Canada Packers Inc. (CPKR) Earnings Call Transcript & Summary

Good day, and welcome, everyone, to the Canada Packers, Inc. Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Annemarie Gerber. Please go ahead.

Good morning, everyone. Thank you for joining Canada Packers' Third Quarter 2025 Financial and Operating Results Conference Call and Webcast. My name is Annemarie Gerber, and I am the Director of Communications for Canada Packers. This conference call is being recorded today and is also available through an audio webcast on the company's website. [Operator Instructions] Following prepared remarks, there will be time for questions. Analysts and investors are reminded that questions can also be directed to Canada Packers at any time to [email protected]. This call contains forward-looking information with the meaning of applicable Canadian securities laws relating to activities, events or developments the company believes or expects will or may occur in the future. Forward-looking information reflects the current expectations, assumptions and beliefs of the company based on information available to it. Although the company believes the assumptions are reasonable, forward-looking information is not a guarantee of future performance. Forward-looking information is subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking information. Company documents filed from time to time with securities regulatory authorities describe the risks, uncertainties, material assumptions and other factors that could influence actual results. Any forward-looking information speaks only as of the date on which it is made, and the company disclaims any intent or obligation to update any forward-looking information, except as required by law. Earlier this morning, Canada Packers issued a press release disclosing its third quarter 2025 financial results. The press release as well as our third quarter financial statements and management's discussion and analysis was filed on SEDAR+ and also may be accessed on the company's website under the Reports and Filings section of the Investors tab at canadapackers.com. The company also posted its Q3 2025 financial and operating results presentation to its website, which can be found under the Investors tab under Events and Presentations. I would now like to turn the call over to Mr. Dennis Organ, President and Chief Executive Officer of Canada Packers. Dennis, the call is yours.

Thank you, and welcome, everyone, to Canada Packer's inaugural Financial and Operating Results Conference Call. I am joined today by Deepak Bhandari, our Chief Financial Officer, who will provide a detailed review of our financials shortly. Today, we will review our third quarter 2025 results and provide an update on our priorities for the quarters ahead. We are immensely proud to be here for this important milestone in our journey to unlock our full potential as an independent category-defining leader in premium sustainable pork. Canada Packers was founded in 1927 when several pioneering meat companies joined together to form what would become one of Canada's most trusted names in food. For nearly a century, we have proudly delivered premium pork to customers around the world. In October, we began trading independently on the Toronto Stock Exchange under the ticker CPKR, marking a new chapter in that legacy. The CPKR symbol has deep roots in our history and bringing it back reflects both our respect for the past and our confidence in the future. Generations of dedicated employees, farmers and partners built this company through hard work, integrity and an unwavering commitment to quality. To them and to everyone who continues that tradition today, I want to express my gratitude. To the shareholders and analysts who followed us from Maple Leaf Foods and continue to believe in the value we are unlocking, thank you for staying with us. And to the new investors joining us for the first time, welcome. We are glad you are here. Discipline and delivery will define Canada Packers. We will compete and grow through operational excellence and a commitment to sustainability in all things. Our focus is on consistent execution, transparency and building long-term value for our stakeholders. One of the unique advantages of our model is that many of our key drivers are visible and measurable. From USDA pork cutout values to global feed and grain prices, investors can track in real time the variables that shape our performance. That transparency, combined with disciplined execution positions us well as a newly independent company. We begin our public life with momentum, a solid balance sheet and strong cash generation. That strength gave the Board confidence to declare Canada Packers' inaugural quarterly dividend of $0.23 per share announced this morning. It represents a healthy yield and signals our commitment to delivering shareholder returns from day 1. Before turning to the quarterly results, I want to highlight what differentiates Canada Packers in the global marketplace. Our portfolio is built around premium value-added pork designed to meet the needs of strategic customers in the world's leading pork importing countries and at home in Canada. We optimize the whole hog across our customer base, matching each cut to the geography and partner that delivers the highest value. About 40% of our revenue comes from North America, where we serve strategic retail and foodservice accounts, partnering with them as experts in solution-based selling to meet the needs of their consumers. Another 40% comes from export markets, which are primarily Asia, including Japan, South Korea, China and the Philippines, where we collaborate with leading distributors to deliver premium pork to some of the world's most discerning markets. The remaining 20% comes from the supply agreement with Maple Leaf Foods, providing stable long-term volume and margin visibility. Simply put, we sell a better mix of products to a better mix of countries, giving us a durable competitive advantage and supporting premium consistent margins. That strategy, combined with favorable market conditions, produced strong results in the third quarter. We delivered double-digit sales growth year-over-year, driven by continued operating momentum, strong on-farm performance and higher market pricing supported by tight North American supply, high competing meat values and low U.S. freezer stocks. Our top line performance also benefited from higher processing volumes. We processed 37,000 more hogs than the prior year, a 3.7% increase, returning to a normalized growth rate after a first half spike of 6%. These gains were driven primarily by improvements within our company-owned hog operations, including better animal health, nutrition and farm management. That performance pushed utilization to roughly 85% of capacity, up several points from last year, yet still leaving significant room for capital-light growth simply by filling our plants further. Internal volume growth also allowed us to capture more of the vertically integrated spread as declining feed cost coincided with stronger market pricing. The combined impact of strong execution and favorable markets resulted in significant adjusted EBITDA gains for the quarter compared to prior year. As we look ahead, our focus is on disciplined execution and unlocking the full potential of our business. We are committed to operational excellence in every part of the value chain from how we raise our pigs, to how we run our plants and how we serve our customers around the world. Our profitability and resilience reflects a diversified global footprint, premium product mix and consistent performance. Our Chapter 1 strategy is straightforward, utilize existing capacity, protect our strong cash-generating business and build the financial flexibility required to fund our Chapter 2 growth, which will continue to enhance shareholder value. With that, I'll now turn it over to Deepak to dive deeper into our financial results and performance drivers.

Thank you, Dennis, and good morning, everyone. I share Dennis' pride in our strong operational and financial performance and the smooth transition we have made to operating independently. I'll now turn to our financial performance for the quarter. It is important to note that prior to July 28, Canada Packers did not operate as a stand-alone business within Maple Leaf Foods. As a result, our prior year comparatives reflect carve-out statements and our third quarter results represent a hybrid period as we began operating under the supply agreement and the long-term service agreement rather than having costs allocated by Maple Leaf Foods. Accordingly, where possible, I will be referencing estimated pro forma numbers in addition to reported numbers because we believe that they better reflect the operating performance of Canada Packers as a stand-alone entity. This will only be necessary during this transitionary quarter as our fourth quarter results will be a full quarter of stand-alone financial performance with prior year carve-out comparatives. Turning to sales. We delivered pro forma sales of approximately $475.6 million, representing an increase of $74.3 million or 18.5% compared to prior year. Reported sales for the same period were $481.8 million, which represented an increase of $61.6 million or 14.7% compared to prior year. Our sales growth was driven by strong market pricing, increased hog volumes, higher average hog weights as well as favorable U.S. and Japanese yen exchange rates. As a result of our continued focus on operational efficiency, we improved our processing volumes to 1.04 million hogs or a 3.7% increase compared to the prior year. In the third quarter, about 47% of hogs processed were internally sourced and 53% were purchased from external suppliers compared to 44% and 56%, respectively, in the prior year. We reported earnings for the quarter of $25.6 million, representing a 31.7% increase over prior year. After removing the impact of the noncash fair value changes in biological assets and derivative contracts, start-up costs and items included in other expenses that are not representative of ongoing operations, adjusted earnings for the quarter was $47.5 million or a 69.9% increase from prior year. We generated pro forma adjusted EBITDA of approximately $56.2 million during the third quarter, an increase of $15 million or 37% compared to the prior year. The pro forma adjusted EBITDA margin improved by 160 basis points to 11.8%. Our reported adjusted EBITDA for the same period was $60.2 million, representing an increase of $19 million or 44.7% compared to the prior year. Reported adjusted EBITDA margin improved 260 basis points to 12.5%. Our increased profitability was driven by higher hog volumes processed and a significant improvement in the vertically integrated spread due to strong cutout values and lower feed costs. This was partially offset by a decline in the packer spread compared to the prior year. During the quarter, we invested $10.6 million in capital compared with $8.5 million in the third quarter of the prior year. In the third quarter, we reported adjusted free cash flow of $42.4 million due to the strong profitability discussed earlier. From a capital allocation perspective, we remain focused on strengthening our balance sheet through free cash flow generation, deleveraging and returning capital to shareholders. As Dennis mentioned, we are pleased to announce that our Board of Directors have approved a quarterly dividend of $0.23 per share, representing an annualized rate of $0.92 per share, right in the middle of our target range. The dividend will be payable on December 31 to shareholders of record at the close of business on December 10. This reflects the durability of our profitability and our ability to generate strong free cash flow, allowing us to execute our capital allocation priorities of deleveraging and returning capital to our shareholders. I will now turn the call back over to Dennis.

Thank you, Deepak. As you've heard today, we are off to a strong start as a public company. We have the right team, the right operating philosophy and the right strategy to deliver consistent, profitable growth. Our vision is clear: to be the global standard in sustainable pork as accelerating global demand for premium responsibly produced protein continues to grow. We will stay disciplined, operate with excellence and fill our plants with the gold standard pork our customers expect, all while staying true to our purpose, proudly raised, responsibly made. We are excited to build on this momentum and create long-term value for our investors. Thank you for your continued support. I look forward to updating you on our progress when we report our fourth quarter results. With that, I'll turn the call back over to the operator for questions.

[Operator Instructions] We'll go first to Michael Van Aelst at TD Cowen.

Congratulations on the spin and the first strong quarter. I wanted to ask you about the hogs process because you're up 3.7%, which is -- don't get me wrong, it's still a very good number, obviously. But like you said, you were at 6% in the first half. So can you just explain the cause of that dip in the hogs process? Was it something that was available to you in the first half that wasn't there in Q3? Or are you just lapping tougher comps now? Or what caused that slowdown?

Mike, thanks for being on the call. Remember, 2 years ago, we started focusing on our operational excellence on our farm operations, driving out costs and improving performance. What will happen for us is, this growth will average around 2% or 3%, but it might be lumpy because as we make improvements on the farms and it takes time for those to work their way through our system to be market hogs, that's why we had a spike, and we're returning back towards more normal levels. When we start procuring hogs on the outside, it might be a little bit more consistent our growth because there'll be sort of smaller managed numbers. But I think we saw the one big wave. It's in our numbers now. And so we think we'll be back towards normalized levels.

When you cycle that first half next year, you expect to be able to grow off of that base? Or is that -- was there some kind of flood of hogs that you don't expect to recover?

We anticipate to grow 2% to 3% top line processing volume during Chapter 1, which say this is roughly 3 years.

Okay. Perfect. And then you mentioned 85% capacity utilization. Is it reasonable to expect 100% is possible? Or is there -- do you have to leave a buffer?

[ Legally ] a buffer. So this is -- mid-90s is more typical. Our mid-90s is on a 5-day work week. If you compare to the U.S., they work what we call 5.5, which is basically every other Saturday. So -- but remember the way that we're growing, we're doing this in roughly 100,000 head increments, making sure that we're validating the profitability of this growth as we go, have a pretty good line of sight to the next year and 2 years, but we're going to continue to revisit that. There's nothing that says we couldn't flex into higher if we wanted to at some point. But right now, Chapter 1, 5-day work week, mid-90%.

So you could go to 5.5 day like in the U.S., so nothing stopping you in terms of your union contract or anything like that?

No, no.

All right. And just final question. So on Maple Leaf's call, they said they suggested they expected to continue to see some margin pressure in Q4 like they did in Q3 from the higher -- their higher cutout or higher cost of the cuts that they were buying. I know they don't buy all the cuts in the same balance, but you guys pretty sell all the cuts in the same balance pretty much. So to what degree can we expect that your performance will -- in Q4 will mirror Q3 versus kind of falling off with the hog prices that we're seeing right now?

Mike, it's Deepak. I'll answer that question for you. So when you think about our Q3 results, one of the big drivers was the vertically integrated spread, which was driven largely by an inflated cutout, as you talked about earlier. There will be normal seasonality of cutouts that will happen in the fourth quarter. The cutout tends to decline seasonally in the fourth quarter. And so that spread will tighten, still be very favorable, but it will tighten relative to our Q3 performance, and that will have an impact on our earnings in Q4 relative to Q3.

Yes. That's not unexpected given the seasonality -- that's good to clarify.

We'll go next to Irene Nattel at RBC.

I'll echo Mike's congratulations. Taking a step back, I kind of lost track, Dennis, of a number of times you used the word disciplined in your opening remarks. Yes, disciplined and consistent those were -- we got those. We got those. So I guess the real question is, you said you were focused on disciplined execution, unlocking full value. Where are the biggest buckets that you see in terms of, I think you outlined how you raise the hogs, how you run the plants and how you serve the customers.

Correct. So the way I would think about it, the first large improvement we had was on the farms, and that's what we were talking about the arrival of these hogs for the 6% growth last quarter. Now we're focused on in-plant operations. We've had some opportunity to do a better job of controlling those costs. Just becoming -- just coming out of the spin, there's things that we're looking at that more productivity than activity, just the processes we use and really trying to take a hard look at our SG&A. And then full sort of the full range of -- is on the sales optimization side as well. So some of the things that are going on today, we talked about a little bit in the markets. There's strength in Mexico. EU production is down. And so that's helping us with North America meat markets. And we're constantly in a position where we're positioning meat -- constantly in a situation where we're positioning meat to the most valuable place. Things to think about for us is, one, launching Canada Packers, the brand in Western Canada. We have specific competitive advantage in Western Canada because of the capabilities that we offer in that market. Then also realizing that in Japan, we operate as closer to a branded company. We have a 3-tier program, gold, silver, bronze, and we're working consistently and today, we're working on brand refreshing, refreshing our brand strategy and our go-to-market strategy in Japan. So we think pretty good shape on the raising costs, work to do on the manufacturing side, always the discipline and durability that we talk about in our businesses because we can position -- we're agile. We can position the meat into the most opportunist -- opportunistic locations, and that's where we end up with our -- that EBITDA range. And then we're trying to continue to distance ourselves from the competition by differentiating ourselves in our programs. And the things that we do in our plants, other suppliers, processors just don't do. And that's more of a branded mentality.