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 $1.22 last year due to similar factors as noted above.
For further discussion on key metrics and a discussion of results by operating segment, refer to the section titled Operating Review
starting on page 3 of this document.
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MANAGEMENT'S DISCUSSION AND ANALYSIS | 2019 | MAPLE LEAF FOODS INC.
3. SELECTED FINANCIAL INFORMATION
The following table summarizes selected financial information for the three years ended December 31:
($ 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.
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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.
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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).
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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%
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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
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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”.
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