insurance coverage to manage certain liability exposures; the extent of future liabilities and recoveries related to legal claims; prevailing regulatory, tax and environmental laws; and future operating costs and performance, including the Company's ability to achieve operating efficiencies and maintain high sales volumes, high turnover of inventories and high turnover of accounts receivable. Readers are cautioned that these assumptions may prove to be incorrect in whole or in part. The Company's actual results may differ materially from those anticipated in any forward-looking statements. Factors that could cause actual results or outcomes to differ materially from the results expressed, implied, or projected in the forward- looking statements contained in this document include, among other things, risks associated with the following: • • • • • • • • • • • • • • • • • • • • • • • competition, market conditions and the activities of competitors and customers; food safety, consumer liability and product recalls; the health status of livestock, including the impact of potential pandemics; international trade and access to markets, as well as social, political and economic dynamics affecting same; availability of and access to capital; decision respecting the return of capital to shareholders; the execution of capital projects, including cost, schedule and regulatory variables; food safety, consumer liability and product recalls; cyber security and the maintenance and operation of the Company’s information systems and processes; acquisitions and divestitures; climate change; fluctuations in the debt and equity markets; fluctuations in interest rates and currency exchange rates; pension assets and liabilities; cyclical nature of the cost and supply of hogs and the competitive nature of the pork market generally; the effectiveness of commodity and interest rate hedging strategies; impact of changes in the market value of the biological assets and hedging instruments; the supply management system for poultry in Canada; availability of plant protein ingredients; intellectual property, including product innovation, product development, brand strategy and trademark protection; consolidation of operations and focus on protein; the use of contract manufacturers; reputation; • weather; • • • • compliance with government regulation and adapting to changes in laws; actual and threatened legal claims; consumer trends and changes in consumer tastes and buying patterns; environmental regulation and potential environmental liabilities; 37  MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC. • • consolidation in the retail environment; employment matters, including complying with employment laws across multiple jurisdictions, the potential for work stoppages due to non-renewal of collective agreements, recruiting and retaining qualified personnel, reliance on key personnel and succession planning; • pricing of products; • managing the Company’s supply chain; • • changes in International Financial Reporting Standards and other accounting standards that the Company is required to adhere to for regulatory purposes; other factors as set out in this document under the heading "Risk Factors". The Company cautions readers that the foregoing list of factors is not exhaustive. Readers are further cautioned that some of the forward-looking information, such as statements concerning future capital expenditures, Adjusted EBITDA margin growth in the Meat Protein Group, expected sales and growth margin targets in the Plant Protein Group and SG&A spend, may be considered to be financial outlooks for purposes of applicable securities legislation. These financial outlooks are presented to evaluate potential future earnings and anticipated future uses of cash flows, and may not be appropriate for other purposes. Readers should not assume these financial outlooks will be achieved. More information about risk factors can be found under the heading “Risk Factors” in the Company's Annual Management's Discussion and Analysis for the year ended December 31, 2019, that is available on SEDAR at www.sedar.com. The reader should review such section in detail. Additional information concerning the Company, including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com. All forward-looking statements included herein speak only as of the date hereof. Unless required by law, the Company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are expressly qualified by this cautionary statement. 38  TABLE OF CONTENTS | 2019 | MAPLE LEAF FOODS INC. 40 42 43 44 45 46 47 47 49 58 58 59 60 60 61 61 64 65 68 69 70 71 71 71 72 79 79 79 81 82 84 86 86 87 87 Consolidated Financial Statements Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Net Earnings Consolidated Statements of Other Comprehensive Income (Loss) Consolidated Statements of Changes in Total Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 The Company Basis of Preparation Significant Accounting Policies Accounts Receivable Inventories Biological Assets Assets Held for Sale Property and Equipment Right-of-Use Assets Employee Benefits Goodwill Intangible Assets Provisions Long-Term Debt Lease Obligations Other Current Liabilities Other Long-Term Liabilities Share Capital Financial Instruments and Risk Management Activities Other Expense Interest Expense and Other Financing Costs Income Taxes Earnings Per Share Share-Based Payment Segmented Financial Information Commitments and Contingencies Composition of the Company Related Party Transactions Business Combinations 39  INDEPENDENT AUDITORS' REPORT | 2019 | MAPLE LEAF FOODS INC. Independent Auditors' Report To the Shareholders of Maple Leaf Foods Inc. Opinion We have audited the consolidated financial statements of Maple Leaf Foods Inc. (the Entity), which comprise: • • • • • • the consolidated balance sheets as at December 31, 2019 and December 31, 2018 the consolidated statement of net earnings for the years then ended the consolidated statement of other comprehensive income (loss) for the years then ended the consolidated statement of changes in total equity for the years then ended the consolidated statement of cash flows for the years then ended and notes to the consolidated financial statements, including a summary of significant accounting policies (Hereinafter referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Entity as at December 31, 2019 and December 31, 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’ Responsibilities for the Audit of the Financial Statements” section of our auditors’ report. We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. Other information comprises: • the information included in Management’s Discussion and Analysis and Annual Report filed with the relevant Canadian Securities Commissions. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated. We obtained the information included in Management’s Discussion and Analysis and Annual Report filed with the relevant Canadian Securities Commissions. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Entity’s financial reporting process. Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. 40  INDEPENDENT AUDITORS' REPORT | 2019 | MAPLE LEAF FOODS INC. Independent Auditors' Report We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. • Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. • Obtain sufficient appropriate audit evidence regarding financial information of the entities or business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Chartered Professional Accountants, Licensed Public Accountants The engagement partner on the audit resulting in this auditors’ report is Kristen Carscallen. Toronto, Canada February 26, 2020 41 CONSOLIDATED BALANCE SHEETS | 2019 | MAPLE LEAF FOODS INC. Notes As at December 31, 2019 As at December 31, 2018(i) 4 27 5 6 7 8 9 10 11 12 13 14 22 16 14 10 13 17 22 18 18 $ $ 97,285 154,969 31,699 385,534 119,016 51,494 34,293 874,290 1,386,482 227,426 1,864 — 14,081 657,179 352,713 $ 3,514,035 $ $ 72,578 146,283 30,504 348,901 111,493 38,222 — 747,981 1,283,950 — 5,109 5,389 8,074 664,879 424,616 $ 3,139,998 $ $ 445,774 3,973 899 39,505 205 44,698 535,054 538,429 204,013 116,742 44,929 3,026 121,972 $ 1,564,165 $ $ 344,460 3,457 80,897 — 42,884 24,031 495,729 302,524 — 103,982 49,895 53,564 127,465 $ 1,133,159 $ 840,005 1,137,450 — 2,793 (30,378) $ 1,949,870 $ 3,514,035 $ 849,655 1,178,389 4,649 3,532 (29,386) $ 2,006,839 $ 3,139,998 Consolidated Balance Sheets (In thousands of Canadian dollars) ASSETS Current assets Cash and cash equivalents Accounts receivable Notes receivable Inventories Biological assets Prepaid expenses and other assets Assets held for sale Property and equipment Right-of-use assets Investment property Employee benefits Other long-term assets Goodwill Intangible assets Total assets LIABILITIES AND EQUITY Current liabilities Accounts payable and accruals Current portion of provisions Current portion of long-term debt Current portion of lease obligations Income taxes payable Other current liabilities Long-term debt Lease obligations Employee benefits Provisions Other long-term liabilities Deferred tax liability Total liabilities Shareholders’ equity Share capital Retained earnings Contributed surplus Accumulated other comprehensive income (loss) Treasury stock Total shareholders’ equity Total liabilities and equity (i) Restated, see Note 29(a). Commitments and contingencies (Note 26) See accompanying Notes to the Consolidated Financial Statements. On behalf of the Board: MICHAEL H. MCCAIN WILLIAM E. AZIZ 42 Consolidated Statements of Net Earnings CONSOLIDATED STATEMENTS OF NET EARNINGS | 2019 | MAPLE LEAF FOODS INC. Years ended December 31, (In thousands of Canadian dollars, except share amounts) Notes 2019 2018 Sales Cost of goods sold Gross profit Selling, general and administrative expenses Earnings before the following: Restructuring and other related costs Other expense Earnings before interest and income taxes Interest expense and other financing costs Earnings before income taxes Income tax expense Net earnings Earnings per share attributable to common shareholders: Basic earnings per share Diluted earnings per share Weighted average number of shares (millions) Basic Diluted See accompanying Notes to the Consolidated Financial Statements. $ 3,941,545 $ 3,495,519 3,350,566 2,943,722 $ 590,979 $ 551,797 457,681 341,492 $ 133,298 $ 210,305 11,004 3,268 46,188 12,974 $ 119,026 $ 151,143 $ $ $ $ 32,031 86,995 12,367 74,628 10,040 $ 141,103 39,755 $ 101,348 0.60 0.60 123.6 125.2 $ $ 0.81 0.79 125.0 127.5 13 20 21 22 23 23 43 CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | 2019 | MAPLE LEAF FOODS INC. Consolidated Statements of Other Comprehensive Income (Loss) Years ended December 31, (In thousands of Canadian dollars) Net earnings Other comprehensive income (loss) 2019 2018 $ 74,628 $ 101,348 Actuarial (losses) and gains that will not be reclassified to profit or loss (Net of tax of $3.6 million; 2018: $3.7 million) $ (9,870) $ 11,879 Items that are or may be reclassified subsequently to profit or loss: Change in accumulated foreign currency translation adjustment (Net of tax of $0.0 million; 2018: $0.0 million) $ (15,992) $ 33,273 Change in foreign exchange on long-term debt designated as a net investment hedge (Net of tax of $2.2 million; 2018: $2.5 million) 11,748 (13,335) Change in unrealized gains and (losses) on cash flow hedges (Net of tax of $1.2 million; 2018: $1.7 million) Total items that are or may be reclassified subsequently to profit or loss Total other comprehensive (loss) income Comprehensive income See accompanying Notes to the Consolidated Financial Statements. 3,505 (6,786) $ (739) $ (10,609) $ 64,019 $ 13,152 $ 25,031 $ 126,379 44 Consolidated Statements of Changes in Total Equity CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY | 2019 | MAPLE LEAF FOODS INC. (In thousands of Canadian dollars) Notes Share capital Retained earnings Contributed surplus Accumulated other comprehensive income (loss)(i) Foreign currency translation adjustment Unrealized gains and losses on cash flow hedges Treasury stock Total equity Balance at December 31, 2018 $ 849,655 1,178,389 4,649 8,518 (4,986) (29,386) $ 2,006,839 Impact of new IFRS standards 3(w) Net earnings Other comprehensive income (loss)(ii) Dividends declared ($0.58 per share) Share-based compensation expense Deferred taxes on share-based compensation Repurchase of shares Exercise of stock options Shares purchased by RSU trust Settlement of share-based compensation 24 18 — — — — — — (1,100) 74,628 (9,870) (71,824) — — — — — — 17,935 460 (17,410) (12,310) (16,016) 7,760 — — — — — — (20,463) (7,028) — — — — (4,244) 3,505 — — — — — — — — — — — — — — — — — — — — — — (1,100) 74,628 (10,609) (71,824) 17,935 460 (45,736) 7,760 (14,978) (14,978) 13,986 (13,505) Balance at December 31, 2019 $ 840,005 1,137,450 — 4,274 (1,481) (30,378) $ 1,949,870 (In thousands of Canadian dollars) Notes Share capital Retained earnings Contributed surplus Balance as at December 31, 2017 $ 835,154 1,253,035 Impact of new IFRS standards Net earnings Issuance of shares for acquisition Other comprehensive income (loss)(ii) Dividends declared ($0.52 per share) Share-based compensation expense Deferred taxes on share-based compensation Repurchase of shares Exercise of stock options Shares purchased by RSU trust Settlement of share-based compensation — — (3,695) 101,348 29 28,801 — 11,879 (65,119) — — — — — — 18,366 (2,400) (30,140) (101,495) (10,360) 24 18 15,840 — — — — (17,564) Balance at December 31, 2018 $ 849,655 1,178,389 Accumulated other comprehensive income (loss)(i) Foreign currency translation adjustment Unrealized gains and losses on cash flow hedges Treasury stock Total equity (11,420) 1,800 (26,961) $ 2,051,608 — — — — — — 19,938 (6,786) — — — — — — — — — — — — — — — — — — — — — — — (3,695) 101,348 28,801 25,031 (65,119) 18,366 (2,400) (141,995) 15,840 (13,000) (13,000) 10,575 (7,946) 8,518 (4,986) (29,386) $ 2,006,839 — — — — — — — — (957) 4,649 (i) (ii) Items that are or may be subsequently reclassified to profit or loss. Included in other comprehensive income (loss) is the change in actuarial gains and losses that will not be reclassified to profit or loss and has been reclassified to retained earnings. See accompanying Notes to the Consolidated Financial Statements. 45 Consolidated Statements of Cash Flows CONSOLIDATED STATEMENTS OF CASH FLOWS | 2019 | MAPLE LEAF FOODS INC. Years ended December 31, (In thousands of Canadian dollars) CASH PROVIDED BY (USED IN): Operating activities Net earnings Add (deduct) items not affecting cash: Change in fair value of biological assets Depreciation and amortization Share-based compensation Deferred income taxes Income tax current Interest expense and other financing costs (Gain) loss on sale of long-term assets Change in fair value of non-designated derivatives Change in net pension liability Net income taxes paid Interest paid Change in provision for restructuring and other related costs Change in derivatives margin Other Change in non-cash operating working capital Cash provided by operating activities Financing activities Dividends paid Net increase in long-term debt Payment of lease obligation Exercise of stock options Repurchase of shares Payment of financing fees Purchase of treasury stock Cash provided by financing activities Investing activities Additions to long-term assets Acquisition of business, net of cash acquired Proceeds from sale of long-term assets Payment of income tax liabilities assumed on acquisition Cash used in investing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period See accompanying Notes to the Consolidated Financial Statements. 46 2019 2018 $ 74,628 $ 101,348 5,545 176,796 17,935 (1,323) 13,690 32,031 (4,164) 5,785 4,730 (40,682) (28,137) 8,144 (2,210) 1,779 5,633 10,905 126,066 18,366 10,055 29,700 10,040 5,623 (4,657) 7,378 (6,820) (7,996) 33,760 10,998 (5,529) (39,552) $ 270,180 $ 299,685 $ (71,824) $ (65,119) 169,491 (34,690) 7,760 (20,347) (5,635) (14,978) 357,941 — 15,840 (166,526) (650) (13,000) $ 29,777 $ 128,486 $ (270,745) $ (179,865) (847) 7,727 (11,385) (379,556) 403 — $ (275,250) $ (559,018) $ $ 24,707 72,578 97,285 $ (130,847) 203,425 $ 72,578 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Notes to the Consolidated Financial Statements (Tabular amounts in thousands of Canadian dollars unless otherwise indicated) Years ended December 31, 2019 and 2018 1. THE COMPANY Maple Leaf Foods Inc. (“Maple Leaf Foods” or the "Company") is a producer of food products under leading brands including Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift®, Lightlife®, and Field Roast Grain Meat Co.™ The Company's portfolio includes prepared meats, ready-to-cook and ready-to-serve meals, valued-added fresh pork and poultry and plant protein products. The address of the Company's registered office is 6985 Financial Dr. Mississauga, Ontario, L5N 0A1, Canada. The consolidated financial statements of the Company as at and for the year ended December 31, 2019, include the accounts of the Company and its subsidiaries. The Company's results are organized into two segments: the Meat Protein Group and the Plant Protein Group. The composition of the Company is further described in Note 27. 2. BASIS OF PREPARATION (a) Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described herein. The consolidated financial statements were authorized for issue by the Board of Directors on February 26, 2020. (b) Basis of Measurement The consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments, biological assets, defined benefit plan assets, acquisitions, and liabilities associated with certain share-based compensation, which are stated at fair value. Liabilities associated with employee benefits are stated at actuarially determined present values. (c) Functional and Presentation Currency The consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. (d) Use of Estimates and Judgements The preparation of consolidated financial statements in accordance with IFRS requires Management to make judgements, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual amounts may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Judgements included in the consolidated financial statements are decisions made by Management, based on analysis of relevant information available at the time the decision is made. Judgements relate to the application of accounting policies and decisions related to the measurement, recognition, and disclosure of financial information. Information about areas of estimation uncertainty and critical judgements in applying accounting policies, that have the most significant effects on the amounts recognized in the consolidated financial statements, are included both below and in the statement notes relating to items subject to significant estimate uncertainty and critical judgements. Long-Lived Assets Valuation The Company performs impairment testing annually for goodwill and indefinite life intangible assets and, when circumstances indicate that there may be impairment, for other long-lived assets. Management judgement is involved in determining if there are circumstances indicating that testing for impairment is required, and in identifying Cash Generating Units (“CGUs”) for the purpose of impairment testing. The Company assesses impairment by comparing the recoverable amount of a long-lived asset, CGU, or CGU group to its carrying value. The recoverable amount is defined as the higher of: (i) value in use; or (ii) fair value less cost to sell. The determination of the recoverable amount involves significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates, and asset lives. These estimates and assumptions could affect the Company’s future results if the current estimates of future performance and fair values change. These determinations will affect the amount of amortization expense on definite life assets recognized in future periods. Measurement of Fair Values A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non- financial assets and liabilities. When the measurement of fair values cannot be determined based on quoted prices in active markets, fair value is measured using valuation techniques and models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Changes in assumptions about the inputs to these models could affect the reported fair value of the Company’s financial and non-financial assets and liabilities. 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. When measuring fair value of an asset or liability, the Company uses market observable data to the extent that it is possible. To the extent that these estimates differ from those realized, the measured asset or liability, net earnings, and/or comprehensive income will be affected in future periods. Information about the valuation techniques and inputs used in determining the fair value of various assets and liabilities are disclosed in Notes 6, 10, 11, 12, 19, 24, and 29. Nature of Interests in Other Entities Management applies significant judgement in assessing the nature of its interest in unconsolidated structured entities relating to its accounts receivable securitization facilities. The Company does not hold any equity interest in the structured entities and based on the terms of the agreements under which the entities are established, the Company does not receive the returns related to their operations and is exposed to limited recourse with respect to losses. Information about the nature of interest in other entities is disclosed in Note 27. Valuation of Inventory Management makes estimates of the future customer demand for products when establishing appropriate provisions for inventory. In making these estimates, Management considers the product life of inventory and the profitability of recent sales of inventory. In many cases, product produced by the Company turns quickly and inventory on-hand values are low, thus reducing the risk of inventory obsolescence. However, code or “best before” dates are very important in the determination of net realizable value of inventory. Management ensures that systems are in place to highlight and properly value inventory that may be approaching code dates. To the extent that actual losses on inventory differ from those estimated, inventory, net earnings, and comprehensive income will be affected in future periods. Biological Assets Biological assets are measured at each reporting date, at fair value less costs to sell, except when fair value cannot be reliably measured. If fair value cannot be reliably measured, biological assets are measured at cost less depreciation and impairment losses. Although a reliable measure of fair value may not be available at the point of initial recognition, it may subsequently become available. In such circumstances, biological assets are measured at fair value less costs to sell from the point at which the reliable measure of fair value becomes available. Gains and losses that arise on measuring biological assets at fair value less costs to sell are recognized in the statement of net earnings in the period in which they arise. Costs to sell include all costs that would be necessary to sell the biological assets, including costs necessary to get the biological assets to market. Management uses estimates for some of the inputs into the determination of fair value. To the extent that actual values differ from estimates, biological assets, net earnings and comprehensive income will be affected in future periods. Trade Merchandise Allowances and Other Trade Discounts The Company provides for estimated payments to customers based on various trade programs and contracts that often include payments that are contingent upon attainment of specified sales volumes. Significant estimates used to determine these liabilities include: the projected level of sales volume for the relevant period, and customer contracted rates for allowances, discounts, and rebates. These arrangements are complex and there are a significant number of customers and products affected. Management has systems and processes in place to estimate and value these obligations. To the extent that payments on trade discounts differ from estimates of the related liability, accounts payable and accruals, net earnings, and comprehensive income will be affected in future periods. Employee Benefit Plans The cost of pensions and other post-retirement benefits earned by employees is actuarially determined using the projected unit credit method prorated on service, and Management’s best estimate of salary escalation and mortality rates. Discount rates used in actuarial calculations are based on long-term interest rates and can have a material effect on the amount of plan liabilities and expenses. Management employs external experts to advise the Company when deciding upon the appropriate estimates to use to value employee benefit plan obligations and expenses. To the extent that these estimates differ from those realized, employee benefit plan assets and liabilities and comprehensive income will be affected in future periods. Income Taxes Provisions for income taxes are based on domestic and international statutory income tax rates and the amount of income earned in the jurisdictions in which the Company operates. Significant judgement is required in determining income tax provisions and the recoverability of deferred tax assets. The calculation of current and deferred income tax balances requires Management to make estimates regarding the carrying values of assets and liabilities that include estimates of future cash flows and earnings related to such assets and liabilities, the interpretation of income tax legislation in the jurisdictions in which the Company operates, and the timing of reversal of temporary differences. The Company establishes additional provisions for income taxes when, despite Management’s opinion that the Company’s tax positions are fully supportable, there is sufficient complexity or uncertainty in the application of legislation that certain tax positions may be reassessed by tax authorities. The Company adjusts these additional accruals in light of 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. changing facts and circumstances. To the extent that these adjustments differ from original estimates, deferred tax assets and liabilities, net earnings, and comprehensive income will be affected in future periods. Provisions The Company evaluates all provisions at each reporting date. These provisions can be significant and are prepared using estimates of the costs of future activities. In certain instances, Management may determine that these provisions are no longer required or that certain provisions are insufficient as new events occur or as additional information is obtained. Provisions are separately identified and disclosed in the consolidated financial statements. Changes to these estimates may affect the value of provisions, net earnings, and comprehensive income in future periods. Share-Based Compensation The Company uses estimates in the calculation of the liability and expenses for certain share-based incentive plans including, but not limited to, estimates of forfeitures, share price volatility, dividends, expected life of the award, risk-free interest rates, and Company performance. These estimates are based on previous experience and may change throughout the life of an incentive plan. Such changes could impact the carrying value of contributed surplus, liabilities, net earnings, and comprehensive income in future periods. Some of the Company’s share-based payment plans may be settled in either cash or equity instruments at the option of the Company. Management uses judgement in determining the appropriate accounting treatment for these plans, based on expectations and historical settlement decisions. Changes to accounting treatment based on Management’s judgement may impact contributed surplus, liabilities, net earnings, and comprehensive income in future periods. Depreciation and Amortization The Company’s property and equipment and definite life intangible assets are depreciated and amortized on a straight-line basis, considering the estimated useful lives of the assets and residual values. Right-of-use ("ROU") assets are depreciated on a straight-line basis, considering the shorter of the useful life of the underlying asset or the lease term. If it is reasonably certain at the commencement of the lease arrangement that the Company will exercise its purchase option or otherwise obtain ownership of the underlying asset at the end of the lease term, the ROU asset is depreciated over the useful life of the underlying asset. Changes to these estimates may affect the carrying value of these assets, inventories, net earnings, and comprehensive income in future periods. Leases The Company applies significant judgement in assessing whether a contract is or contains a lease. Such judgements include the determination of whether an asset or assets are specifically or implicitly identified in the contract, if the Company has the right to obtain substantially all the economic benefits from use of the asset or assets and whether the Company has the right to direct the use of the asset or assets. These judgements are made at the inception of a contract and may change if there are material changes to the agreement. Estimates are used to determine the incremental borrowing rate of a lease when the interest rate implicit to the lease is not readily available. The Company's incremental borrowing rate is determined using a model which incorporates the Company's credit worthiness, the nature and quality of the underlying asset, geographic environments and the duration of the lease. The inputs used in determining the incremental borrowing rate are reviewed and updated quarterly. The Company also applies significant judgement in determining whether it is reasonably certain to exercise lease extension options or purchase options in a contract by considering all relevant factors and circumstances that may create an economic incentive for the Company to exercise the option considering such factors as past experience, the terms and conditions of the contract, and the importance of the underlying assets to the Company’s operations. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Principles of Consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries from the date that control commences until the date that control ceases. Control exists when the Company is exposed to or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. All intercompany accounts and transactions have been eliminated on consolidation. (b) Business Combinations and Goodwill Business combinations are accounted for using the acquisition method at the acquisition date, which is the date that control is transferred to the Company. In assessing control, the Company takes into consideration potential voting rights that are currently exercisable. 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Goodwill is measured as the excess of the sum of the fair value of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of any previously held equity interest in the acquiree over the net of the acquisition date fair value of the identifiable assets acquired and the liabilities assumed. If the excess is negative, a bargain purchase gain is recognized immediately in earnings. Transaction costs, other than those associated with the issue of debt or equity, are recognized in earnings as incurred. Goodwill is not amortized and is tested for impairment annually in the fourth quarter and as required if events occur that indicate that its carrying amount may not be recoverable. Goodwill is tested for impairment at the CGU group level by comparing the carrying amount to its recoverable amount, consistent with the methodology outlined in Note 3(k). Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not re-measured, and settlement is accounted for in equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in earnings. When the initial accounting for a business combination has not been finalized by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting has not been finalized. These provisional amounts are adjusted during the measurement period, which does not exceed one year from the acquisition date, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date. (c) Fair Value Measurements The Company measures certain financial and non-financial assets and liabilities at fair value at each balance sheet date. In addition, fair value measurements are disclosed for certain financial and non-financial assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and disclosure purposes is determined on such a basis, except for share- based payment transactions, and measurements that have some similarities to fair value but are not fair value, such as net realizable value or value in use. Assets and liabilities, for which fair value is measured or disclosed in the consolidated financial statements, are classified using a three- level fair value hierarchy that reflects the significance and transparency of the inputs used in making the fair value measurements. Each level is based on the following: Level 1 - inputs are unadjusted quoted prices of identical assets or liabilities in active markets Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly Level 3 - one or more significant inputs used in a valuation technique are unobservable in determining fair values of the asset or liability Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of an asset or liability in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. (d) Non-current Assets (or Disposal Groups) Held for Sale The Company classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. The criteria for held for sale classification is regarded as met when a sale is highly probable, the asset or disposal group is available for immediate sale in its present condition, and Management is committed to the sale, which is expected to be completed within one year from the date of classification. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets are not depreciated once classified as held for sale. (e) Translation of Foreign Currencies The accounts of the Company are presented in Canadian dollars. Transactions in foreign currencies are translated at the actual rates of exchange. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the Canadian dollar at the exchange rate for that date. Foreign exchange differences arising on translation are recognized in net earnings. Non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction. The financial statements of foreign subsidiaries whose unit of measure is not the Canadian dollar are translated into Canadian dollars using the exchange rate in effect at the period-end for assets and liabilities, and the average exchange rates for the period for revenue, expenses, and cash flows. Foreign exchange differences arising on translation are recognized in accumulated other comprehensive income (loss) in total equity. 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. When a foreign operation is disposed of in its entirety or partially such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Company disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to the non-controlling interest. When the Company disposes of only part of an associate or joint venture while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to net earnings. Foreign exchange gains and losses arising from a receivable or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operations, are recognized in other comprehensive income (loss) in the cumulate foreign currency translation differences. (f) Financial Instruments The Company’s financial assets, upon initial recognition, are measured at fair value and are classified as Fair Value through Profit or Loss (“FVTPL”), Fair Value through Other Comprehensive Income (“FVOCI”), or amortized cost. The classification is determined at initial recognition and is dependent on the business model in which a financial asset is managed and the characteristics of the contractual cash flows. Subsequent reclassification may only occur on the first day of the reporting period following a change to the business model. The classification of the Company’s financial assets is disclosed in Note 19. The Company’s financial liabilities, upon initial recognition, are measured at fair value and are classified as amortized cost or FVTPL. A financial liability is classified as amortized cost at initial recognition unless it is classified as held-for-trading, is a derivative instrument or is specifically designated as FVTPL. Financial liabilities classified as amortized cost are subsequently measured using the effective interest method while financial liabilities at FVTPL are subsequently measured at fair value with changes in fair value recognized in the consolidated statements of net earnings in the period in which such changes arise. The Company records a loss allowance of expected credit losses for financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit risk on its financial assets has increased significantly since initial recognition. If credit risk has not significantly increased since initial recognition, the Company measures the loss allowance at an amount equal to the 12-month expected credit losses. Transaction costs, other than those related to financial instruments classified as fair value through profit or loss, which are expensed as incurred, are capitalized to the carrying amount of the instrument and amortized using the effective interest method. (g) Hedge Accounting The Company uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in interest rates, foreign exchange rates, and commodity prices. At the inception of a hedging relationship, the Company designates and formally documents the relationship between the hedging instrument and the hedged item, the risk management objective, and its strategy for undertaking the hedge. The documentation identifies the specific asset, liability, or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used, and how effectiveness will be assessed. The Company also formally assesses both at inception and at least quarterly thereafter, whether or not the derivatives that are used in hedging transactions are effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. If a hedging relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in the consolidated statements of net earnings. When hedge accounting is permitted, the hedging relationship may be designated as a cash flow hedge, a fair value hedge, or a net investment in foreign operation hedge. For most cash flow hedges, the change in fair value of the hedging instrument is recorded, to the extent it is effective, in other comprehensive income until the hedged item affects net earnings. If the cash flow hedge is a forecast transaction that results in the recognition of a non-financial asset or liability, the Company removes that amount from the cash flow hedge reserve and includes it directly in the initial cost or other carrying amount of the asset or the liability. In a fair value hedge, the change in fair value of the hedging derivative is offset in the consolidated statements of net earnings by the change in fair value of the hedged item relating to the hedged risk. Hedge ineffectiveness is measured and recorded in current period earnings in the consolidated statements of net earnings. When either a fair value hedge or cash flow hedge is discontinued, any cumulative adjustment to either the hedged item or other comprehensive income (loss) is recognized in net earnings, as the hedged item affects net earnings, or when the hedged item is derecognized. If a designated hedge is no longer effective, the associated derivative instrument is subsequently carried at fair value through net earnings without any offset from the hedged item. Derivatives that do not qualify for hedge accounting are carried at fair value on the consolidated balance sheets, and subsequent changes in their fair value are recorded in the consolidated statements of net earnings. (h) Cash and Cash Equivalents Cash and cash equivalents are comprised of cash balances, demand deposits and investments with an original maturity at the date of purchase of three months or less. 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. (i) Inventories Inventories are valued at the lower of cost and net realizable value, with cost being determined substantially on a first-in, first-out basis. The cost of inventory includes direct product costs, direct labour, and an allocation of variable and fixed manufacturing overhead, including depreciation. When circumstances that previously caused inventories to have a write-down below cost no longer exist, or when there is clear evidence of an increase in the net realizable value, the amount of a write-down previously recorded is reversed through cost of goods sold. (j) Biological Assets Biological assets consist of live hogs, poultry, and eggs. For the purposes of valuation, these assets are categorized as either parent stock or commercial stock. Parent stock represents animals held and bred for the purpose of generating commercial stock and to replace parent stock nearing the end of its productive cycle. Commercial stock is held for the purposes of further processing or eventual sale, at which point it becomes inventory. The fair value of commercial stock is determined based on market prices of livestock of similar age, breed, and genetic merit, less costs to sell the assets, including estimated costs necessary to transport the assets to market. Where reliable market prices of parent stock are not available, they are valued at cost less accumulated depreciation and any accumulated impairment losses. No active market exists for parent stock as they are rarely sold. Hog parent stock is depreciated on a straight-line basis over two to three years after considering residual values, whereas poultry parent stock is depreciated on a straight- line basis over six to eight months. Biological assets are transferred into inventory at fair value less costs to sell at the point of delivery. (k) Impairment or Disposal of Long-Lived Assets The Company reviews long-lived assets or asset groups held and used, including property and equipment and intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Asset groups referred to as CGUs include an allocation of corporate assets and are reviewed at their lowest level for which identifiable cash inflows are largely independent of cash inflows of other assets or groups of assets. The recoverable amount is the greater of its value in use and its fair value less cost to sell. Value in use is based on estimates of discounted future cash flows expected to be recovered from a CGU through its use. Management develops its cash flow projections based on past performance and its expectations of future market and business developments. Once calculated, the estimated future pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Fair value less cost to sell is the amount obtainable from the sale of an asset or CGU in an arm’s-length transaction between knowledgeable, willing parties, less the costs of disposal. Costs of disposal are incremental costs directly attributable to the disposal of an asset or CGU, excluding financing costs and income tax expense. An impairment loss is recognized in the consolidated statements of net earnings when the carrying amount of any asset or its CGU exceeds its estimated recoverable amount. Impairment losses recognized in respect of CGUs are allocated, first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the net carrying amount of the other assets in the CGU on a pro rata basis. Impairment losses related to long-lived assets recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation and amortization, if no previous impairment loss had been recognized. (l) Property and Equipment Property and equipment, with the exception of land, is recorded at cost less accumulated depreciation and any net accumulated impairment losses. Land is carried at cost and not depreciated. For qualifying assets, cost includes interest capitalized during the construction or development period. Construction-in-process assets are capitalized during construction and depreciation commences when the asset is available for use. Depreciation related to assets used in production is recorded in inventory and cost of goods sold. Depreciation related to non-production assets is recorded through selling, general, and administrative expense ("SG&A"). Depreciation is calculated on a straight-line basis, after taking into account residual values, over the following expected useful lives of the assets: ____________________________________________________________________________________________________ Buildings, including other components Machinery and equipment ____________________________________________________________________________________________________ 10-40 years 3-20 years When parts of an item of property and equipment have different useful lives, those components are accounted for as separate items of property and equipment. 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. (m) Investment Property Investment property is comprised of properties owned by the Company that are held to either earn rental income or for capital appreciation, or both. The Company’s investment properties include land and buildings. Investment properties are recorded at cost less accumulated depreciation and any accumulated impairment losses, except for land which is recorded at cost less any accumulated impairment losses. The depreciation policies for investment properties are consistent with those for buildings. (n) Right-of-use Assets and Lease Obligations At the inception of a contract, the Company assesses if the agreement is or contains a lease arrangement. A lease arrangement exists if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a ROU asset and lease obligation with respect to all lease arrangements with a lease term greater than 12 months. Leases with a term of 12 months or less and variable rent expenses are recognized as an expense in the consolidated statement of net earnings when performance relating to those expenses has occurred. The Company measures its lease obligation as the present value of the outstanding lease payments, discounted using the interest rate implicit in the lease and the term of the contract adjusted for reasonably certain renewal or termination options. If the interest rate implicit in the lease is not readily available, the payments are discounted using the Company’s incremental borrowing rate. The lease obligation is subsequently measured by increasing the carrying amount for interest using the effective interest method. Lease payments are recognized as reductions to the carrying amount of the lease obligation. A ROU asset is measured at the amount of the initial lease obligation and adjusted for any lease payments made at or before the commencement date of the lease less any incentives, initial direct costs, or the estimate of costs to restore the ROU asset at the conclusion of the lease term. ROU assets are depreciated on a straight-line basis over the shorter of the useful life of the underlying asset consistent with the Company’s depreciation policy for property and equipment as outlined in Note 3(l), or the lease term. If it is reasonably certain at the commencement of the lease arrangement that the Company will exercise its purchase option or otherwise obtain ownership of the underlying asset at the end of the lease term, the ROU asset is depreciated over the useful life of the underlying asset. The Company remeasures the lease obligation and ROU asset as a result of material modifications to a lease arrangement. (o) Intangible Assets Intangible assets include computer software, trademarks, recipes, customer relationships and poultry production quota. Definite life intangible assets are measured at cost less accumulated amortization and any net accumulated impairment losses. Amortization is recognized in the consolidated statements of earnings on a straight-line basis over the estimated useful lives of the following assets: ____________________________________________________________________________________________________ Computer software Customer relationships Recipes ____________________________________________________________________________________________________ 3-10 years 20-25 years 5-20 years Indefinite life intangibles including trademarks and poultry production quota are tested for impairment annually in the fourth quarter and otherwise as required if events occur that indicate that the net carrying value may not be recoverable. Upon recognition of an intangible asset, the Company determines if the asset has a definite or indefinite life. In making this determination, the Company considers the expected use, expiry of agreements, the nature of the asset, and whether the value of the asset decreases over time. (p) Employee Benefit Plans The Company provides post-employment benefits through defined benefit and defined contribution plans. Defined Benefit Plans The Company accrues obligations and costs in respect of employee defined benefit plans. The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected unit credit method prorated on service and Management's best estimate of salary escalation, retirement ages of employees, mortality rates, inflation and expected health care costs. Changes in these assumptions could affect future pension expense. The fair value of plan assets and the present value of the obligation are used to calculate net interest cost or income. The discount rate used to value the defined benefit obligation is based on high-quality corporate bonds in the same currency in which the benefits are expected to be paid and with terms to maturity that, on average, match the terms of the defined benefit obligations. The discount rate used to value the current service cost is based on high-quality corporate bonds in the same currency in which the employer contributions are expected to be made in and with terms of maturity that, on average, match the expected remaining service period for active employees. 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Actuarial gains and losses due to changes in defined benefit plan assets and obligations are recognized immediately in accumulated other comprehensive income (loss). When the calculation results in a net benefit asset, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of future refunds from the plan or reductions in future contributions to the plan (the “asset ceiling”). To calculate the present value of economic benefits, consideration is given to minimum funding requirements that apply to the plan. Where it is anticipated that the Company will not be able to recover the value of the net defined benefit asset, after considering minimum funding requirements for future services, the net defined benefit asset is reduced to the amount of the asset ceiling. The impact of the asset ceiling is recognized in other comprehensive income (loss). When future payment of minimum funding requirements related to past service would result in a net defined benefit asset “surplus” or an increase in a surplus, the minimum funding requirements are recognized as a liability, to the extent that the surplus would not be fully available as a refund or a reduction in future contributions. Re-measurement of this liability is recognized in other comprehensive income (loss) in the period in which the re-measurement occurs. Defined Contribution Plans The Company’s obligations for contributions to employee defined contribution pension plans are recognized in the consolidated statement of net earnings in the periods during which services are rendered by employees. Multi-Employer Plans The Company participates in multi-employer pension plans which are accounted for as defined contribution plans. The Company does not administer these plans as the administration and the investment of these assets are controlled by a board of trustees consisting of union and employer representatives. The Company’s responsibility to make contributions to these plans is established pursuant to collective bargaining agreements. The contributions made by the Company to the multi-employer plans are expensed when due. (q) Share-Based Compensation The Company applies the fair value method of accounting for share-based compensation. The fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model. The fair value of restricted share units (“RSUs”), including performance share units (“PSUs”), is measured based on the fair value of the underlying shares on the grant date and expected achievement of performance conditions. Compensation cost is recognized on a straight-line basis over the expected vesting period of the share-based compensation. The Company estimates the number of units expected to vest at the grant date and revises the estimate as necessary if subsequent information indicates that the actual number of units vesting differs significantly from the original estimate. The fair value of deferred share units (“DSUs”) is measured based on the fair value of the underlying shares at each reporting date. The Company has share-based compensation plans which are able to be settled in either cash or equity instruments at the option of the Company. Each grant is accounted for based on the expected settlement method at the time of issue. The expectation is re-evaluated at the end of each reporting period. (r) Provisions Provisions are liabilities of the Company for which the amount and/or timing of settlement is uncertain. A provision is recognized in the consolidated financial statements when the Company has a present legal or constructive obligation because of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. (s) Revenue Recognition The majority of the Company’s revenue is derived from the sale of products to retail and foodservice customers, as well as the sale of by-products to industrial and agricultural customers. The Company recognizes revenue for all sales at the fair value of the consideration received or receivable. Sales are net of a provision for variable consideration of estimated allowances and sales incentives provided to customers, such that it is highly probable that a significant reversal will not occur once the uncertainty related to the variable consideration is subsequently resolved. For all transactions, revenue is recognized when control of the goods has transferred, being at the point the customer receives and accepts the product. The customer may receive product either through delivery or by pick-up. There are no significant financing components associated with the Company's payment terms. The Company generally does not accept returns of spoiled products from customers. For product that may not be returned, the Company, in certain cases, provides customers with allowances to cover any damage or spoilage, and such allowances are deducted from sales at the time of revenue recognition. The value of sales incentives provided to customers are estimated using historical trends and are recognized at the time of sale as a reduction of revenue. Sales incentives include rebate and promotional programs provided to the Company's customers. These rebates are based on achievement of specified volume or growth in volume levels and other agreed promotional activities. In subsequent periods, the Company monitors the performance of customers against agreed upon obligations related to sales incentive programs and makes any adjustments to both revenue and sales incentive accruals as required. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The Company enters into repurchase agreements, which represent sales to third parties where the Company is required to buy-back the asset sold or a good containing that asset as a component. These sales and their associated costs of goods sold are not recognized in the consolidated statements of earnings until their eventual third party sale. (t) Borrowing Costs Borrowing costs are primarily comprised of interest on the Company's indebtedness. Borrowing costs are capitalized when they are attributable to the acquisition, construction, or production of a qualifying asset. The Company defines qualifying assets as any asset that requires more than six months to prepare for its intended use. Borrowing costs attributable to qualifying assets are calculated using the Company’s average borrowing cost excluding the costs associated with the de-recognition of accounts receivables under securitization programs. Borrowing costs that are not attributable to a qualifying asset are expensed in the period in which they are incurred and reported within interest expense in the consolidated statements of net earnings. (u) Government Incentives Government incentives are not recognized until there is reasonable assurance that they will be received and that the Company will be in compliance with any conditions associated with the incentives. Incentives that compensate the Company for expenses or losses are recognized in earnings with the same classification as the related expense or loss in the same periods in which the expenses or losses are recognized. Government incentives received with the primary condition that the Company should purchase, construct, or otherwise acquire non- current assets are recognized as a deduction from the associated asset on the consolidated balance sheet. The incentive is recognized in earnings over the useful life of the asset as a reduction of the related depreciation expense. Government incentives that are receivable as compensation for expenses or losses already incurred, or for the purpose of giving immediate financial support to the Company with no future related costs, are recognized in earnings in the period in which they become receivable. The benefit of a government loan at a below-market rate of interest is treated as a government incentive, and is measured as the difference between proceeds received and the fair value of the loan based on prevailing market interest rates. (v) Income Taxes Income tax expense is comprised of current and deferred tax. Income tax is recognized in the consolidated statements of net earnings, except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income (loss). Current tax expense represents the amount of income taxes payable, in respect of the taxable profit for the period, based on tax law that is enacted or substantially enacted at the reporting date, and is adjusted for changes in estimates of tax expense recognized in prior periods. A current tax liability or asset is recognized for income tax payable, or paid but recoverable in respect of all periods to date. The Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years when those temporary differences are expected to be recovered or settled and in the manner in which those temporary differences are expected to be recovered or settled through sale or continued use. In addition, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in both net earnings and comprehensive income in the period in which the enactment or substantive enactment takes place. A deferred tax asset is recognized for unused tax losses, tax credits, and deductible temporary differences, to the extent that it is probable that future taxable income will be available to utilize such amounts. Deferred tax assets are reviewed at each reporting date and are adjusted to the extent that it is no longer probable that the related tax benefits will be realized. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. (w) Accounting Standards Adopted During the Period During the year ended December 31, 2019, the Company adopted certain IFRS and amendments. As required by International Accounting Standard ("IAS 8") Accounting Policies, Changes in Accounting Estimates and Errors, the nature and the effect of these changes are disclosed below: 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Leases Beginning on January 1, 2019, the Company adopted IFRS 16 Leases using the modified retrospective approach where prior periods are not restated. The new standard replaces IAS 17 Leases and provides a new framework for lessee accounting that requires most ROU assets obtained through operating leases to be capitalized and a related liability to be recorded. IFRS 16 substantially carries forward the accounting requirements for lessors. The adoption of IFRS 16 results in changes to property, equipment and vehicle lease contracts which were previously classified as operating leases under IAS 17. Upon adoption, lease obligations equal to the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate are recognized. An ROU asset, representing the Company's right-to-use the underlying leased asset, will generally be equal to the lease obligation at adoption and subsequently depreciated on a straight-line basis. Payments previously recognized in the consolidated statements of net earnings are replaced by a combination of depreciation on the ROU asset and interest expense on the lease obligations. Depreciation is classified as either SG&A expenses or cost of goods sold, depending on the leased asset’s intended use. Interest expense is classified as interest expense and other financing costs. On transition to IFRS 16, the Company elected to apply the following practical expedients: • • • The practical expedient to not include initial direct costs from the measurement of the ROU asset on transition; The practical expedient to rely on the Company's assessment of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review. ROU assets as at January 1, 2019 have been adjusted by the amount of any provisions for onerous leases recognized on the balance sheet as at December 31, 2018; and The practical expedient to not reassess whether a contract is, or contains, a lease at the date of initial application. Existing contracts that were not identified as leases under IAS 17 or International Financial Reporting Interpretations Committee ("IFRIC") 4 Determining Whether an Arrangement Contains a Lease, were not reassessed under IFRS 16 to determine if a lease exists. The definition of a lease under IFRS 16 has only been applied to contracts entered into or changed on or after January 1, 2019. The increase (decrease) to opening balances from adopting IFRS 16 on the opening consolidated balance sheet is as follows: Prepaid expenses and other assets Property and equipment Right-of-use assets Other long-term assets Intangible assets Total assets Current portion of lease obligations(i)(ii) Current portion of provisions Other current liabilities Lease obligations(i)(ii) Provisions Other long-term liabilities Total liabilities As at January 1, 2019 720 (19,880) 240,815 1,548 (28,830) 194,373 39,164 (557) (3,783) 215,362 (3,653) (52,160) 194,373 $ $ $ $ (i) The difference between the net present value of the commitments disclosed in Note 24 of the Company's 2018 annual audited consolidated financial statements discounted using the weighted average incremental borrowing rate and the opening lease obligation as at January 1, 2019 is a result of the impact of lease extensions assumed in the calculation of the opening lease obligation and the effect of lease make good costs previously recorded in other liabilities. (ii) The weighted average incremental borrowing rate applied to the Company’s portfolio of leases as at January 1, 2019 was 3.7%. Uncertainty over Income Tax Treatments Beginning January 1, 2019, the Company adopted IFRIC 23 Uncertainty over Income Tax Treatments. The interpretations provide guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept a company's tax treatments. Current tax liabilities increased by $1.1 million as a result of the implementation of IFRIC 23, with a corresponding decrease of $1.1 million to opening retained earnings. 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Long-term Interests in Associates and Joint Ventures Beginning January 1, 2019, the Company adopted amendments to IAS 28 Investments in Associates and Joint Ventures. The amendments clarify that a company applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture. The Company adopted the amendments to IAS 28 retrospectively in its consolidated financial statements for the annual period beginning January 1, 2019. The adoption of the amendments to IAS 28 did not have a material impact on the consolidated financial statements. Annual Improvements to IFRS (2015-2017) Cycle Beginning January 1, 2019, the Company adopted narrow-scope amendments to a total of four standards as part of its annual improvement process. Amendments were made to clarify that a company must remeasure its previously held interest in a joint operation when it obtains control of the business in accordance with IFRS 3 Business Combinations but does not remeasure when it obtains joint control of the business under IFRS 11 Joint Arrangements. The amendments also include clarification that, all income tax consequences of dividend payments should be recognized consistently with the transactions that generated the distributable profits, under IAS 12 Income Taxes and that under IAS 23 Borrowing Costs, any specific borrowing that remains outstanding after the related asset is ready for its intended use or sale becomes part of general borrowings. The Company adopted these amendments prospectively in its consolidated financial statements for the annual period beginning January 1, 2019. The adoption of these standards did not have a material impact on the consolidated financial statements. Employee benefits (amendment) Beginning January 1, 2019, the Company adopted an amendment to IAS 19 Employee Benefits. The amendment clarifies the effect of a plan amendment, curtailment and settlement on the requirements regarding the asset ceiling. In addition, if a plan amendment, curtailment or settlement occurs, it is mandatory under the amended standard that the current service cost and the net interest for the period after the remeasurement are determined using the assumptions used for the remeasurement. The Company adopted the amendment to IAS 19 prospectively in its consolidated financial statements for the annual period beginning January 1, 2019. The amendment to IAS 19 did not have a material impact on the consolidated financial statements. (x) Accounting Pronouncements Issued But Not Yet Effective Conceptual Framework On March 29, 2018, the IASB issued its revised Conceptual Framework for Financial Reporting. The revised Conceptual Framework does not constitute a substantial revision from the previously effective guidance, but does provide additional guidance on topics not previously covered such as presentation and disclosure. This amendment is effective on January 1, 2020. The Company intends to adopt this amendment in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the revised Conceptual Framework for Financial Reporting is not expected to have a material impact on the consolidated financial statements. Definition of a Business On October 22, 2018, the IASB issued a narrow scope amendment to IFRS 3. This amendment narrowed and clarified the definition of a business, as well as permitted a simplified assessment of whether an acquired set of activities and assets is a group of assets rather than a business. This amendment is effective on January 1, 2020 and is to be applied prospectively. The Company intends to adopt the amendment to IFRS 3 in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the amendment to IFRS 3 is not expected to have a material impact on the consolidated financial statements. Definition of Material On October 31, 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8. These amendments clarify and align the definition of material and provide guidance to help improve consistency in the application of materiality when used in other IFRS standards. These amendments are effective on January 1, 2020 and are to be applied prospectively. The Company intends to adopt the amendments to IAS 1 and IAS 8 in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the amendments to IAS 1 and IAS 8 are not expected to have a material impact on the consolidated financial statements. Interest Rate Benchmark Reform - Phase 1 On September 26, 2019, the IASB issued amendments to IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments Disclosures to address the potential effects Interbank Offered Rates ("IBOR") reform could have on financial reporting. The amendments modify specific hedge accounting requirements to allow entities to assume that the interest rate benchmark on which the hedged cash flows and the cash flows of which the hedging instrument are based on, are not altered as a result of IBOR reform. The Company intends to adopt the amendments to IFRS 9, IAS 39 and IFRS 7 in its consolidated financial statements for the annual period beginning January 1, 2020. The adoption of the amendments to IFRS 9, IAS 39 and IFRS 7 are not expected to have a material impact on the consolidated financial statements. 57 4. ACCOUNTS RECEIVABLE Trade receivables Less: Allowance for doubtful accounts Net trade receivables Other receivables: Commodity taxes receivable Government receivable Other (i) Restated, see Note 29(a). The aging of trade receivables is as follows: Current Past due 0-30 days Past due 31-60 days Past due > 60 days NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. As at December 31, 2019 2018(i) $ 123,617 $ 109,945 (3,107) (1,757) $ 120,510 $ 108,188 12,082 8,484 13,893 11,394 15,753 10,948 $ 154,969 $ 146,283 As at December 31, 2019 2018 $ 79,284 $ 72,605 30,990 4,559 8,784 29,830 2,677 4,833 $ 123,617 $ 109,945 Trade receivables are impaired when their estimated future cash flows are less than their contractual cash flows. The amount of impairment takes into account the financial condition of the customers, delinquencies in payments, collaterals and credit insurance coverage on the trade receivables. The Company has sold certain of its trade accounts receivables under a securitization program as described in Note 27. The Company's securitization program requires the sale of trade receivables to be treated as a sale from an accounting perspective and as a result, trade receivables sold under this program are derecognized from the consolidated balance sheets as at December 31, 2019 and 2018. 5. INVENTORIES Raw materials Work in process Finished goods Packaging Spare parts As at December 31, 2019 2018 $ 60,190 $ 43,455 33,297 223,877 16,940 51,230 27,921 216,520 15,017 45,988 $ 385,534 $ 348,901 For the year ended December 31, 2019, inventory in the amount of $3,061.8 million (2018: $2,656.5 million) was expensed through cost of goods sold. 58 6. BIOLOGICAL ASSETS Balance at December 31, 2018 Additions and purchases Depreciation Change in fair value realized Change in fair value unrealized Further processing and sales NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Hog stock Poultry stock Commercial $ 82,590 346,335 — 5,042 (10,587) (335,362) Parent 22,115 5,697 (4,412) — — — Commercial 4,789 60,687 — — — (60,158) 5,318 Parent 1,999 3,562 (3,281) — — — Total $ 111,493 416,281 (7,693) 5,042 (10,587) (395,520) 2,280 $ 119,016 Balance at December 31, 2019 $ 88,018 23,400 Hog stock Poultry stock Balance at December 31, 2017 Additions and purchases Depreciation Change in fair value realized Change in fair value unrealized Further processing and sales Commercial $ 84,587 307,876 — (5,863) (5,042) (298,968) Parent 21,369 4,734 (3,988) — — — Balance at December 31, 2018 $ 82,590 22,115 Commercial 4,400 56,890 — — — (56,501) 4,789 Parent 1,379 3,526 (2,906) — — — Total $ 111,735 373,026 (6,894) (5,863) (5,042) (355,469) 1,999 $ 111,493 Hog stock is comprised of approximately 0.8 million animals as at December 31, 2019 (2018: 0.8 million). During the years ended December 31, 2019 and 2018, substantially all hog stock was directly transferred to the Company's primary processing operations. Poultry stock is comprised of approximately 8.5 million eggs and 0.2 million birds as at December 31, 2019 (2018: 8.9 million eggs and 0.2 million birds). The change in fair value of commercial hog and poultry stock for the year was a loss of $5.5 million for the year ended December 31, 2019 (2018: loss of $10.9 million) recorded in cost of goods sold. The fair value measures of commercial hog stock have been categorized as a Level 3 fair value based on inputs to the valuation techniques used. There were no transfers between levels for the year ended December 31, 2019. The Company uses the market comparison approach to determine the fair value of its commercial hog stock. The valuation model is based on the market price of hog stock of similar age, weight, breed, and genetic make-up. The model is based on the U.S. dollar market price per cut weight and adjusted for foreign exchange, conversion from pounds to kilograms, and specific significant unobservable inputs, including a quality index adjustment and a market conversion factor, as defined below. The quality index adjustment is a value adjustment based on the relative quality of a processed hog based on the lean yield (being the ratio between muscle and fat content) and total weight. Quality adjustments range from 6.5% to 7.1%. A higher (lower) quality adjustment percentage will result in an increase (decrease) to the fair market value of the commercial hog stock. The market conversion factor is a market adjustment used to discount the formula from a U.S. market price to a Canadian pricing model. The market conversion factor experiences minimal fluctuation. A higher (lower) market conversion factor will result in an increase (decrease) to the fair market value of the commercial hog stock. Commercial poultry stock are valued at cost as an indicator of fair value in the case where little biological transformation has taken place since initial cost occurrence or when the impact of the biological transformation on price is not expected to be material. Where reliable market prices of parent stock are not available, they are valued at cost less accumulated depreciation and any accumulated impairment losses. No active liquid market exists for parent stock as they are rarely sold. The Company has established environmental policies and procedures which comply with local environmental and other laws. Management performs regular reviews to identify environmental risks and to ensure that the systems in place are adequate to manage those risks. The Company's biological asset operations can be affected by outbreaks of disease among livestock. To mitigate this risk, the Company monitors herd health status and has strict bio-security procedures and employee training programs throughout its livestock production operation. 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. 7. ASSETS HELD FOR SALE Assets held for sale are those relating to a poultry plant and associated quota in Drummondville, Québec and a vacant plant located in St. Anselme, Québec. 8. PROPERTY AND EQUIPMENT Cost Accumulated depreciation Net balance, December 31, 2019 Cost(i) Accumulated depreciation Net balance, December 31, 2018(i) (i) Restated, see Note 29(a). Land Buildings Machinery and equipment Under construction Total 50,374 989,410 1,370,489 216,360 $ 2,626,633 — (342,811) (897,340) — (1,240,151) 50,374 646,599 473,149 216,360 $ 1,386,482 Machinery and equipment Under construction Buildings Total 946,792 1,298,570 130,055 $ 2,427,501 Land 52,084 — (306,799) (836,752) — (1,143,551) 52,084 639,993 461,818 130,055 $ 1,283,950 $ $ $ $ The changes in net carrying amounts of property, plant and equipment during 2019 and 2018 were as follows: Net balance, December 31, 2018(i) Impact of new IFRS standards(ii) $ Additions Transfers from under construction Depreciation Foreign currency translation Other(iii) Land 52,084 (3,591) — 2,195 — (18) (296) Net balance, December 31, 2019 $ 50,374 Net balance, December 31, 2017 Business combinations(i) Additions Transfers from under construction Depreciation Foreign currency translation Other(iii) Net balance, December 31, 2018(i) (i) Restated, see Note 29(a). (ii) See Note 3(w). Land 41,238 7,660 — 3,957 — 35 (806) 52,084 $ $ (iii) Includes disposals, reclassifications and other adjustments. 60 Buildings Machinery and equipment Under construction Total 639,993 (3,169) — 46,136 (34,297) (377) (1,687) 646,599 Buildings 560,557 68,584 — 41,652 (28,677) 574 (2,697) 639,993 461,818 (13,120) — 115,698 (88,531) (488) (2,228) 473,149 130,055 $ 1,283,950 — 251,021 (164,029) — (695) 8 (19,880) 251,021 — (122,828) (1,578) (4,203) 216,360 $ 1,386,482 Machinery and equipment Under construction Total 439,102 26,274 — 79,967 (78,928) 666 (5,263) 461,818 75,412 $ 1,116,309 6,124 173,546 (125,576) — 585 (36) 108,642 173,546 — (107,605) 1,860 (8,802) 130,055 $ 1,283,950 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Borrowing Costs For the year ended December 31, 2019, borrowing costs of $2.7 million were capitalized (2018: $0.0 million), using an average capitalization rate of 4.2% (2018: 0.0%). 9. RIGHT-OF-USE ASSETS The Company enters into lease arrangements for land, buildings, vehicles, machinery and equipment, and other assets as part of its daily operations. Land and building leases include the rental of office space, manufacturing and distribution facilities and barns. These leases vary in length and are typically over 5 years and may include several renewal options. Vehicle leases primarily include leases of employee vehicles. Employee vehicle leases have an initial term of 3 years. As part of its leasing agreement for employee vehicles, MLF is required to pay a residual value guarantee to the lessor for the value of the leased vehicle at the end of the lease term. As at December 31, 2019, the Company's residual value guarantees on employee vehicles totaled $2.6 million. Machinery and equipment leases include the rental of manufacturing machinery and computer hardware. These leases vary in duration and structure and typically do not exceed 10 years. Other leased assets include an indefinite life poultry supply quota from a third party, with an option to purchase the quota by 2022. Right-of-use assets are comprised of: Cost Accumulated depreciation Net balance, December 31, 2019 Land and Buildings $ 210,324 (28,814) $ 181,510 Vehicles 7,488 (2,530) 4,958 Changes in the net balance of right-of-use assets during 2019 were as follows: Opening Balance, January 1, 2019(i) Additions Depreciation Disposals Foreign Currency Translation Net balance, December 31, 2019 (i) See Note 3(w). Land and Buildings $ 191,583 20,635 (29,527) (1,063) (118) $ 181,510 Vehicles 5,039 3,418 (3,001) (498) — 4,958 Machinery and Equipment 15,115 (2,987) 12,128 Machinery and Equipment 15,363 — (3,184) (11) (40) Other Total 28,830 $ 261,757 — (34,331) 28,830 $ 227,426 Other Total 28,830 $ 240,815 — — — — 24,053 (35,712) (1,572) (158) 12,128 28,830 $ 227,426 Lease obligations associated with the Company's right-of-use assets are described in Note 15. 10. EMPLOYEE BENEFITS The Company sponsors several defined benefit pension plans for Canadian employees which are either final salary plans, career salary plans, service-based plans, or a combination thereof. The Company also sponsors a final salary defined benefit pension plan in the U.K. in which membership is closed with no members accruing benefits. These defined benefit plans require contributions to be made to separately administered funds. Certain retired employees are covered under a post-retirement benefit plan, which reimburses certain medical costs and provides life insurance coverage. The Canadian plans are governed by the pension laws of Ontario. The U.K. plan is governed by the employment laws of the U.K. The Company's pension funding policy is to contribute amounts sufficient, at a minimum, to meet local statutory funding requirements. For the Company's defined benefit pension plans, local regulatory bodies either define minimum funding requirements or approve funding plans submitted by the Company. From time to time the Company may make additional discretionary contributions considering actuarial assessments and other factors. The contributions that have been made to support ongoing plan obligations have been recorded in the respective asset or liability accounts on the consolidated balance sheet. Actuarial valuations for the Company's defined benefit pension plans are completed based on the regulations in place in the jurisdictions where the plans operate. 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Information about the Company's defined benefit plans as at December 31, in aggregate, are as follows: Other post- retirement benefits Pension 2019 Total Other post- retirement benefits Pension 2018 Total $ $ — — — — — — — — 1,010,188 $ 1,010,188 $ 37,360 84,770 9,849 3,542 (73,357) (2,689) 37,360 84,770 9,849 3,542 (73,357) (2,689) 1,069,663 $ 1,069,663 $ — — — — — — — — 1,070,480 $ 1,070,480 35,428 (36,658) 9,565 3,609 (69,495) (2,741) 35,428 (36,658) 9,565 3,609 (69,495) (2,741) 1,010,188 $ 1,010,188 Plan Assets Fair value, beginning of year Interest income Actuarial gains (losses)(i) Employer contributions Employee contributions Benefits paid Administrative costs Fair value, end of year Accrued benefit obligations: Balance, beginning of year $ (50,345) (1,057,903) $ (1,108,248) $ (54,286) (1,122,374) $ (1,176,660) Current service cost Interest cost Benefits paid from plan assets Benefits paid directly from the Company Actuarial gains (losses) - experience Actuarial (losses) gains - financial assumptions Employee contributions Special termination benefits Curtailments Balance, end of year Unfunded Funded(ii) Total benefit obligations Other Accrued net benefit obligations, end of year (85) (1,844) — 3,162 1,430 (3,497) — — — (13,492) (39,550) 73,358 (13,577) (41,394) 73,358 2,143 744 5,305 2,174 (95,967) (3,542) (500) 210 (99,464) (3,542) (500) 210 (97) (1,784) — 3,207 598 2,017 — — — (15,143) (37,545) 69,495 1,495 (7,118) 55,766 (3,609) (420) 1,550 (15,240) (39,329) 69,495 4,702 (6,520) 57,783 (3,609) (420) 1,550 (51,179) (1,134,499) $ (1,185,678) $ (50,345) (1,057,903) $ (1,108,248) (51,179) (35,945) $ (87,124) $ (50,345) (33,685) $ (84,030) — (1,098,554) (1,098,554) — (1,024,218) (1,024,218) (51,179) (1,134,499) $ (1,185,678) $ (50,345) (1,057,903) $ (1,108,248) — (727) $ (727) $ — (533) $ (533) (51,179) (65,563) $ (116,742) $ (50,345) (48,248) $ (98,593) $ $ $ $ $ (i) Return on plan assets greater (less) than discount rate. (ii) Includes wholly and partially funded plans. Amounts recognized in the consolidated balance sheet consist of: Employee benefit assets Employee benefit obligations Accrued net benefit obligations, end of year 62 As at December 31, 2019 — (116,742) (116,742) $ $ 2018 5,389 (103,982) (98,593) $ $ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Pension benefit expense recognized in net earnings: Current service cost - defined benefit $ Current service cost - defined contribution and multi-employer plans Net interest cost Administrative costs Special termination benefits(i) Curtailments(i) Net pension benefit expense $ 2019 13,492 16,450 2,190 2,689 500 (210) $ 35,111 $ 2018 15,355 15,459 2,117 2,741 420 (1,550) 34,542 (i) Included in restructuring and other related costs pertaining to organizational restructuring initiatives and plant closures - see Note 13. For the year ended December 31, 2019, the Company expensed salaries of $738.0 million (2018: $681.1 million), excluding pension and other post-retirement benefits. Amounts recognized in other comprehensive income (loss) (before income taxes): Actuarial (losses) gains 2019 $ (13,419) $ 2018 15,625 The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations were as follows: Weighted average discount rate Rate of salary increase Medical cost trend rates Plan assets were comprised of: Equity securities Debt securities Other investments and cash 2019 3.10% 2.75% 5.00% As at December 31, 2019 45% 49% 6% 100% 2018 3.80% 2.75% 5.00% 2018 45% 50% 5% 100% As at December 31, 2019, the Company's plans were invested in pooled funds which hold underlying equity, debt and other securities and are not quoted in an active market. Other post-retirement benefits expense recognized in net earnings: Current service cost Interest cost Other post-retirement benefits expense 2019 85 1,844 1,929 $ $ 2018 97 1,784 1,881 $ $ 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Impact of changes in major assumptions: Increase (decrease) in defined benefit obligations Other post- Total retirement Sensitivity pensions benefits 3.10% 0.25% decrease $ 35,958 0.25% increase $ (34,838) 2.75% 110% of 2014 Private Sector Canadian Pensioners' Mortality Table, projected generationally using scale MI-2017 0.50% increase $ $ Increase of 1 year in expected lifetime of plan participants 2,171 35,714 1,310 (1,191) N/A 743 Total 37,268 (36,029) 2,171 36,457 $ $ $ $ December 31, 2018 December 31, 2019 Actuarial Assumption Period end discount rate Rate of salary increase Mortality Measurement dates: 2019 expense Balance sheet The average expected maturity of the pension obligations is 13.2 years (2018: 13.3 years). The Company expects to contribute $32.4 million to pension plans in 2020, inclusive of defined benefit plans, defined contribution plans and multi-employer plans. Governance and Risk Management The Company administers its pension plans through its Board of Directors. The Company’s Board of Directors has established a governance structure and delegated to the Audit Committee and the Pension Investment Advisory Committee all aspects of the investment of the funds. The Company’s Board of Directors has delegated to the Pension Policy and Administration Committee the authority to make amendments to the documents that govern the pension plans of an administrative or compliance nature, that relate to collective bargaining agreements entered into by the Company or that have a minimal financial impact on the plans. In fulfilling their responsibilities, the Audit Committee and the Pension Investment Advisory Committee may delegate functions or responsibilities to, or otherwise utilize employees of the Company where appropriate. The Audit Committee and the Pension Investment Advisory Committee may rely on independent experts for certain aspects of the funds’ operations. The Audit Committee or the Pension Investment Advisory Committee, as appropriate, retain responsibility and utilize suitable personnel for such activities and monitor the activities undertaken by the selected personnel. The plan assets are invested primarily in well-diversified pooled funds that meet the constraints set out in legislation of the jurisdictions in which the plans operate. Further diversification criteria set out in investment funds' governing documents require the division of investments between equities and fixed income. There are no significant concentrations of risks. Multi-Employer Plan The Company contributes to the Canadian Commercial Workers Industry Pension Plan which is a multi-employer defined benefit plan for employees who are members of the United Food and Commercial Workers Canada union. This is a large-scale plan for union workers of multiple companies across Canada. Adequate information to account for these contributions as a defined benefit plan in the Company’s statements is not available due to the size and number of contributing employers in the plan. Included in the pension benefit expense is $0.8 million (2018: $0.7 million) related to payments into this plan. The Company expects to contribute $0.8 million into this plan in 2020. 11. GOODWILL The net carrying value for goodwill was $657.2 million as at December 31, 2019 (2018: $664.9 million). There were no impairment losses recorded for the years ended December 31, 2019 and 2018. 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. For the purposes of annual impairment testing, goodwill is allocated to the Meat Protein and Plant Protein CGU groups, being the groups expected to benefit from the synergies of each business combination in which the goodwill arose: CGU Group Meat Protein Plant Protein As at December 31, 2019 2018 $ 469,560 $ 469,683 187,619 195,196 $ 657,179 $ 664,879 Annual impairment testing involves determining the recoverable amount of the CGU group to which goodwill is allocated and comparing this to the carrying value of the CGU groups. The measurement of the recoverable amount of the CGU groups was calculated based on fair value less costs to sell. Where there was no market information available, fair value was determined by discounting the future cash flows generated from the continuing use of the groups. The calculation of the fair value based on discounting the future cash flows was based on the following key assumptions: • Cash flows were projected based on the Company's long-term business plan. Cash flows for a further perpetual period were extrapolated using growth rates ranging from 2.0% to 3.0% (2018: 1.8% to 3.0%). • The business plan contains forecasts based on past experience of actual operating results in conjunction with anticipated future growth opportunities. While the forecast does assume some base business expansion, largely related to innovation, the primary engine of growth is strategic in nature and is consistent with the projects and expectations as articulated in the Company's strategic plan. • Discount rates applied in determining the recoverable amount of the CGU groups were ranging from 8.8% to 11.4% (2018: 8.3% to 11.4%). The discount rates were estimated based on past experience and the weighted average cost of capital of each CGU group and other competitors in the industry. The values assigned to the key assumptions represent Management's assessment of future trends in the industries in which the CGU groups operate and are based on both external and internal sources and historical trend data. The change in the carrying amount of goodwill during 2019 and 2018 was as follows: 2019 2018(i) $ 664,879 $ 517,387 — (7,700) 128,280 19,212 $ 657,179 $ 664,879 As at December 31, 2019 2018(i) $ 212,922 $ 221,621 139,791 202,995 $ 352,713 $ 424,616 Net balance, beginning of year Business combinations Foreign currency translation Net balance, end of year (i) Restated, see Note 29(a). 12. INTANGIBLE ASSETS Definite life Indefinite life Total intangible assets (i) Restated, see Note 29(a). 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Definite life Software in use $ 137,666 (93,077) $ 44,589 Software in process 20,643 — 20,643 Software in use $ 120,611 (78,996) $ 41,615 Software in process 18,144 — 18,144 Recipes 33,495 (6,952) 26,543 Recipes 34,538 (4,027) 30,511 Customer relationships Total 134,535 $ 326,339 (13,388) (113,417) 121,147 $ 212,922 Customer relationships Total 138,288 $ 311,581 (6,937) (89,960) 131,351 $ 221,621 Cost Accumulated amortization Net balance, December 31, 2019 Cost(i) Accumulated amortization Net balance, December 31, 2018(i) (i) Restated, see Note 29(a). The changes in net carrying amounts of definite life intangibles during 2019 and 2018 were as follows: Net balance, December 31, 2018(i) Additions Transfers Amortization Foreign currency translation Other(ii) Software in use Software in process $ 41,615 — 17,225 (14,053) (4) (194) 18,144 19,724 (17,225) — — — Recipes 30,511 — — (3,127) (841) — Customer relationships Total 131,351 $ 221,621 — — (6,792) (3,412) — 19,724 — (23,972) (4,257) (194) Net balance, December 31, 2019 $ 44,589 20,643 26,543 121,147 $ 212,922 Net balance, December 31, 2017 Business combinations(i) Additions Transfers Amortization Foreign currency translation Net balance, December 31, 2018(i) (i) (ii) Restated, see Note 29(a). Includes disposals, reclassifications and other adjustments. Amortization Software in use $ 47,676 1,512 — 5,607 (13,401) 221 $ 41,615 Software in process 9,998 — 13,999 (5,607) — (246) 18,144 Recipes 7,787 23,505 — — (2,672) 1,891 30,511 Customer relationships 57,800 73,304 — — (4,695) 4,942 Total $ 123,261 98,321 13,999 — (20,768) 6,808 131,351 $ 221,621 Amortization is recorded through cost of goods sold or SG&A depending on the nature of the asset. Borrowing Costs For the years ended December 31, 2019 and 2018, there were no borrowing costs capitalized on intangible assets. Indefinite Life Intangibles Indefinite life intangible assets are comprised of trademarks and poultry production quota. The Company expects to renew the registration of the trademarks and poultry production quota at each expiry date indefinitely and expects these assets to generate economic benefit in perpetuity. As such, the Company assessed these intangibles to have indefinite useful lives. 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The changes in net carrying amounts of indefinite life intangibles during 2019 and 2018 were as follows: Net balance, December 31, 2018(i) Impact of new IFRS standards(ii) Other(iii) Foreign Currency Translation Net balance, December 31, 2019 Net balance, December 31, 2017 Business Combinations(i) Additions Foreign Currency Translation Net balance, December 31, 2018(i) (i) (ii) Restated, see Note 29(a). See Note 3(w). Indefinite life Trademarks $ 122,102 — — (2,464) Quota 80,893 (28,830) (31,910) — Total $ 202,995 (28,830) (31,910) (2,464) $ 119,638 20,153 $ 139,791 Trademarks $ 71,783 45,069 — 5,250 Quota 20,153 31,910 28,830 — Total $ 91,936 76,979 28,830 5,250 $ 122,102 80,893 $ 202,995 (iii) Reclassification of quota in Drummondville, Québec to Assets Held For Sale. The indefinite life intangible assets are allocated between the Meat Protein and Plant Protein CGU groups as follows: CGU Group Meat Protein(i) Plant Protein (i) Restated, see Note 29(a). As at December 31, 2019 2018 $ 36,873 $ 97,613 102,918 105,382 $ 139,791 $ 202,995 The Company performs annual impairment testing on its indefinite life intangible assets. Annual impairment testing, consistent with the impairment testing for goodwill as described in Note 11, involves determining the recoverable amount of each indefinite life intangible asset and comparing it to the net carrying value. Trademarks The recoverable value of trademarks is calculated using the royalty savings approach, which involves present valuing the royalties earned by similar trademarks. The key assumptions used in this determination are: Royalty rate range Growth rate Discount rate 2019 2018 1.0 - 3.0% 1.5 - 3.0% 1.5 - 3.0% 1.5 - 3.0% 7.7 - 10.7% 8.3 - 11.4% 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. 13. PROVISIONS Balance at December 31, 2018 Impact of new IFRS standards(i) Charges Reversals Cash payments Non-cash items Legal $ 289 — — — — — Environ- mental 4,762 — — (2,000) (57) — Balance at December 31, 2019 $ 289 2,705 Current Non-current Total at December 31, 2019 (i) See Note 3(w). Balance at December 31, 2017 Charges Reversals Cash payments Non-cash items Legal $ 289 Environ- mental 4,833 — — — — — — (71) — Lease make- good 1,810 (1,810) — — — — — Lease make- good 2,228 — (390) (28) — Balance at December 31, 2018 $ 289 4,762 1,810 Current Non-current Total at December 31, 2018 Restructuring and Other Related Costs Restructuring and related provisions Severance and other employee related costs Site closing and other cash costs 43,820 — 8,678 (3,937) (2,762) — 45,799 2,671 (2,400) 40 — (99) (103) 109 Restructuring and related provisions Severance and other employee related costs Site closing and other cash costs Total $ 53,352 (4,210) 8,718 (5,937) (2,918) (103) $ 48,902 $ 3,973 44,929 $ 48,902 Total $ 20,608 48,377 (3,202) 10,379 46,119 (2,726) (9,952) — 43,820 2,879 2,258 (86) (2,476) (12,527) 96 2,671 96 $ 53,352 $ 3,457 49,895 $ 53,352 For the year ended December 31, 2019, the Company recorded restructuring and other related costs of $11.0 million. Of this amount, $5.9 million related to accelerated depreciation and other asset write-offs, and $0.2 million related to severance and other employee related costs as a result of the announced closure of the poultry plants in St. Mary's, Brampton, and Toronto. The remaining $4.9 million related to employee related costs for other organizational restructuring initiatives. For the year ended December 31, 2018, the Company recorded restructuring and other related costs of $46.2 million. Of this amount, $40.7 million related to accelerated depreciation and severance and other employee costs as a result of the announced closure of the poultry plants in St. Mary's, Brampton, and Toronto, $2.4 million related to costs as a result of the St. Anselme plant closure, and $2.4 million related to costs as a result of the Thamesford turkey processing plant closure. The remaining $0.7 million related to other previously announced organizational restructuring initiatives. 68 14. LONG-TERM DEBT Revolving line of credit U.S. term credit Canadian term credit Government loans Total long-term debt Current Non-current Total long-term debt NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. As at December 31, 2019 — $ As at December 31, 2018 374,775 346,461 185,000 7,867 539,328 899 538,429 539,328 $ $ $ — — 8,646 383,421 80,897 302,524 383,421 $ $ $ $ On April 30, 2019, the Company entered into a new syndicated credit facility (the "Credit Facility") consisting of a $1,300.0 million unsecured committed revolving line of credit maturing April 30, 2024 and two unsecured committed term credit facilities for US$265.0 million and $350.0 million maturing April 30, 2024 and April 30, 2023, respectively. The Credit Facility refinanced and replaced the Company's previous $250.0 million and $400.0 million unsecured committed revolving credit facilities, which were due to mature on November 7, 2019 and October 19, 2021, respectively. The Credit Facility can be drawn in Canadian or U.S. dollars and bears interest payable monthly, based on Banker's Acceptance and Prime rates for Canadian dollar loans and the London Inter-bank Offered Rate ("Libor") for U.S. dollar loans. The Credit Facility is intended to meet the Company's funding requirements for capital investments, including the construction of its two new manufacturing facilities in London, Ontario and Shelbyville, Indiana, in addition to providing appropriate levels of liquidity and for general corporate purposes. On December 11, 2019, the Company amended the Credit Facility to reduce interest paid upon achievement of certain sustainability targets. This reduction will not materialize until at least 2021, and there is no penalty for not achieving the targets. In addition to loans, as at December 31, 2019 the Company had drawn letters of credit of $6.2 million on the Credit Facility (2018: $6.3 million on the previous facility). The Credit Facility requires the maintenance of certain covenants. As at December 31, 2019, the Company was in compliance with all of these covenants. The primary financial covenant requires that the Company maintain a Total Debt to Capitalization ratio below a specified threshold. The Company has additional uncommitted credit facilities for issuing letters of credit up to a maximum of $125.0 million (2018: $125.0 million). As at December 31, 2019, $79.5 million of letters of credit had been issued thereon (2018: $72.2 million). The Company has various government loans on specific projects, with contractual interest rates ranging from non-interest bearing to 2.9% per annum (2018: 2.9%). These facilities are repayable over various terms from 2022 to 2024. As at December 31, 2019, $7.9 million (2018: $8.6 million) was outstanding. All of these facilities are committed. The Company’s estimated average effective cost of borrowing for 2019 was approximately 4.1% (2018: 4.4%). Required repayments of long-term debt are as follows: 2020 2021 2022 2023 2024 Total required repayments of long-term debt $ $ 1,083 1,083 5,209 185,556 346,831 539,762 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The following table reconciles the changes in cash flows from financing activities for long-term debt for the period in the respective years: As at December 31, Total long-term debt, beginning of period Revolving and term credit facilities - net drawings Government loans - repayments Total cash flow from long-term debt financing activities Foreign exchange revaluation Other non-cash changes Total non-cash changes Total long-term debt, end of period 15. LEASE OBLIGATIONS Changes in the balance of lease obligations during 2019 were as follows: Opening Balance, January 1, 2019(i) Payments Interest Additions Disposals Foreign currency translation Balance at December 31, 2019 Current Non-current Total at December 31, 2019 (i) See Note 3(w). Total cash outflows arising from lease obligations are as follows: Payment of lease obligations in financing activities Payment of lease interest expense in operating activities Total cash outflows of leases The maturity of contractual undiscounted lease obligation payments are as follows: Due within 1 year Due between 1 and 3 years Due between 3 and 5 years Due after 5 years Total lease obligation payments The Company does not face a significant liquidity risk in regard to its lease obligations. 70 2019 383,421 $ 170,621 $ (1,130) 169,491 $ (13,935) $ 351 (13,584) $ 539,328 $ $ $ $ $ $ $ $ $ $ $ 2018 9,248 358,978 (1,037) 357,941 15,797 435 16,232 383,421 254,526 (42,304) 9,001 24,053 (1,487) (271) 243,518 39,505 204,013 243,518 As at December 31, 2019 34,690 7,614 42,304 40,769 102,368 36,556 105,843 285,536 $ $ $ $ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The following amounts were recognized in the consolidated statements of net earnings pertaining to leases: Variable rent expense(i) Short-term rent expense(ii) As at December 31, 2019 12,184 5,937 $ $ (i) (ii) Pertains to property taxes and common area maintenance on buildings which are calculated annually. These payments make up 28.8% of fixed payments made in the year. Pertains primarily to leases of property, equipment and vehicles with a contract term of less than one year. Right-of-use assets associated with the Company's lease obligations are described in Note 9. 16. OTHER CURRENT LIABILITIES Derivative instruments Obligation for repurchase of shares Contract liabilities Other 17. OTHER LONG-TERM LIABILITIES Step rent and lease inducements(i) Finance leases(i) Other (i) See Note 3(w). 18. SHARE CAPITAL (Thousands of shares) Balance, beginning of year Distributions under share-based compensation plans Exercise of share options Shares repurchased Purchase of treasury stock Issuance of shares for acquisition (Note 29) Balance, end of year Common Shares As at December 31, Notes 2019 2018 19 18 $ 4,034 $ 7,661 25,389 10,983 4,292 — 10,827 5,543 $ 44,698 $ 24,031 As at December 31, $ 2019 — — 3,026 2018 $ 8,369 43,791 1,404 $ 3,026 $ 53,564 Common Shares Treasury Stock 2019 2018 123,448 126,489 440 358 (840) (476) — 326 1,338 (5,258) (418) 971 122,930 123,448 2019 924 (440) — — 476 — 960 2018 832 (326) — — 418 — 924 The authorized share capital consists of an unlimited number of common shares, an unlimited number of non-voting common shares, and an unlimited number of preference shares. These shares have no par value. The holders of common shares are entitled to receive dividends as declared from time to time, and they are entitled to one vote per share at meetings of the Company. 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Treasury Stock Treasury stock is comprised of shares purchased by a trust in order to satisfy the requirements of the Company's Restricted Share Unit Plan, as described in Note 24. Share Repurchase On May 17, 2019, the Toronto Stock Exchange ("TSX") accepted the Company's notice of intention to commence a Normal Course Issuer Bid ("NCIB"), allowing the Company to repurchase, at its discretion, up to 7.5 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company are cancelled. The program commenced on May 24, 2019 and will terminate on May 23, 2020, or on such earlier date as the Company completes its purchases pursuant to the notice of intention. Under this bid, during the year ended December 31, 2019, 0.8 million shares were purchased for cancellation for $20.3 million at a volume weighted average price paid of $24.21 per common share. On May 22, 2018, the TSX accepted the Company's notice of intention to commence an NCIB, which allows the Company to repurchase, at its discretion, up to 7.8 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on May 24, 2018 and was terminated on May 23, 2019 as the Company completed its purchase and cancellation of 4.0 million common shares for $126.6 million at a volume weighted average price of $31.82 per common share. Under this bid, during the year ended December 31, 2019, no shares were purchased for cancellation. Under this bid, during the year ended December 31, 2018, 4.0 million common shares were purchased for cancellation for $126.6 million at a volume weighted average price of $31.82 per common share. On May 17, 2017, the TSX accepted the Company's notice of intention to commence an NCIB, which allowed the Company to repurchase, at its discretion, up to 8.2 million common shares in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. Common shares purchased by the Company were cancelled. The program commenced on May 23, 2017 and was terminated on May 22, 2018 as the Company completed its purchase and cancellation of 3.6 million common shares for $117.3 million at a volume weighted average price of $32.51 per common share. Under this bid, during the year ended December 31, 2018, 1.3 million shares were purchased for cancellation for $39.9 million at a volume weighted average price paid of $31.17 per common share. The Company entered into an Automatic Share Purchase Plan ("ASPP") with a broker that allows the purchase of common shares for cancellation under the NCIB at any time during predetermined trading blackout periods. As at December 31, 2019, an obligation for the repurchase of shares of $25.4 million (2018: $0.0 million) was recognized under the ASPP. 19. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES Capital The Company’s objective is to maintain a robust, cost-effective capital structure that ensures resilience, supports its long-term growth strategy, and maximizes operating flexibility. In allocating capital to investments to support its earnings goals, the Company establishes internal hurdle return rates for capital initiatives. Capital projects are generally financed with internal cash flows and senior debt where required. The Company uses leverage in its capital structure to reduce the cost of capital. The Company’s goal is to maintain its primary credit ratios at levels that are designed to provide continued access to investment-grade credit pricing and terms. The Company measures its credit profile using a number of metrics, some of which are non-IFRS measures, primarily cash and cash equivalents, less long-term debt and bank indebtedness (“Net Debt”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”). In addition to credit facilities and equity, the Company uses leases and a very limited recourse accounts receivable securitization program as additional sources of financing. The Company has maintained a stable dividend distribution that is based on a long-term sustainable net earnings base. From time to time, the Company has purchased shares for cancellation pursuant to normal course issuer bids and to satisfy awards under its Restricted Share Unit Plan described in Note 24. There have been no material changes to the Company’s risk management activities during the year ended December 31, 2019. 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Financial Instruments The Company’s financial assets and liabilities are classified into the following categories: Cash and cash equivalents Accounts receivable Notes receivable Accounts payable and accruals Long-term debt Derivative instruments(i) FVTPL Amortized cost Amortized cost Amortized cost Amortized cost FVTPL (i) These derivative instruments may be designated as cash flow hedges, fair value hedges or net investments in foreign operations hedges as appropriate. The Company applies hedge accounting as appropriate and uses derivatives and other non-derivative financial instruments to manage its exposures to fluctuations in foreign exchange rates, interest rates, and commodity prices. The fair values and notional amounts of derivative financial instruments as at December 31 are shown below: Cash flow hedges Foreign exchange contracts Interest rate swaps Fair value hedges(iii) Foreign exchange contracts Commodity contracts Derivatives not designated in a formal hedging relationship Foreign exchange contracts Commodity contracts Total fair value Current(ii)(iv)(v) Non-current(ii) Total fair value 2019 2018 Notional amount(i) Fair value Asset(ii) Liability(ii) Notional amount(i) Fair value Asset(ii) Liability(ii) $ 29,273 $ $ 479,129 $ $ 50,718 $ $ 54,725 $ $ 251,868 $ $ 242,711 $ $ $ $ 497 2,160 2,657 904 3,184 4,088 842 91 933 7,678 6,197 1,481 7,678 $ $ $ $ $ $ $ $ $ 40 $ 63,204 $ 130 $ 2,271 — $ — — — 40 $ 130 $ 2,271 — $ 58,156 $ — $ 1,837 — $ 59,570 2,148 — — $ 2,148 $ 1,837 3,003 $ 126,719 $ 3,472 $ 483 991 $ 135,941 2,805 3,070 3,994 4,034 4,034 — 4,034 $ $ $ $ 6,277 $ 3,553 8,555 $ 7,661 8,555 $ 7,661 — — 8,555 $ 7,661 (i) Unless otherwise stated, notional amounts are stated at the contractual Canadian dollar equivalent. (ii) The current portion of derivative assets and liabilities are recorded in prepaid expenses and other assets and other current liabilities, respectively, in the consolidated balance sheets. The non-current portion of derivative assets and liabilities are recorded in other long-term assets and other long- term liabilities, respectively, in the consolidated balance sheets. (iii) The carrying amount of the hedged items in the consolidated balance sheets are recorded at the inverse of the associated hedging instruments and are equal to the accumulated fair value hedge adjustments less hedge ineffectiveness. (iv) Derivatives are short-term and will impact profit or loss at various dates within the next 12 months. (v) As at December 31, 2019, the above fair value of current assets has been increased on the consolidated balance sheets by an amount of $1.1 million (2018: decreased by $1.1 million), which represents the excess or deficit of the fair market value of exchange traded commodities contracts over the initial margin requirements. The excess or deficit in maintenance margin requirements with the futures exchange is net settled in cash each day and is therefore presented as cash and cash equivalents. The Company's financial assets and liabilities include accounts receivable, notes receivable, and accounts payable and accruals for which fair value approximates the carrying value due to their short-term nature. 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The carrying value of long-term debt as at December 31, 2019 and 2018 approximates its fair value. The fair value of the Company’s long-term debt has been classified as Level 2 in the fair value hierarchy and was estimated based on discounted future cash flows using current rates for similar financial instruments subject to similar risks and maturities. The Company's cash and cash equivalents and derivative instruments are recorded at fair value. The fair value of cash and cash equivalents approximates carrying value due to the short-term nature of the assets and has been classified as Level 1 in the fair value hierarchy. The fair values of the Company’s interest rate and foreign exchange derivative instruments were estimated using current market measures for interest rates and foreign exchange rates. Commodity futures and commodity options contracts are exchange- traded and over-the-counter. Fair value is determined based on exchange prices and other observable market data. Net gains and losses on financial instruments recognized at fair value through profit or loss consist of realized and unrealized gains and losses on derivatives that were de-designated or were otherwise not in a formal hedging relationship. For the year ended December 31, 2019, the Company recorded a gain of $5.4 million (2018: gain of $10.6 million) on financial instruments recognized at fair value through profit or loss. The gain was mainly attributed to a gain in commodity exchange traded contracts which economically hedge and offset price risk volatility inherent in the hog operational business. The table below sets out fair value measurements of financial instruments as at December 31, 2019 using the fair value hierarchy: Assets: Foreign exchange contracts Commodity contracts Interest rate swaps Liabilities: Foreign exchange contracts Commodity contracts Level 1 Level 2 Level 3 Total $ $ $ $ — 3,184 — 3,184 — 991 991 2,243 91 2,160 4,494 3,043 — 3,043 — — — — — — — $ $ $ $ 2,243 3,275 2,160 7,678 3,043 991 4,034 There were no transfers between levels for the year ended December 31, 2019. Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. For financial instruments that are recognized at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization at the end of each reporting period. Accumulated other comprehensive income (loss) The Company estimates that $0.8 million, net of tax of $0.3 million, of the unrealized gain included in accumulated other comprehensive income (loss) will be reclassified into net earnings within the next 12 months. The actual amount of this reclassification will be impacted by future changes in the fair value of financial instruments designated as cash flow hedges. The actual amount reclassified could differ from this estimated amount. During the year ended December 31, 2019, a gain of $1.9 million, net of tax of $0.7 million, was released to earnings from accumulated other comprehensive income (loss) and included in the net change for the year (2018: gain of $0.0 million, net of tax of $0.0 million). The risks associated with the Company’s financial instruments and policies for managing these risks are detailed below. Market Risk Interest Rate Risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Company’s interest rate risk arises from long-term borrowings issued at fixed rates that create fair value interest rate risk and variable-rate borrowings that create cash flow interest rate risk. In addition, the Company’s cash balances are typically invested in short-term interest-bearing assets. The Company manages its interest rate risk exposure by using a mix of fixed and variable-rate debt and periodically using interest rate derivatives to achieve the desired proportion of variable to fixed-rate debt. As at December 31, 2019, the Company had variable-rate debt of $531.5 million with a weighted average interest rate of 3.3% (2018: $374.8 million at a weighted average interest rate of 3.8%). The Company has converted $479.1 million of the variable-rate debt to fixed-rate debt using interest rate swaps with a weighted average interest rate of 3.0% (2018: $0.0 million at a weighted average 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. interest rate of 0.0%). In addition, the Company was exposed to floating interest rates on its accounts receivable securitization program. As at December 31, 2019, the amount serviced pursuant to this program was $101.6 million at a weighted average interest rate of 1.6% (2018: $96.9 million at a weighted average interest rate of 2.0%). The maximum amount available to the Company under these programs is $120.0 million (2018: $110.0 million). As at December 31, 2019, the Company had fixed-rate debt of $7.9 million (2018: $8.6 million) with a weighted average effective interest rate of 4.5% (2018: 4.7%). Changes in market interest rates cause the fair value of long-term debt with fixed interest rates to fluctuate but do not affect net earnings, as the Company’s debt is carried at amortized cost and the carrying value does not change as interest rates change. As at December 31, 2019, 75.2% (2018: 1.8%) of the Company’s outstanding debt and revolving accounts receivable securitization program were not exposed to interest rate movements, after including the effect of interest rate swaps. The Company's interest rate swaps are accounted for as cash flow hedges to reduce the variability of floating rate interest payments of variable-rate debt. The Company's designated interest rate swaps settle periodically and mature in 2023 and 2024 respectively, in line with the hedged items. The critical terms of the interest rate swaps and the associated hedged items are closely aligned. The Company performs a qualitative assessment of the effectiveness, and it is expected that the value of the interest rate swaps and the value of the corresponding hedged items will systematically change in opposite directions in response to movements in the underlying interest rates. Sources of hedge ineffectiveness include the effect of the counterparty and the Company's own credit risk on the fair value of the interest rate swaps and a lack of access to negative benchmark interest rates on the Company's borrowings. The change in fair values of interest rate hedges used as the basis for recognizing ineffectiveness for the year ended December 31, 2019 and 2018 were as follows: 2019 2018 Hedging instruments Hedged items Hedging instruments Hedged items Cash flow hedges $ 2,160 $ (2,184) $ — $ — Amounts recognized in the consolidated statements of other comprehensive income (loss) as at December 31 consist of: Cash flow hedges Balance, beginning of year Change in fair value of interest rate swaps Balance, end of year 2019 2018 Continuing hedges Discontinued hedges Continuing hedges Discontinued hedges $ $ — $ 2,160 2,160 $ — $ — — $ — $ — — $ — — — It is estimated that, all else constant, an adverse hypothetical 10.0% change in the variable interest rate would result in a decrease in the fair value of the Company’s interest rate swaps of $3.1 million, with a decrease in earnings before taxes of $0.0 million and a decrease in other comprehensive income (loss) of $3.1 million. Foreign Exchange Risk Foreign exchange risk refers to the risk that the value of financial instruments or cash flows will fluctuate due to changes in foreign exchange rates. The Company’s foreign exchange risk arises primarily from transactions in currencies other than Canadian dollars, U.S. dollar- denominated borrowings, and investments in foreign operations. The Company uses foreign exchange forward contracts to manage foreign exchange transaction exposures. The primary currencies to which the Company is exposed to are the U.S. dollar and the Japanese yen. The Company uses forward contracts which are accounted for as fair value hedges to minimize the price risk assumed under forward priced contracts with suppliers. The Company also uses forward contracts which are accounted for as cash flow hedges as well as non-designated derivative instruments to minimize the price risk of anticipated transactions. The critical terms of foreign exchange forward contracts and the associated hedged items are similar. The Company performs a quantitative assessment of the effectiveness, and it is expected that the value of the forward contracts and the value of the corresponding hedged items will systematically change in opposite direction in response to movements in the underlying exchange rates. The main source of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Company's own credit risk on the fair value of the foreign exchange contracts, which is not reflected in the fair value of the hedged item attributable to 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. changes in foreign exchange rates. Other sources of ineffectiveness include differences in the underlying terms of the foreign exchange contracts and the hedged items. The Company's designated foreign exchange forward contracts mature within one year. The average exchange rate of the Company's U.S. dollar denominated contracts is 1.32 (2018: 1.32). There were no Japanese yen denominated contracts in 2019 (2018: average exchange rate of 85.48 for Japanese yen denominated contracts). As at December 31, 2019, the Company had US$265.0 million (2018: US$216.0 million) drawn on its Credit Facility (see Note 14) that is designated as a net investment hedge of the Company's U.S. operations. Foreign exchange gains and losses on the designated drawings are recorded in shareholder's equity in the foreign currency translation adjustment component of accumulated other comprehensive income (loss) and offset translation adjustments on the underlying net assets of the U.S. operations, which are also recorded in accumulated other comprehensive income (loss). The gain on the net investment hedge recorded in other comprehensive income (loss) for the year ended December 31, 2019 was $11.7 million, net of tax of $2.2 million (2018: loss of $13.3 million, net of tax of $2.5 million). The critical terms of the U.S. denominated drawings and the associated hedged items are the same. The Company performs a qualitative assessment of the effectiveness, and it is expected that the value of the U.S. denominated drawings and the value of the corresponding hedged items will systematically change in opposite direction in response to movements in the underlying exchange rates. There are no sources of hedge ineffectiveness. The change in fair values of foreign exchange hedges used as the basis for recognizing ineffectiveness for the year ended December 31, 2019 and 2018 were as follows: Cash flow hedges Fair value hedges Net investment in foreign operations 2019 2018 Hedging instruments Hedged items Hedging instruments Hedged items $ $ $ 457 904 8,427 $ $ $ (463) $ (964) $ (2,141) $ (1,837) $ 2,122 1,822 (8,427) $ (15,797) $ 15,797 Amounts recognized in the consolidated statements of other comprehensive income (loss) as at December 31 consist of: Cash flow hedges Balance, beginning of year Change in fair value of foreign exchange contracts Balance, end of year Net investment in foreign operations Balance, beginning of year Change in fair value of U.S. denominated drawings Balance, end of year 2019 2018 Continuing hedges Discontinued hedges Continuing hedges Discontinued hedges (2,122) $ (3,931) $ 2,436 $ 2,579 — (4,558) 457 $ (3,931) $ (2,122) $ — (3,931) (3,931) 2019 2018 Continuing hedges Discontinued hedges Continuing hedges Discontinued hedges (15,797) $ — $ — $ 24,224 (10,289) (15,797) 8,427 $ (10,289) $ (15,797) $ — — — $ $ $ $ 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Gains (losses) related to the Company's designated derivative financial instruments recorded in the consolidated statements of net earnings as at December 31 were as follows: Cash flow hedges Foreign exchange contracts Fair value hedges Foreign exchange contracts 2019 2018 Effective portion(i)(ii) Ineffective portion(i) Effective portion(i)(ii) Ineffective portion(i) $ $ — $ — $ — $ 904 $ (60) $ (1,822) $ (52) (15) (i) Gains (losses) are recorded in cost of goods sold in the consolidated statements of net earnings. (ii) The effective portion in earnings for cash flow hedges represents the accumulated other comprehensive income (loss) released to the consolidated statements of net earnings. It is estimated that, all else constant, an adverse hypothetical 10.0% change in the value of the Canadian dollar against all relevant currencies would result in a decrease in the fair value of the Company’s foreign exchange forward contracts of $3.6 million, with a decrease in earnings before taxes of $5.8 million and an increase in other comprehensive income (loss) of $2.2 million. Commodity Price Risk The Company is exposed to price risk related to commodities such as live hogs, fuel costs, and purchases of certain other agricultural commodities used as raw materials, including feed grains. The Company uses fixed price contracts with suppliers as well as exchange- traded and over-the-counter futures and options to manage its exposure to price fluctuations. The Company uses futures which are accounted for as fair value hedges as well as non-designated derivative instruments to minimize the price risk assumed under forward priced contracts with suppliers. The Company also uses futures which are accounted for as cash flow hedges as well as non-designated derivative instruments to minimize the price risk of anticipated transactions. The Company does not use component hedging as part of its commodity price risk management. The critical terms of the futures contracts and the associated hedged items are similar for fair value hedges. The Company performs a quantitative assessment of the effectiveness, and it is expected that the value of the futures contracts and the value of the corresponding hedged items will systematically change in opposite direction in response to movements in the underlying commodity prices. Hedge ineffectiveness in these hedging relationships is due to timing differences in the term of the futures contracts and the hedged items. The Company's designated commodity futures contracts mature within one year. The outstanding designated commodity futures contracts as at December 31 were as follows: Fair value hedges Hog contracts 2019 2018 Average Price Volume (000's cwt) Average Price Volume (000's cwt) $ 81.92 514 $ 74.34 600 The change in fair values of commodity hedges used as the basis for recognizing ineffectiveness for the year ended December 31, 2019 and 2018 were as follows: Fair value hedges 2019 2018 Hedging instruments Hedged items Hedging instruments Hedged items $ 2,956 $ (2,956) $ 2,148 $ (2,148) 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Gains (losses) related to the Company's designated derivative financial instruments recorded in the consolidated statements of net earnings as at December 31 were as follows: Fair value hedges Commodity contracts 2019 2018 Effective portion(i) Ineffective portion(i) Effective portion(i) Ineffective portion(i) $ 2,956 $ — $ 3,737 $ — (i) Gains (losses) are recorded in cost of goods sold in the consolidated statements of net earnings. It is estimated that, all else constant, an adverse hypothetical 10.0% change in market prices of the underlying commodities would result in a decrease in the fair value of underlying outstanding derivative contracts of $6.2 million, with a decrease in earnings before taxes of $6.2 million and $0.0 million in other comprehensive income (loss). The earnings before taxes excludes the offsetting impact of the commodity price risk inherent in the transactions being hedged. Credit Risk Credit risk refers to the risk of losses due to failure of the Company’s customers and counterparties to meet their payment obligations. In the normal course of business, the Company is exposed to credit risk from its customers, substantially all of which are in the retail, food service, industrial, and convenience channels. The Company performs ongoing credit evaluations of new and existing customers’ financial condition and reviews the collectibility of its trade accounts receivable and other receivables in order to mitigate any possible credit losses. The Company records a loss allowance of expected credit losses for financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses if the credit risk on its financial assets has increased significantly since initial recognition. If credit risk has not significantly increased since initial recognition, the Company measures the loss allowance at an amount equal to the 12-month expected credit losses. Average accounts receivable days sales outstanding for the year is consistent with historic trends. Management believes concentrations of credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company’s major customers, the large number and geographic dispersion of smaller customers, and the operation of the accounts receivable securitization facility as described in Note 27. The Company does, however, conduct a significant amount of business with a small number of large grocery retailers. The Company's two largest customers as at December 31, 2019 comprise approximately 21.6% (2018: two largest customers representing 22.8%) of total sales. The Company is also exposed to credit risk on its notes receivable from an unconsolidated structured entity in respect of the accounts receivable securitization program as described in Note 27. Management believes that this credit risk is limited by the long-term AA- debt rating held by the financial institution financing the third-party trust. The Company is exposed to credit risk on its cash and cash equivalents (comprising primarily of deposits with Canadian chartered banks) and non-exchange-traded derivative contracts. The Company mitigates this credit risk by transacting primarily with counterparties that are major international financial institutions with long- term debt ratings of A or higher. The Company’s maximum exposure to credit risk at the balance sheet date consisted primarily of the carrying value of non-derivative financial assets and non-exchange-traded derivatives with positive fair values. Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The contractual undiscounted cash flows payable in respect of financial liabilities as at the balance sheet date, were as follows: December 31, 2019 Due within 1 year Due between 1 and 3 years Due between 3 and 5 years Due after 5 years Total Financial liabilities Accounts payable and accruals $ 445,774 $ — $ — $ — $ 445,774 Debt Foreign exchange contracts Commodity futures contracts Other liabilities Total 1,083 3,043 991 36,515 6,292 532,387 — — 135 — — — — — — — 539,762 3,043 991 36,650 $ 487,406 $ 6,427 $ 532,387 $ — $ 1,026,220 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The Company manages liquidity risk by monitoring forecasted and actual cash flows, minimizing reliance on any single source of credit, maintaining sufficient undrawn committed credit facilities and managing the maturity profiles of financial assets and financial liabilities to minimize re-financing risk. As at December 31, 2019, the Company had available undrawn committed credit of $1,465.0 million (2018: $268.9 million) under the terms of its principal banking arrangements (Note 14). These banking arrangements are subject to certain covenants and other restrictions. 20. OTHER EXPENSE Loss on disposal of property and equipment Gain on sale of investment properties Insurance proceeds Net investment property expense Interest income Legal and other fees on transactions Other legal expense Other 21. INTEREST EXPENSE AND OTHER FINANCING COSTS Interest on borrowings from Credit Facility Interest on lease obligations Interest expense on securitized receivables Interest expense on government loans Deferred finance charges Other interest charges Interest capitalized Write-off of deferred finance fees 22. INCOME TAXES The components of income tax expense were as follows: Current tax expense Current year Deferred tax (recovery) expense Origination and reversal of temporary differences Change in tax rates Total income tax expense 79 $ 2019 1,049 (5,213) — 1,098 (5) 4,414 1,159 766 $ 2018 5,623 (1,250) (7,292) 661 (265) 13,597 1,361 539 $ 3,268 $ 12,974 2019 $ 16,876 $ 9,001 2,824 351 1,496 3,177 (2,650) 956 2018 3,980 — 2,467 435 1,149 2,009 — — $ 32,031 $ 10,040 2019 2018 $ 13,690 $ 13,690 $ 29,700 $ 29,700 $ (348) (975) $ (1,323) $ 12,367 $ 10,055 — $ 10,055 $ 39,755 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Reconciliation of Effective Tax rate Income tax expense varies from the amount that would be computed by applying the combined federal and provincial statutory income tax rates as a result of the following: Income tax expense according to combined statutory rate of 26.7% (2018: 26.8%) Increase (decrease) in income tax resulting from: Tax rate differences in other jurisdictions Manufacturing and processing credit Share based compensation Non-deductible expenses and transactional costs Unrecognized income tax benefit of losses Adjustment for favorable tax audit resolution Deferred tax (recovery) expense relating to changes in tax rates Adjustment to tax expense of prior periods Other Income Tax Recognized in Other Comprehensive Income (Loss) Derivative instruments Pension adjustments Deferred Tax Assets and Liabilities Recognized Deferred Tax Asset and Liabilities 2019 2018 $ 23,228 $ 37,813 754 (1,240) 1,112 948 92 (314) (927) 998 2,926 113 (10,460) (1,177) (975) (1,434) 342 — — 323 $ 12,367 $ 39,755 2019 3,426 (3,350) 2018 $ (4,165) 3,728 76 $ (437) $ $ The Company has recognized deferred tax assets in the amount of approximately $88.9 million (2018: $67.9 million), relating primarily to future deductions for employee benefits, tax losses and deductions carried forward, and restructuring expenses. These deferred tax assets are recorded based on the Company's estimate that it will earn sufficient taxable profits to fully utilize its tax losses in the appropriate carry over periods. The Company has recognized deferred tax liabilities in the amount of approximately $210.9 million (2018: $195.4 million), relating primarily to claims for tax depreciation in excess of accumulated book depreciation, cash basis farming adjustments, and the excess of book value over the tax cost of intangible assets. 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. As at December 31, 2019 2018(i) $ 38,213 $ 15,973 13,172 32,156 5,358 13,370 31,121 7,485 $ 88,899 $ 67,949 $ 129,540 $ 110,418 24,591 56,740 23,732 61,264 $ 210,871 $ 195,414 $ — $ — $ 121,972 $ 127,465 Deferred tax assets: Tax losses and deductions carried forward Accrued liabilities Employee benefits Other Deferred tax liabilities: Property and equipment Cash basis farming Goodwill and other intangible assets Classified in the consolidated financial statements as: Deferred tax asset Deferred tax liability (i) Restated, see Note 29(a). Unrecognized Deferred Tax Assets The Company has no unrecognized deferred tax assets as at December 31, 2019 and 2018. Unrecognized Deferred Tax Liabilities Deferred tax is not recognized on the unremitted earnings of subsidiaries and other investments as the Company is in a position to control the reversal of the temporary difference and it is probable that such differences will not reverse in the foreseeable future. The unrecognized temporary difference at December 31, 2019 for the Company's subsidiaries was $395.5 million (2018: $303.0 million). 23. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing the net earnings of the Company by the weighted average number of shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net earnings of the Company by the weighted average number of shares outstanding during the year, adjusted for the effects of potentially dilutive instruments. The following table sets forth the calculation of basic and diluted earnings per share (“EPS”): Years ended December 31, Basic Stock options(i) Diluted 2019 Weighted average number of shares(ii) EPS 123.6 $ 0.60 1.6 Net earnings 74,628 74,628 125.2 $ 0.60 $ $ 2018 Weighted average number of shares(ii) 125.0 2.5 EPS $ 0.81 Net earnings 101,348 101,348 127.5 $ 0.79 $ $ (i) (ii) Excludes the effect of approximately 2.3 million (2018: 1.4 million) options and performance shares that are anti-dilutive. In millions. 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. 24. SHARE-BASED PAYMENT Under the Maple Leaf Foods Share Option Plan in effect as at December 31, 2019, the Company may grant options to its employees and employees of its subsidiaries to purchase shares of common stock. Under the Maple Leaf Foods Restricted Share Unit Plan (adopted in 2006) ("the 2006 Plan") in effect as at December 31, 2019, the Company may grant RSUs and PSUs to its employees and employees of its subsidiaries entitling employees to receive common shares or cash at the Company’s option. Options, RSUs, and PSUs are granted from time to time by the Human Resources and Compensation Committee or by the Board of Directors on the recommendation of the Human Resources and Compensation Committee. The vesting conditions for options, RSUs, and PSUs are specified by the Board of Directors and may include the continued service of the employee with the Company and/or other criteria based on measures of the Company’s performance. Under the Company’s Share Purchase and Deferred Share Unit Plans, eligible Directors may elect to receive their retainer and fees in the form of DSUs or as common shares of the Company. Stock Options A summary of the status of the Company’s outstanding stock options as at December 31, 2019 and 2018, and changes during these years are presented below: Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year Options currently exercisable 2019 2018 Weighted average exercise price $ 25.38 $ 28.42 $ 21.65 $ 29.96 $ 26.26 $ 24.14 Options outstanding 3,976,300 1,060,350 (358,400) (120,000) 4,558,250 2,868,900 Weighted average exercise price $ 20.23 $ 32.45 $ 11.84 $ — $ 25.38 $ 22.44 Options outstanding 4,556,400 757,500 (1,337,600) — 3,976,300 2,450,300 All outstanding stock options vest and become exercisable over a period not exceeding five years (time vesting) from the date of grant. The outstanding options have a term of seven years. The number of options outstanding as at December 31, 2019, is as follows: Options outstanding Options currently exercisable Options subject to time vesting only Range of exercise prices Number outstanding Weighted average exercise price Weighted average remaining term of options (in years) Weighted average exercise price Number exercisable Number outstanding Weighted average exercise price $ 20.28 to $ 22.53 2,128,200 $ 21.61 $ 28.38 to $ 30.86 1,707,400 $ 29.44 $ 31.57 to $ 32.50 722,650 $ 32.45 Total Options 4,558,250 $ 26.26 2.3 5.3 5.2 3.9 2,128,200 $ 21.61 — $ — 488,200 $ 30.86 1,219,200 $ 28.87 252,500 $ 32.45 470,150 $ 32.45 2,868,900 $ 24.14 1,689,350 $ 29.87 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The number of options outstanding as at December 31, 2018, is as follows: Options outstanding Weighted average exercise price Weighted average remaining term of options (in years) Options currently exercisable Options subject to time vesting only Weighted average exercise price Number exercisable Weighted average exercise price Number outstanding Range of exercise prices Number outstanding $ 20.28 to $ 22.53 2,486,600 $ 21.62 $ 30.86 to $ 30.86 732,200 $ 30.86 $ 31.57 to $ 32.50 757,500 $ 32.45 Total Options 3,976,300 $ 25.38 3.3 5.2 6.2 4.2 2,206,200 $ 21.50 280,400 $ 22.53 244,100 $ 30.86 488,100 $ 30.86 — $ — 757,500 $ 32.45 2,450,300 $ 22.44 1,526,000 $ 30.12 At grant date, each option series is measured at fair value based on the Black-Scholes formula. Expected volatility is estimated by considering historic average share price volatility. The inputs used in this model for the options granted during the years ended December 31, 2019 and 2018 are shown in the table below(i): Share price at grant date Exercise price Expected volatility Option life (in years)(ii) Expected dividend yield Risk-free interest rate(iii) (i) Weighted average based on number of units granted. (ii) Expected weighted average life. (iii) Based on Government of Canada bonds. 2019 $28.09 $28.42 21.3% 4.5 2.1% 1.8% 2018 $32.13 $32.45 21.4% 4.5 1.6% 2.0% The fair value of options granted during the year ended December 31, 2019 was $4.5 million (2018: $4.1 million). Expenses relating to current and prior year options were $4.3 million (2018: $3.8 million). Restricted Share Units and Performance Share Units The awards granted under the 2006 Plan are satisfied either by shares to be purchased on the open market by a trust established for that purpose, or cash at the option of the Company at the time of vesting. Under the 2006 Plan, one common share of the Company may be distributed for each RSU, and these units vest strictly over time. The PSUs are subject to both time and performance vesting. The PSUs provide the holder with up to two RSUs based on the achievement of predetermined Company performance targets. All outstanding RSUs and PSUs under the 2006 Plan vest over a period of approximately one to three years from the date of grant. A summary of the status of the Company’s RSU plans (including PSUs) as at December 31, 2019 and 2018 and changes during these periods is presented below: Outstanding, beginning of year Granted Exercised Forfeited Outstanding, end of year 2019 2018 Weighted average fair value at grant $ $ $ $ $ 28.48 26.51 26.33 28.26 28.80 RSUs outstanding 1,471,662 541,450 (671,658) (95,539) 1,245,915 RSUs outstanding 1,561,695 394,600 (455,789) (28,844) 1,471,662 Weighted average fair value at grant $ $ $ $ $ 25.61 30.67 20.85 24.00 28.48 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. On April 1, 2016, the Company communicated to its employees the intent to issue RSUs at which time the service period commenced. During the year ended December 31, 2017, the RSUs were formally granted. The service period for these units vested in 2019. All of the Company's outstanding RSUs are accounted for as equity-settled awards. The fair value of RSUs and PSUs granted in 2019 was $12.5 million (2018: $10.2 million). Expenses for the year ended December 31, 2019 relating to current and prior year RSUs and PSUs, were $12.2 million (2018: $13.0 million). No RSUs or PSUs were cash settled in the year (2018: $0.0 million). The key assumptions used in the valuation of fair value of RSUs granted during the year are shown in the table below(i): Expected RSU life (in years) Forfeiture rate Risk-free discount rate (i) Weighted average based on number of units granted. Director Share Units 2019 3.1 12.6% 1.7% 2018 3.1 16.1% 1.9% If an eligible Director elects to receive his or her retainer and fees as common shares of the Corporation, the Company purchases shares at market rates on behalf of the participating Directors. Prior to 2013, if an eligible Director elected to receive his or her fees and retainer in the form of DSUs, each DSU had a value equal to the market value of one common share of the Company at the time the DSU is credited to the Director. DSUs attract dividends in the form of additional DSUs at the same rate as dividends on common shares of the Company. The value of each DSU is measured at each reporting date and is equivalent to the market value of a common share of the Company at the reporting date. In 2013, the Company adopted a new Share Purchase and Deferred Share Unit Plan (the “2013 DSU Plan”), which replaced the Company’s existing Share Purchase and Deferred Share Unit Plan (the “2002 DSU Plan”). The 2002 DSU Plan only allows for DSUs to be satisfied in cash, whereas the 2013 DSU Plan allows the Company, at its discretion, the flexibility to satisfy DSUs in common shares, either issued from treasury or purchased by the Company on the open market. DSUs outstanding under the 2002 DSU Plan will be governed by the terms of the 2002 DSU Plan, unless a participant elected in writing that his or her DSUs outstanding under the 2002 DSU Plan are to be governed by the 2013 DSU Plan. The fair value of director share units expensed during the year ended December 31, 2019 was $1.4 million (2018: $1.6 million). A summary of the status of the Company’s outstanding DSUs as at December 31, 2019 and 2018, and changes during these years is presented below: Units outstanding Outstanding, beginning of year Additions: granted Additions: dividends reinvested Exercised Outstanding, end of year Value of liability at December 31(i) (i) Value of liability is only applicable to the 2002 plan. 25. SEGMENTED FINANCIAL INFORMATION 2019 2018 2013 DSU plan 2002 DSU plan 2013 DSU plan 2002 DSU plan 245,334 43,598 4,438 (75,532) 217,838 $ — $ 20,004 — 108 (20,112) — — 251,742 43,127 4,419 (53,954) 245,334 $ — $ 19,677 — 327 — 20,004 554 During the year ended December 31, 2019, the Company completed a comprehensive analysis of the role of its rapidly expanding plant protein business in the Company's meat and plant protein portfolios, their respective financial profiles and long-term value creation opportunities. Based on the importance of these two distinct businesses and differing strategic and financial requirements to maximize their market leadership and long-term shareholder value, the Company has disaggregated its business into two operating segments. As described below, these segments offer different products, with separate organizational structures, brands, financial, and marketing strategies. The Company's chief operating decision makers regularly review internal reports for these businesses; performance of the Meat Protein Group is based on revenue growth, Adjusted Operating Earnings and Adjusted EBITDA, while the performance of the Plant Protein Group is based predominantly on revenue growth rates, while managing gross margins and controlling investment levels which generate high revenue growth rates. Refer to the section, Non-IFRS Financial Measures, of the Company's Management's 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Discussion and Analysis for the year ended December 31, 2019, for the definitions of these non-IFRS financial measures. The operations of each segment are described as follows: (a) The Meat Protein Group is comprised of prepared meats, ready-to-cook and ready-to-serve meals, hog production and value- added fresh pork and poultry products that are sold to retail, foodservice and industrial channels. The Meat Protein Group includes brands such as Maple Leaf®, Maple Leaf Prime®, Schneiders®, Mina®, Greenfield Natural Meat Co.®, Swift® and many sub- brands. (b) The Plant Protein Group is comprised of refrigerated plant protein products, premium grain-based protein and vegan cheese products sold to retail, foodservice and industrial channels. The Plant Protein Group includes the brands Lightlife® and Field Roast Grain Meat Co.™ 2019 2018(i) Meat Protein Group Plant Protein Group Non- Allocated(ii) Meat Protein Group Plant Protein Group Non- Allocated(ii) Total Total Sales Gross profit $ 3,778,039 176,415 (12,909) $3,941,545 $3,356,950 138,569 — $ 3,495,519 $ 568,045 34,994 (12,060) $ 590,979 $ 518,269 38,849 (5,321) $ 551,797 Selling, general and administrative expenses $ 338,706 118,975 — $ 457,681 $ 305,488 36,004 — $ 341,492 Earnings (loss) before income taxes $ 218,003 (84,223) (46,785) $ 86,995 $ 169,346 2,748 (30,991) $ 141,103 Interest expense and other financing costs Other expense (income) Restructuring and other related costs — 332 11,004 — 242 — 32,031 32,031 — 2,694 3,268 (2,753) — 11,004 46,188 — 97 — 10,040 10,040 15,630 12,974 — 46,188 Earnings (loss) from operations $ 229,339 (83,981) (12,060) $ 133,298 $ 212,781 2,845 (5,321) $ 210,305 Decrease in fair value of biological assets(iii) Unrealized loss (gain) on derivative contracts(iv) — — — — 5,545 6,515 5,545 6,515 — — Adjusted Operating Earnings $ 229,339 (83,981) — $ 145,358 $ 212,781 Depreciation and amortization 164,197 12,599 — 176,796 116,098 — — 2,845 9,937 Items included in other (expense) income representative of ongoing operations (332) (242) (392) (966) 2,753 (97) 10,905 10,905 (5,584) (5,584) — $ 215,626 — — 126,035 2,656 Adjusted EBITDA $ 393,204 (71,624) (392) $ 321,188 $ 331,632 12,685 — $ 344,317 (i) Comparative figures have been presented to align with current reportable segments. (ii) Non-Allocated includes eliminations of inter-segment sales and associated cost of goods sold, and non-allocated costs which are comprised of expenses not separately identifiable to reportable segments and are not part of the measures used by the Company when assessing a segment’s operating results. (iii) Refer to Note 6 for further details regarding biological assets. (iv) Unrealized gains/losses on derivative contracts are reported within cost of goods sold. The following summarizes capital expenditures by segments: Capital expenditures Meat Protein Group Plant Protein Group Non-allocated capital expenditures 2019 221,822 $ 27,911 21,012 270,745 $ 2018 146,552 15,776 17,537 179,865 $ $ 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. Information About Geographic Areas The following summarizes sales by country of origin: Canada U.S. Japan Other Sales The following summarizes non-current assets by country: Canada U.S. Other Total non-current assets(i) 2019 2,927,632 $ 419,631 372,918 221,364 3,941,545 $ 2018 2,581,918 363,491 343,418 206,692 3,495,519 As at December 31, 2019 As at December 31, 2018 2,246,146 $ 393,146 453 2,639,745 $ 1,999,244 387,215 169 2,386,628 $ $ $ $ (i) Excludes financial instruments, employee benefits and deferred tax assets. Information About Major Customers For the year ended December 31, 2019, the Company reported sales to two customers representing 11.2% and 10.4% (2018: 11.9% and 10.9%) of total sales. No other sales were made to any one customer that represented in excess of 10.0% of total sales. 26. COMMITMENTS AND CONTINGENCIES The Company has been named as a defendant in several legal actions and is subject to various risks and contingencies arising in the normal course of business. Management is of the opinion that the outcome of these uncertainties will not have a material adverse effect on the Company’s financial position. During the year ended December 31, 2017, the Company was added as a defendant in a class action lawsuit against a group of food retailers and bread manufacturers that are the subject of an investigation by the Competition Bureau relating to pricing practices. Maple Leaf Foods has been advised that it is not the subject of the Bureau's investigation, however, the Company believes it was added as a defendant to the class action as a result of the share ownership position it previously held in Canada Bread, and is of the view that the action does not present a material financial risk to the Company. In the normal course of business, the Company and its subsidiaries enter into sales commitments with customers, and purchase commitments with suppliers. These commitments are for varying terms and can provide for fixed or variable prices. The Company believes that these contracts serve to reduce risk, and does not anticipate that losses will be incurred on these contracts. The Company entered into a number of contracts related to the construction of new and expanded facilities. As at December 31, 2019 these contract commitments were approximately $634.0 million (2018: $0.0 million). 27. COMPOSITION OF THE COMPANY Unconsolidated Structured Entity On July 19, 2019, the Company amended its three-year accounts receivable securitization facility (the "Securitization Facility") by extending the maturity to July 19, 2022 and increasing the maximum cash advance available to the Company under the Securitization Facility to $120.0 million (2018: $110.0 million). The Securitization Facility provides cash funding with a proportion of the Company's receivables being sold, and provides the Company with competitively priced financing and further diversifies its funding sources. Under the Securitization Facility, the Company has sold certain of its trade accounts receivable, with very limited recourse, to an unconsolidated third-party trust financed by an international financial institution with a long-term AA- debt rating, for cash and short-term notes back to the Company. The receivables are sold at a discount to face value based on prevailing money market rates. The Company retains servicing responsibilities for these receivables. As at December 31, 2019, trade accounts receivable being serviced under this program amounted to $133.3 million (2018: $127.4 million). In return for the sale of its trade receivables, the Company will receive cash of $101.6 million (2018: $96.9 million) and notes receivable in the amount of $31.7 million (2018: $30.5 million). The notes receivable are non-interest bearing and are settled on the settlement dates of the securitized accounts receivable. Due to the timing of receipts and disbursements, the Company may, from time 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. to time, also record a receivable or payable related to the Securitization Facility. As at December 31, 2019, the Company recorded a net payable amount of $10.1 million (2018: $32.5 million net payable) in accounts payable and accruals. The Company’s maximum exposure to loss due to its involvement with a structured entity is equal to the current carrying value of the interest in the notes receivable due from the structured entity. The Company has not recognized any income or losses with its interest in unconsolidated structured entities for the year ended December 31, 2019 and 2018. 28. RELATED PARTY TRANSACTIONS The Company sponsors a number of defined benefit and defined contribution plans. During the year ended December 31, 2019, the Company's contributions to these plans were $30.1 million (2018: $28.8 million). Key Management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the Company and/or its subsidiary, directly or indirectly, including any external director of the Company and/or its subsidiary. Remuneration of key Management personnel of the Company is comprised of the following expenses: Short-term employee benefits Salaries, bonuses, and fees Company car allowances Other benefits Total short-term employee benefits Severance benefits Post-employment benefits Share-based compensation Total remuneration 2019 2018 $ 13,640 $ 9,304 326 137 291 111 $ 14,103 $ 9,706 110 805 7,700 — 732 10,636 $ 22,718 $ 21,074 During the year ended December 31, 2019, key Management personnel of the Company exercised 0.4 million share options (2018: 1.3 million share options) granted under the Maple Leaf Foods share option plans for an amount of $7.8 million (2018: $15.4 million). The Company’s largest shareholder is McCain Capital Inc. (“MCI”) which is beneficially owned or controlled by Mr. Michael H. McCain, Chief Executive Officer and President of the Company. For the year ended December 31, 2019, the Company received services from MCI in the amount of $0.4 million (2018: $0.6 million), which represented the market value of the transactions with MCI. As at December 31, 2019, $0.0 million (2018: $0.4 million) was owing to MCI relating to these transactions. McCain Financial Advisory Services ("MFAS"), is an entity jointly controlled by individuals including Mr. Michael H. McCain. For the year ended December 31, 2019 and 2018, the Company provided services to, and received from, MFAS for a nominal amount which represented the market value of the transactions. 29. BUSINESS COMBINATIONS (a) 2018 Acquisitions VIAU Food Products Inc. On November 13, 2018, the Company acquired 100% of the outstanding shares of VIAU Food Products Inc. ("VIAU"), a privately held Canadian market leader in premium Italian cooked, dry-cured and charcuterie meats, for a purchase price of $215.0 million. The Company financed the transaction using a combination of drawings on existing credit facilities and equity. Recognized goodwill is attributable to VIAU's assembled workforce combined with its considerable expertise, product development knowledge and skills. No portion of goodwill is deductible for tax purposes. 87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The fair value of consideration transferred for the acquisition of VIAU consists of the following: Agreed-upon purchase price Working capital adjustments Reduction for liabilities assumed Total consideration Consideration paid in cash Consideration paid in common shares Purchase price November 13, 2018 $ $ $ $ 215,000 (12,790) (4,456) 197,754 168,953 28,801 During the second quarter of 2019, the Company finalized amounts recorded in the business combination which resulted in the following adjustments to the preliminary purchase price allocation: Current Assets Cash Accounts receivable Inventories Prepaid expenses and other assets Non-current assets Property and equipment Goodwill Intangible assets Current liabilities Accounts payable and accruals Current income tax liabilities Other current liabilities Non-current liabilities Other long-term liabilities Deferred tax liability Total net assets acquired November 13, 2018 Preliminary amounts Adjustments Final amounts $ 6,930 12,383 32,096 1,566 85,579 17,601 81,632 (19,877) (11,186) (1,294) (3,123) (5,400) $ 196,907 — $ (353) — — — 17,599 (4,800) — (199) — — (11,400) 847 $ 6,930 12,030 32,096 1,566 85,579 35,200 76,832 (19,877) (11,385) (1,294) (3,123) (16,800) 197,754 The consolidated balance sheet as at December 31, 2018 has been re-stated to reflect the adjustments to the purchase price allocations above. Cericola Farms Inc. On October 22, 2018, the Company acquired two poultry plants and associated supply from Cericola Farms Inc. ("Cericola"), a privately held Canadian company. The purchase price of the assets was $80.0 million, with a put/call option to purchase a third processing facility for a purchase price of $40.0 million, exercisable within three years. The Company financed the transaction using existing credit facilities. The acquisition has been accounted for as a business combination. The amount of goodwill deductible for tax purposes is $6.2 million. 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. The fair value of consideration transferred for the two poultry plants and associated supply acquired from Cericola Farms consists of the following: Agreed-upon purchase price Cash deposit on purchase of third processing facility Working capital adjustments Total consideration paid in cash Purchase price October 22, 2018 $ $ 80,000 (20,185) 226 60,041 During the second quarter of 2019, the Company finalized amounts recorded in the business combination which resulted in the following adjustments to the preliminary purchase price allocation: Current Assets Accounts receivable Inventories Prepaid expenses and other assets Non-current assets Property and equipment Goodwill Intangible assets Current liabilities Accounts payable and accruals Total net assets acquired October 22, 2018 Preliminary amounts Adjustments Final amounts $ $ 5,748 980 56 17,702 6,688 31,910 (3,269) 59,815 (99) $ — — 281 (441) — 485 226 $ 5,649 980 56 17,983 6,247 31,910 (2,784) 60,041 The consolidated balance sheet as at December 31, 2018 has been re-stated to reflect the adjustments to the purchase price allocations above. The Field Roast Grain Meat Company, SPC On January 29, 2018, the Company acquired 100% of the outstanding shares of The Field Roast Grain Meat Company, SPC ("Field Roast Grain Meat Co."), a privately held U.S. based corporation engaged in the production and distribution of premium grain-based protein and vegan cheese products, for a purchase price of $140.2 million. The Company financed the transaction using a combination of cash-on- hand and drawings on existing credit facilities. Recognized goodwill is attributable to Field Roast Grain Meat Co.'s leadership position in the fast-growing plant protein market combined with its considerable expertise, product development knowledge and skills. No portion of goodwill is deductible for tax purposes. The fair value of consideration transferred for the acquisition of Field Roast Grain Meat Co. consists of the following: Agreed-upon purchase price Working capital adjustments Reduction for liabilities assumed Total consideration Consideration paid in cash Contingent consideration paid in cash 89 Purchase price January 29, 2018 $ $ $ $ 147,906 (1,787) (5,949) 140,170 138,755 1,415 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | 2019 | MAPLE LEAF FOODS INC. During the fourth quarter of 2018, the Company finalized amounts recorded in the business combination which resulted in the following adjustments to the preliminary purchase price allocation: Current Assets Cash Accounts receivable Inventories Income and other taxes recoverable Prepaid expenses and other assets Non-current assets Property and equipment Goodwill Intangible assets Current liabilities Accounts payable and accruals Other current liabilities Non-current liabilities Other long-term liabilities Deferred tax liability Total net assets acquired (b) Transaction Costs January 29, 2018 Preliminary amounts Adjustments Final amounts $ 375 3,302 6,332 336 354 5,080 137,777 — (9,634) (638) (2,212) (902) $ 140,170 — $ — 863 — — — (50,944) 66,558 — — — (16,477) — $ 375 3,302 7,195 336 354 5,080 86,833 66,558 (9,634) (638) (2,212) (17,379) 140,170 During the year ended December 31, 2019, the Company recorded transaction costs of $0.0 million (2018: $13.6 million) that have been excluded from the consideration paid and have been recognized as an expense in other expense. 90 Corporate Information Capital Stock The Company’s authorized capital consists of an unlimited number of voting common shares, an unlimited number of non-voting common shares and an unlimited number of preferred shares issuable in series. At December 31, 2019, 123,890,126 voting common shares were issued and outstanding. There were 752 shareholders of record of which 723 were registered in Canada, holding approximately 96.1% of the issued voting shares. Ownership As at December 31, 2019, the Company’s largest shareholder is McCain Capital Inc., directly or indirectly holding 48,472,517 voting shares representing approximately 39.15% of the total issued and outstanding shares. Michael H. McCain beneficially owns and controls 100% of McCain Capital Inc. The remainder of the issued and outstanding shares are publicly held. Corporate Office Maple Leaf Foods Inc. 6985 Financial Drive Mississauga, Ontario L5N 0A1 Canada Tel: (905) 285-5000 Fax: (905) 285-6000 www.mapleleaffoods.com Annual Meeting The annual meeting of shareholders of Maple Leaf Foods Inc. will be held on Wednesday, April 29, 2020 at 11:00 a.m. at Maple Leaf Foods ThinkFOOD! 6897 Financial Drive Mississauga, Ontario L5N 0A8 Canada Dividends The declaration and payment of quarterly dividends are made at the discretion of the Board of Directors. Anticipated payment dates in 2020: March 31, June 30, September 30 and December 31. Shareholder Inquiries Inquiries regarding dividends, change of address, transfer requirements or lost certificates should be directed to the Company’s transfer agent: Computershare Investor Services Inc. 100 University Avenue 8th Floor, North Tower Toronto, Ontario M5J 2Y1 Canada Tel: (514) 982-7555 or 1-800-564-6253 (toll-free North America) or service@computershare.com Company Information For Investor Relations, please call (905) 285-5898. For copies of annual and quarterly reports, the annual information form and other disclosure documents, please contact our Senior Vice-President, General Counsel and Corporate Secretary at (905) 285-5000. Transfer Agent and Registrar Computershare Investor Services Inc. 100 University Avenue 8th Floor, North Tower Toronto, Ontario M5J 2Y1 Canada Tel: (514) 982-7555 or 1-800-564-6253 (toll-free North America) or service@computershare.com Auditors KPMG LLP Toronto, Ontario, Canada Stock Exchange Listings and Stock Symbol The Company’s voting common shares are listed on the Toronto Stock Exchange and trade under the symbol “MFI”. I m o c . n g i s e d s k r o w S N O I T A C N U M M O C N G S E D S K R O W E H T I : n g i s e D d n a t p e c n o C 

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