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Executives

Michael McCain - President and CEO

Michael Vels - CFO

Analysts

Irene Nattel - RBC Capital Markets

Jim Durran - National Bank Financial

Bob Gibson - Octagon

Michael Van Aelst - TD Newcrest

Ken Zaslow - BMO Capital Markets

Maple Leaf Foods Inc. (OTCPK:MLFNF) Q1 2010 Earnings Call April 29, 2010 2:30 AM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to the Maple Leaf Foods first quarter financial results conference call hosted by Mr. Michael McCain. (Operator Instructions) I would now like to turn the meeting over to Mr. Michael McCain. Please go ahead, sir.

Michael McCain

Thank you and good afternoon, everyone, and thank you for standing by. In today's webcast we will discuss Maple Leaf's financial and operating results for 2010 first quarter. The news release and today's webcast presentation are available at mapleleaf.com under the Investor section.

As a reminder, some of the statements made in this call may constitute forward-looking information, and future results could differ materially from what we may discuss today. Please refer to our 2009 annual report, MD&A, and other information on our website for a broader description of our operations and the factors that impact our financial results.

On today's call, I will discuss the operating results for the first quarter and then turn it over to Michael Vels, our Chief Financial Officer, to provide some other financial information. I will then wrap it up and open the line up for questions.

So if I could begin by turning your attention to page 2 of the presentation materials. My highlight would be that it was indeed a challenging quarter, but one where we feel we achieved very satisfactory results, considering the magnitude of those challenges.

We had modest earnings growth, with operating earnings up 7% to $34 million from $32 million last year. Our earnings increased 53% in our Protein Group, which we're very pleased with despite the significant short-term impact of rising meat costs. That was to some degree offset by weaker performance in our Bakery Group highlighted by the U.K. and North American frozen bakery operations resulting in a 14% decline in the overall Bakery Group earnings.

We are anticipating some near term improvements in both of those soft spots in the U.K. and frozen bakery. A combination of volume recovery, cost reduction and pricing initiatives across the business we feel are going to contribute to better results through the balance of 2010.

And finally, we are continuing to implement longer term strategic agendas, which you are well aware of, to expand the operating margins in this business and drive organic growth.

Turn your attention to page three, please. The highlight of adjusted earnings per share increased from $0.05 to $0.09 in the first quarter, a 62% increase driven by the 7% increase in operating earnings.

On page four, getting into the segments, the meat products group had a sales decline from $822 million to $768 million this year in the quarter. Over half of that decline in fact was due to non-core category, specifically the exiting of a non-core segment in the business, which contributed to over half that decline.

Having said that, we also, as expected, and this is always normal and expected that when prices rise there will be a short term offsetting volume impact for a short period of time. And we certainly experienced that as we reduced promotional spending in the first quarter to deal with the increasing raw material cost.

The adjusted operating earnings in the meat products group, notwithstanding that rather stark and significant increase in raw material cost, our operating earnings in the meat business went up by $2.14 million from 11 to 14; a very satisfactory outcome in our belief.

There was a very, very sharp rise in meat costs late in 2009, which impacted the pace of our margin improvements. I'll discuss the magnitude of that increase in a moment.

We expect to stage price increases through the latter part of the first quarter, mostly in promotional spending into the second quarter and early in the third quarter to recover those increased input costs. Specifically, most of our branded retail categories, we are effecting price increases in April; our food service categories mostly are in the month of May, but there is some staggering depending on the category throughout May.

And our private label and deli categories, depending on contract positions and so forth, would increase early in July.

So, as you can see, it is normal and customary in these type of market conditions. There is staged rollout of price increases depending on the channel and the contract, the positions that we have that those stage increases will have an effect on the second and third quarter accordingly.

It is always important to remember the four stages of pass-through economics in this and any other food business. The first stage is realizing the cost increase; the second stage is passing on the pricing; the third stage is a temporary volume impairment, which is normal, customary, anytime there is a pricing action of that magnitude or type; and the final phase is normalization of both margins and volumes.

Our experience historically is that these things can take from one to three quarters to execute. There are never long-term systemic issues attached to them, and we are quite accustomed to executing that pass-through economics in stages as we are, but it always has a short-term impact on our business.

Offsetting this was very strong fresh poultry results in the quarter, which benefited from improved markets. Some stronger yields and efficiencies in that business as well; we did have a very strong fresh poultry result in the period, although we experienced lower primary pork processing earnings, due largely to the Canadian dollar and weaker export market conditions, which offset the benefit of modestly higher North American pork prices.

Turning your attention to page number 5, you will see the dramatic shift which occurred in the last few months in rising hog and pork markets. You'll see on the chart on the right-hand side, the Pork Carcass Cutout, which is a composite value for pork as a raw material. This does represent a primary source of raw material cost to our packaged meat business.

And you'll see the dramatic shift that began late in the fourth quarter of 2009 and continued through to the current market conditions; a very steep curve, going from below standard deviation, below the 5-year average, to significantly above, in the span of a few months.

This was not unexpected. It's earlier than we felt. We felt this was going to occur middle of 2010; it's occurred earlier than what we expected. But the magnitude of it is not unexpected.

I would tell you again, this is not a concerning issue to us. We just have to go through the four stages of pass-through economics to reflect that in our pricing in each one of our categories.

I'd point out that the peak to trough impact of this was a $51 per 100 weight (right) through the middle of August trough in the last 12 months, and the hidden new high this week of $83, which is a 61% increase in that raw material cost. So you can just get a sense of the magnitude of that shift expected, but earlier than expected.

Having said that, the most important observation I'd make is that in spite of this shift, in the first quarter of 2010, we realized a 53% increase in our protein operating earnings notwithstanding this increase in hog and pork markets, a 53% increase, notwithstanding that rising market conditions. So I am pleased with our ability to manage through this, and optimistic that that will continue through the balance of 2010.

Turning to page number 6, in our Agribusiness group, sales were $42 million compared to $45 million last year. Adjusted operating earnings increased to $6.5 million from $2 million last year. We had stronger hog prices, which were reflected in the quarter, and lower feed costs, but those were offset by the stronger Canadian dollar, hence the muting effect of short-term hedging positions against that hog portfolio.

We also had the benefit of about $3 million related to government support to compensate the hog production sector in Canada for losses in prior years. Our rendering earnings were down slightly from year ago, which mostly reflected the higher raw material cost this year versus last.

Now turning to page number 7 and our bakery products group, sales were soft in the quarter, $412 million to $382 million, due largely to currency changes and lower volumes. Those lower volumes were specifically in our UK business and the frozen bakery business.

The frozen bakery business in North America had a very challenging volume quarter, but very important to note that the challenges that they faced were very specific customer activity, very individually-focused customer activity and not any broad market trend or systemic contributor to that. And we are expecting a rebound in that as 2010 unfolds.

UK on the other hand has been attributed to the overall economic circumstance against the backdrop of a premium product portfolio. We do believe that that has bottomed out. Market conditions continue to be soft, but we are seeing some early signs of improvement.

Page number 8, which really is the underpinning of our strategic plan, which is a focus on growing our EBITDA margins to industry norms, specifically in our protein business, but also investing in margin expansion in our bakery business.

You'll see on the left hand chart, the 12-month rolling trend line going back to 2006 where we had a rolling 12-month full percent up EBITDA margins. We are now on a rolling 12-month basis, up to 5.9%, again, challenged in the very, very short term by the rising hog markets.

But we are optimistic, with the continued recovery in our packaged meats business margins following the recall 18 months ago as well as our strategic initiatives, we're confident we'll see steady margin expansion over the course of this next year on into future years. We've identified what our target is in this business very explicitly.

The bakery EBITDA margins are typically stable and in line with industry norms, although last quarter and this quarter were below our expectations for the reasons I described.

Page number 9 highlights some of the product innovation we have in the market today. We've launched Dempster's premium Pitas. The demographic shifts that are occurring in the Canadian marketplace around more ethnic products and meeting consumers' more refined culinary tastes are reflected in many of our new product offerings in the bread business.

We've had exceptional performance in tortillas. We are investing more recently in the Pita category and the non-category Pitas that specifically in the last few periods have had an excellent launch and are doing exceptionally well in the early stages. We're very optimistic about that.

We also have launched Maple Leaf Natural Selections in the Deli counter. It's the only all-natural deli meat available in Canada in four different varieties made with all natural ingredients, no more than eight ingredients per item, all of them pronounceable, which is a distinct point of difference in that marketplace and on trend from a consumer perspective. It was launched nationally this month, and is responding to growing market for healthy, more natural products.

On page number 10, we are fully migrated back to our strategic agenda which is top of our list of priorities. The first of those is continuing to build food safety excellence. We are nearing the end of our implementation of a bacterial growth inhibitor in all of our packaged meat products, which should be complete by July of this year.

Over 1200 items had to be converted and it's a significant effort, but we're pleased with the progress there. We have a range of new training programs that have been launched over the last six months, and are very well-received across the organization. And we've set the framework for all of our facilities to meet the Global Food Safety Initiative Standards in 2011 implementation. So we're very pleased with how that's unfolding.

We are focused on continuing to realize the full potential of our packaged meats business; I think done a very good job of recovering the health of the brand, the core volume in the brand, the health of the business. We now are focused on restoring the margins to more historical norms in that business.

The increase in our efficiency and specifically, significant cost reduction is the centerpiece of our margin enhancements over the next several years. The most significant project announced in the quarter was the new bakery plant to be built in Hamilton, Ontario.

It's certainly the largest and most technologically advanced after three years of scouring the world for the very best technology to deploy the largest and most sophisticated in Canada, but we think it's actually possibly the largest in North America.

You should expect many more projects of this size and impact in the remainder of our supply chain over the course of the next several years.

We have similarly, now completed 14 SAP installations throughout the organization, all competed on time and on budget. We're very pleased with how that initiative is unfolding. And again, that will be a substantial contributor to cost reduction in the Maple Leaf organization.

Finally, we are continuing to rebuild our pipeline for organic growth. We've added significantly to our bench strength of talent, certainly highlighted by the addition to out team of a Chief Marketing Officer, Stephen Graham. But throughout the organization, we are focused on building a (topside) marketing talent and bench strength.

We've launched a new Maple Leaf ad campaign to underpin that brand equity, and we've taken very significant steps to strengthen our innovation pipeline.

So with that, I'll turn it over to Michael Vels who'll talk about some of the financial factors that are contributing to the quarter and the business. Michael?

Michael Vels

Thanks, Michael. Moving to page 11, some information on our capital expenditures. Capital expenditures for the quarter were relatively speaking quite low compared to the past couple of years at $29 million, compared $58 million last year. Our capital expenditure program for 2010 will be back-ended to some extent as we will begin spending on the new Ontario bakery towards the back half of 2010.

One of the significant projects in our capital expenditure program is the SAP program as Michael said. That implementation is continuing successfully. Our first business is almost now completely on the program, and we have also had successful implementations in two of our other large businesses, namely Fresh Bakery and Consumer Foods.

As I mentioned, a new mega bakery project is underway in design at this point. We expect to break ground towards the middle of the year, and we're hoping to commission in mid-2011.

Moving to page 12, our SG&A for the quarter decreased primarily as a result of the benefit of cost containment initiatives. The debt to EBITDA ratio which is one of the ratios we track that reflects the health of our balance sheet improved again to 2.8 times.

This has improved from 2.9 at the end of fourth quarter of last year and down significantly from a year ago when it was running at 3.8 in the aftermath of the significant costs related to our product recall.

Management is comfortable with our existing debt levels, and we'd anticipate that we would manage ratios around this level going forward, at least in the short term.

Cash provided by the operations was very strong in the quarter and reflects the continued focus on very aggressive working capital management and focus on our balance sheet. Subsequent to the end of the quarter, we completed a $75 million issue of private placement bonds on April 28th.

The notes bear interest at about 6.1%, and the use of the proceeds will be to repay other bonds that are rolled over in about the same period, themselves yielding about 7.7%.

Furthermore, we also executed $590 million of interest rate swaps. As our bonds have been maturing, and related swaps have been maturing, our percentage of floating debt has increased over the last six to twelve months. And we consider it would be prudent at this point, especially considering the low interest rates to fix a higher percentage of our debt going forward.

This completion of these swaps will result in an effective economic coverage of about 60% of the debt outstanding.

And with that, I'll pass the presentation on to Michael.

Michael McCain

Thank you, Mike. In summary, we had continued earnings growth in the first quarter, notwithstanding the very substantial increase in raw material cost. We experienced this 53% increase in our protein profitability, which quite frankly we're very, very pleased with, all things considered.

The pace of our improvement we expect will continue to grow throughout 2010. It obviously was slowed by the pace of improvement, although we did show good improvement. That pace was slowed by some short-term business challenges in the quarter, but we're optimistic with cost reduction and pricing missions underway, we'll improve margins and earnings growth as 2010 unfolds.

And most importantly, we're proceeding with our longer term strategic initiatives to deliver higher margins and growth in the Maple Leaf organization as a whole and on a continued and sustainable basis.

So with that, I'd be happy Joe, to turn over the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will be from Irene Nattel from RBC Capital Markets.

Irene Nattel - RBC Capital Markets

Michael, I was wondering if you could give us an idea of the magnitude of the price increases that you're putting through in the Prepared Meats area in the current quarter and in Q3?

Michael McCain

Irene, suffice to say that the magnitude is such that they will offset fully the cost of raw material cost increases that we are experiencing. So it differs category by category, cup by cup, and so it's very challenging to give you an aggregate number, but our pricing is entirely focused on full cost recovery for the raw material increases. So that's the objective, is margin restoration.

Irene Nattel - RBC Capital Markets

And just from a volume perspective, are we now at the point where the Maple Leaf brand has fully recovered in terms of volume from the product recall?

Michael Vels

No, we are not.

Michael McCain

I guess the subjective answer to, is it still down? The answer is, it's still down, the Maple Leaf brand is down. The other brands were certainly less affected. At its peak Maple Leaf brand declined 55% or more; were down to, for the most part we think single digit impacts. So there's a large school of thought that would say that is "substantially recovered". But I can technically say that it's up versus where it was at the stage.

Having said that, Irene, its very challenging to segregate that from the current market conditions, because as I said and I articulated earlier, there's the time tested inevitable four stages of pass-through economics that a food category always faces.

And when you are in that stage of passing on pricing, how much of your current volume challenges which you are facing, for example, in all our packaged meats business are attributable to that and will fully recover versus how much is still sustainable residual impact of the product recall is challenging to segregate.

What we are doing, and most importantly is that we have begun really investing in a more significant way with new marketing strategies around the Maple Leaf brand, and we think that's the most significant next stage of evolution that the Maple Leaf brand will experience.

We launched within the last 30 days, the new master brand advertising campaign. You may have seen it. It's under the banner of Maple Leaf, 'Your Butcher Shop', and spectacular advertising campaign.

We've invested in talent, we are investing in our innovation pipeline, we are investing in the brand support. So, we are optimistic we are going to do all the things to recover that last few percentage (gains).

Irene Nattel - RBC Capital Markets

And then a couple of financial questions if I might; I noticed that the slide highlighting CapEx doesn't have a little bar in it for 2010. Wondering when we might get that number.

Michael Vels

That was obviously an oversight on our part, Irene.

Irene Nattel - RBC Capital Markets

Yes, I thought it might be Mike.

Michael Vels

I want us to remedy that immediately. So actually that's a good question. We are very close to finalizing our plans for and timing for breaking ground with the new bakery, and that's the biggest wildcard in determining how much money we'll spend this year on it. Our depreciation is about $150 million.

It would be fair to say that we will spend at least that, which obviously is no great new news. Most of it's back-ended, and the portion which is above that level would be the bakery.

So as soon as we are I think more settled on how much we are going to spend this year on the bakery, I think we'll be able to tell you. How long would that take? Maybe another couple of months.

Irene Nattel - RBC Capital Markets

And then just on your interest expense, certainly very quickly back of the envelope, looks like you've probably taken at least $10 million of interest expense out on an annualized basis. Is that a fair calculation?

Michael Vels

I am not sure, but yes. I am just not sure what the base level free calculation is, but if you look at the bonds that we repaid last year, they were relatively speaking high interest rates, and the one that we just repaid was about 7.7 in effective yield.

Irene Nattel - RBC Capital Markets

Yes, and then just looking at the rate on the swaps, Mike?

Michael Vels

No, I understand. Sorry for taking so long to get to the answer.

Irene Nattel - RBC Capital Markets

That's okay.

Michael Vels

And so, certainly that's some positive pickup on those two. Definitely we have been paying up choking rates on bank debt, so we in fact have a negative carry, probably on at least 300 million of the swaps. So, compared to today or the first quarter, our interest will actually go up slightly as a result of the swap transaction.

Operator

The next question will be from Jim Durran from National Bank Financial.

Jim Durran - National Bank Financial

Just a couple of things; Mike, on the SG&A, if I recall, last year there was an extraordinary increase in the pension expense. Has there been any contribution to the SG&A decline this quarter as a result of pension expense coming down?

Michael Vels

No, there has not. I think it is disclosed in the quarter somewhere or maybe in the MD&A, but I think there was a marginal increase but not very material. So certainly, pension has not contributed to the reduction in SG&A.

Jim Durran - National Bank Financial

And then with respect to Burlington and Lethbridge, with the Canadian dollar where it is now, are you still cash flow positive on those businesses, and is there any update in terms of plans to divest those locations?

Michael Vels

Our intention is to divest of those locations during 2010. Both of those assets are successful and have contributed to the cash flow of the business. Recently, the margins in pork processing have been volatile because of the significant and fairly sharp changes in the price of pigs. So, from week to week that profitability level changes.

But certainly over the medium term, say 2009 and recently it's been a cash positive asset, both of them.

Jim Durran - National Bank Financial

And then over on the bakery side, I don't know if you disclosed this or not, but can you tell us where you're at in terms of your wheat costs and how far out are you hedged on your wheat costs?

Michael Vels

Wheat costs, as you can see from the market, have stabilized and certainly are reduced over last year to some extent. We don't disclose our hedging strategy for competitive reasons, but we tend to hedge fairly short term on that particular commodity.

Jim Durran - National Bank Financial

Do you anticipate taking any price increases on that business?

Michael Vels

I think we're going to look at taking price increases across all of our businesses. We have, particularly in the fresh bakery, quite significant inflationary cost increases that do occur on the fixed element of the business.

You have to remember that commodities are a relatively small proportion of the bread cost, and certainly commodities have received more than their fair share of attention because of the spikes that we've seen in past years. But we do have underlying inflation on a very high number, which is the fixed costs of producing and distributing fresh bread, particularly.

And we haven't had a price increase to offset that for a while, so certainly we would look at taking price increases more in the normal course in our bakery business to offset inflation.

Jim Durran - National Bank Financial

Last question, just the UK Bakery business; it's been a negative impact for quite a while now. Have you got a sense as to how much longer it's going to be in terms of number of quarters before you feel that the profit drain there is no longer a factor?

Michael McCain

I think we're quite optimistic. We're seeing some improvement there as we speak, Jim. That business over the last five years has been a spectacular business for us. We certainly had some challenges as it relates to an oven explosion that impacted our business for a period of time.

And then the impact of the recession, which as we've discussed, has been much more dramatic, acute, pronounced, whatever all of you want to describe it, in the UK than any other part of our business.

As the global economy recovers, we're starting to see some improvement in those market conditions. Our response to those market conditions is as it should be, seeking any and every cost reduction opportunity that we can, and then some material initiatives that are just now coming to benefit us.

So this has been a great business. It's gone through a bit of a rough patch now for a year, year-and-a-half. We, in the like of that business that we don't think it's necessarily that material, and it's going to be a good business going forward as well.

Specifically to answer your question, we are starting to see some improvement now as we speak, and we think that will continue to be better as 2010 unfolds.

Operator

The next question will be from Bob Gibson at Octagon.

Bob Gibson - Octagon

The Fresh Bakery, can you give me any kind of color on what the retail customers did on the Frozen Bakery?

Michael McCain

On the Frozen Bakery?

Bob Gibson - Octagon

Yes, sorry. Frozen.

Michael McCain

That's a challenging thing to do, because we have a very large and diverse customer base in that business. We have a few large customers in North America that contribute to that. Gains and losses in that business are normal.

There's always a list of gains and losses in the normal course of trading. And they just happen to have a pretty weak trading quarter, if you look from a volume perspective, traced to a number of customer activity groups.

So there's nothing specifically that I would point to Bob, rather than to say, there's nothing systemic or any market trends going on there, and we're pretty optimistic that that will get back to more normal environments over the course of the next few quarters.

Operator

The next question will be from Michael Van Aelst from TD Newcrest.

Michael Van Aelst - TD Newcrest

I guess I'll start on the Agribusiness side. It seems like profits are always significantly lower in Q1 than the rest of the year. Can you explain that at all, or is there no real trend there?

Michael Vels

On the Agribusiness, Michael?

Michael Van Aelst - TD Newcrest

Yes.

Michael Vels

Well, it can be technical, and have been in the past, but that cycle to some extent has been broken in the last couple of years, because hog prices have been up and down at odd times. So in general, a hog producer would have had lower prices through the fall and then the first quarter, depending on the market could have either been good or not good.

So the first quarter has actually always been hard to call from that perspective. And then underlying it also, you have changes in all of the peak rents. So that's one way of saying that there's no real pattern, and any similarity to past first quarters or anything is more coincidental than anything else.

Michael Van Aelst - TD Newcrest

Is there anything on the rendering side that would --?

Michael Vels

No, that tends to follow markets, and soybean and that sort of thing.

Michael Van Aelst - TD Newcrest

Sticking on the rendering, the biodiesel tax credit that was not renewed yet in the states, did that have an impact in your first quarter profits?

Michael Vels

It would have; not sufficiently material for us to disclose or talk about. Surely we anticipate, at least our expectation is that that will be renewed through the US legislators, but is not material enough to talk about in the quarter.

Michael Van Aelst - TD Newcrest

And what is that short-term hedging program that you have on the hog production side?

Michael Vels

We just had some hogs purchased or (inaudible) within the quarter. So nothing long-term, and there's just been a mismatch between the immediate cash price and when those hedges came off. So we have short-term programs to provide some level of flexibility for our businesses and frequently don't last more than a quarter, basically this quarter or the next quarter.

So if you take the hog market price quarter-to-quarter, we would have had slightly different results because of the hedges that came off at that time.

Michael Van Aelst - TD Newcrest

But they were unfavorable in the quarter, right?

Michael Vels

That's right they were, yes.

Michael Van Aelst - TD Newcrest

Were they materially unfavorable?

Michael Vels

No. Michael, certainly material enough to talk about, but not very significant.

Michael Van Aelst - TD Newcrest

And then just on the North American Frozen Bakery. A couple of years ago, you did start mentioning that there was a client whatever, one or two customers that you seem to have let go of because of lower profitability, and that you're going to get that volume back through other customers, but it was ramping up, and it seems like it's taken longer though.

Has there been a delay in ramping it up relative to your initial expectations? And if so, why?

Michael McCain

No, I don't think so. I don't think I would draw those conclusions, Michael. It traces back to very specific customer activity in the quarter. I look back at our Frozen Bakery business in North America four years ago and that leadership team that's been in place for the last several years has done a spectacular job of recovering the profitability of that business, just a spectacular job.

I have great confidence in the leadership of that business, in the sales leadership, the operating performance of the business, their plants' operations, their product quality and food safety, product performance, in every respect has been a massive turnaround in the last several years. They've just had kind of not such a great volume quarter. And quite frankly, in the evolution of any high caliber business team, that happens every now and then from a quarter-to-quarter perspective.

So there's nothing systemic going on there. But to the question on here, might be another quarter of that kind of an impact possibly. We watch it on a week-to-week basis. But this is still an outstanding leadership team that is running a very good business, and we expect that'll be the case going forward as well.

Michael Van Aelst - TD Newcrest

And last question on the Fresh Bakery side. I think you mentioned that there was an increase in trade investment. Was that specifically for sandwiches or was that in general?

Michael McCain

I'm not sure I'm understanding your question, Michael.

Michael Van Aelst - TD Newcrest

Well, the increase in your trade investment on the fresh side? I can follow up offline if you like, but I think there was a mention of that in the press release.

Michael McCain

In the Fresh Bakery business in the first quarter, the one driving the better performance which we experienced in our Fresh Bakery was certainly a strong Canadian Dollar and lower raw material costs, but offsetting that is some higher trade marketing expenditures in the quarter.

But on balance, we had a significant improvement in our Fresh Bakery results in the quarter year-over-year. So when you have specific quarters with strong market conditions in the underlying commodity, it's not uncommon that there's periods of higher investments in trade marketing.

We did have last quarter at the end of fourth quarter of 2009 as you will recall at our last quarterly discussion, we had some additional trade activity in certain regions in this country. We think that, it would appear that’s improved markedly. There will always be competitive hot spots; this is a very competitive category.

So there will always be skirmishes and competitive activity from region to region and time to time, but in this particular quarter there was nothing material of that nature, and specifically illustrated by the very, very good improvements in our fresh bakery results, quarter one this year over last.

Operator

(Operator Instructions) The next question will be from Ken Zaslow from BMO Capital Markets.

Ken Zaslow - BMO Capital Markets

If I was to look into 2011, and I kind of go past this, first on the Agribusiness. Is there anything specific in this quarter that would take you off the run rate for the last three quarters that we can't just think about for 2011?

Michael McCain

We're talking about the Agribusiness, Ken?

Ken Zaslow - BMO Capital Markets

Yes, let's start with the Agribusiness. I'm just curious to see, for three quarters in a row, you did pretty consistent. The restructuring seemed to be working, and yet this quarter was a pretty strong sequential fall off. I didn't know if there was something specific to this quarter, or is it just the volatility of the business, or how we should look at it beyond 2010?

Michael McCain

Well, actually Ken I am going to differ slightly around this pretty significant fall off. I think if I turn your attention to page number five in our presentation, and you look at this chart, which I know you are incredibly schooled in and well-versed in.

With the rising hog and pork markets in this quarter and to effect quarter one and quarter two and the impact temporarily on your margins, I actually feel that the margin performance that we realized, which is higher than our historical norm is terrific evidence of the underlying strength of the actions that we've taken.

Said differently, we're quite pleased with the results that we delivered in our protein business, considering this massive spike in raw material market.

Ken Zaslow - BMO Capital Markets

I was just talking about the Agribusiness.

Michael McCain

The challenge is, it's hard to segregate those two between our Agribusiness unit and the Meat business. We certainly look at them on a combined basis.

Michael Vels

If you try to model it on a run rate basis, you have to extract the government incentive payments which are irregular and surely not recurring. The remainder of the Agribusiness would vary depending on relative hog and feed prices. Those can be volatile, so from a run rate perspective, you have to understand where they are going, so you have to be able to model that.

And then the rendering business, it's not quite as impacted but it will vary for sure with changes in protein prices and particularly soybeans. In fact, it would be a mistake to take the Agribusiness and say, that's a run rate from the absolute perspective, but if you model in the impacts of things like hog prices, feed prices, and soybeans, that’s a pretty stable segment, it is operating very efficiently. The benefits from the restructuring are all now flowing through, and with the exception of commodities, yes, it is a pretty stable set of operations.

Michael McCain

Also Ken, I'd encourage you to (imagine) there would be a very significant health warning trying to model Agribusiness and the meat product sectors separately because of the intimate correlations between the performance of one and the performance of the other. They are so tightly correlated that modeling them independently feels very risky to me.

Ken Zaslow - BMO Capital Markets

No, I always think of the Agribusiness more at the hog side and the meat more at the pork side. That's why I figured the higher hog prices would actually have helped a little bit on the Agribusiness.

Michael McCain

It can, but there's this countercyclical aspect relative to pork processing margins. There's a currency factor involved. And then the rendering biodiesel are recorded in Agribusiness, and that's essentially the by-product from our meat processing sectors. So correlations are pretty high.

Ken Zaslow - BMO Capital Markets

So if I look at 2011 on the overall meat business, and you start to pass along the pricing over the next couple of quarters, is there a case to be made that your actual margins could actually be better than before the price increases if you see some abatement on the input prices as you are probably not going to take down your retail prices? Or is that a far fetched idea?

Michael McCain

Well, that's essentially our strategic plan which we illustrated at the last Investor Day is that we think there are two plateaus to the growth in our EBITDA margins; the first plateau is just normalizing our operating results in the packaged meats business, which is first and foremost fully recovering from the product recall, and secondly, going through the pass-through economic phases of this raw material increase.

So, as we said at our last investor day, we are anticipating that that would deliver EBITDA margins in the 8% range, which is what we articulated in our last investor day presentation. In and of itself is materially higher than we've ever experienced in our past, but largely a reflection of the restructuring that we've done in the last several years.

The next plateau is more driven by the capital investment of reducing our costs in our supply chain through the network consolidation and systems investments that we've talked a lot about. So I think your assertion is absolutely correct, but we've just got to work through these near term challenges to get there.

Ken Zaslow - BMO Capital Markets

And then a pretty straightforward question is, you kind of gave the idea of what interest expense. Can you just tell us what your forecast for interest expense for the full year is? I just didn't quite understand what you were trying to get at. The run rate I think for the quarter was $16 million; you said it's going to be up a little bit. Did you just assume like $18 million, $19 million for quarter? Is that easier?

Michael Vels

I'm not in position to actually give you that number. And we don't officially provide forward-looking estimates. But the negative carry, if you want to call it that or the increase in rates, as the swap at round about 3% or 4%, if you model out the two bonds that we replaced.

The one I know was 7.70 through the quarter, and it was a relatively smaller number, then we have $75 million that's come on at about 6%. The remainder of the swap, swaps at about four compared to our short term ad funding, which, given the very, very low base rate, it's probably running at about 1.5%. So that would give you mathematically what your increment would be, interest.

Ken Zaslow - BMO Capital Markets

And then my final question is, I think last quarter you talked about incremental promotional activity in the bakery section. And then I think this time you talked a little bit more about the whole specific with a customer. But the promotional side, are they linked, and has there been any abatement of that?

Michael McCain

Well actually, Ken, they're not linked because last quarter we had some challenges on a regional basis in our fresh bakery business and we saw a very good recovery of that this quarter.

Ken Zaslow - BMO Capital Markets

So that has abated, and that issue is completely behind you?

Michael McCain

Has it abated? I think abated is a relative term. It's still a very competitive market; it has been for a long time, and probably always will be. But certainly the rather material impact that we had in the fourth quarter has not recurred in the first quarter of 2010.

The challenge this quarter is in largely our frozen business, not our fresh bakery business.

Ken Zaslow - BMO Capital Markets

That's what I thought. I thought there was a difference, and I just wanted to make sure that the one from last quarter at least has not recurred as much. Maybe not abated, but not as much. Thank you.

Operator

We have a follow-up question from Jim Durran from National Bank Financial.

Jim Durran - National Bank Financial

Yes, I just wanted to get an update on the sandwich business as to where it is in terms of stabilizing it and getting it back to some growth?

Michael McCain

So the sandwich business is a continued work in process. We're certainly not satisfied with the results. Its not eroding further, but it's not improving as we would like it to. We have a great deal of attention being paid to that business. I wouldn't say it is a significant drain on our earnings, but we do have a large focus on that as we speak and we're hopeful that we can engineer solutions over the balance of this year.

So the headline is, not getting worse, getting a little bit better, but not materially better, and we're reviewing that in detail.

Jim Durran - National Bank Financial

On the supply chain optimization that you're going to be doing over the next several years, you mentioned that you're going to be spending a fair amount of capital. At what point in time are you going to share with us what kind of savings you think you're going to generate to enhance the profitability of that capital spend?

Michael McCain

When we've completed our analysis and we're ready to announce the details of the plan, I think would be the right answer. I don't think I can give you a specific date at this point.

Jim Durran - National Bank Financial

And will we sort of get that as each initiative comes to the table, like the Canada bread piece now and then some type of Packaged Meats process plant?

Michael McCain

I think you'll see more bundling of that to give you a better holistic view in the future, but I just can't tell you when that might be.

Operator

And there are no further questions registered at this time. So I will turn the meeting back to you Mr. McCain.

Michael McCain

Well thank you very much all. We appreciate it. We're, as we said, very pleased with the progress, although pace sometimes slows when you have obstacles that we faced in this quarter. But I think we met that challenge, had a nice increase in our earnings notwithstanding that and are looking forward to that trend accelerating as the year unfolds.

So thank you very much for your support, and look forward to the next quarter to review our performance. Thank you all, and have a wonderful day.

Operator

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time. And we thank you for your participation.

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Source: Maple Leaf Foods Inc. Q1 2010 Earnings Call Transcript
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