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

Good morning, everyone. Thank you for joining Canada Packers First Quarter 2026 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] 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 within 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 currently 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 first quarter 2026 financial results. The press release as well as our first quarter financial statements and management's discussion and analysis were 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. We also posted the quarterly investor presentation on our website, which can be found under the Investors tab under Events and Presentations. I would now like to turn the call over to Mr. Organ, President and Chief Executive Officer of Canada Packers. Dennis, the call is yours.

Thank you, Annemarie, and hello, everyone. We delivered a solid first quarter, and the results reflect the same things we have said from the beginning will drive our business. We run a transparent company. The key variables that move our earnings are visible in public market data, and our job is to manage the controllables and execute. This quarter played out that way. Let me start with volume. Canada Packers continues to have a capital-light path to growth because we still have room in our existing plants. In the quarter, hog processing volume grew 2%, supported by continued improvement in on-farm performance and across the supply chain. That brings us to approximately 80% of existing capacity today with meaningful room to continue growth within our current network. While hog volume will move quarter-to-quarter with normal seasonality, we remain on track to deliver annual volume growth within our 2026 target range of 2% to 3%. Now, profitability. In the quarter, we delivered an adjusted EBITDA margin of 9.8%, which is within our normal operating range. That reflects strong execution on our farms, in our plants, and across the supply chain, along with the benefits of our premium value-added product portfolio and optimized global sales mix. Commercial execution remains a key driver of our performance. We continue to sell a better mix of products to a better mix of markets by optimizing the whole hog across our customer base and placing each cut with the customer and geography that delivers the best value. Our business is agile, and that allows us to shift volumes towards the most attractive markets as conditions change. That flexibility is what supports durable profitability. That performance also translated into free cash flow, which we used to pay down debt and support a leverage ratio that remains within our strategic range. Disciplined and balanced capital allocation will continue to be a hallmark of Canada Packers. Our priorities are clear: strengthen the balance sheet, build financial flexibility and return cash to shareholders in a sustainable way. Overall, this was a solid quarter and another step forward in our Chapter 1 plan, fill our plants, continue to improve operational execution and use free cash flow to strengthen the balance sheet and position the business for Chapter 2 opportunities over time. With that, I will turn the call over to Deepak.

Thank you, Dennis, and good morning, everyone. I'm pleased to report on our financial results for the first quarter 2026. As Dennis mentioned, we delivered strong year-over-year performance in the quarter, demonstrating the durability of our highly profitable business model through market cycles. As a quick reminder, until we reach the anniversary of Canada Packers independent operations, I will be comparing our current results against estimated pro forma numbers, which we believe better reflect our operating performance. Total sales for the first quarter of 2026 were $428.3 million, a decrease of 0.6% or approximately $3 million when compared to pro forma first quarter 2025 sales. The change in Q1 sales was driven by higher volumes, offset by currency headwinds. Our Q1 hog processing volumes improved to 1.07 million hogs, a 2% increase compared to the prior year. In the first quarter, about 49% of our hogs processed were internally sourced and 51% were purchased from external suppliers compared to 46% and 54%, respectively, in the prior year. We reported adjusted EBITDA for the quarter of $42.1 million, representing a decrease of approximately $2 million or 4% when compared to pro forma first quarter of 2025 adjusted EBITDA. The Q1 adjusted EBITDA margin of 9.8% was a 50 basis point decline over our Q1 2025 pro forma margin of 10.3%. Despite significant currency headwinds in the quarter, a slight decline in year-over-year profitability underscores the durability of our business as we benefited from increased hog volumes, strong on-farm and supply chain performance and targeted sales of our global customers. During the first quarter, we invested $5.3 million in capital compared with $7.9 million in the first quarter of prior year, while generating free cash flow of $14.8 million. On to the balance sheet, and in line with stated priorities, net debt atthe end of Q1 2026 was $428.6 million, including lease obligations of $88.3 million as strong cash flow from operations allowed us to repay $10 million towards our bank loan. This resulted in a leverage ratio of 2.3x based on trailing 12 months pro forma adjusted EBITDA and is within our strategic range. We are pleased to announce our Q2 dividend of $0.23 per share to be paid out on June 30, 2026. This reflects the durability of our profitability and our continued focus on managing the controllables to generate strong free cash flow and deliver value to our shareholders. I'll now turn the call back over to Dennis.

All right. Thank you, Deepak. Overall, our first quarter performance reflects disciplined commercial and operational execution and continued progress on the commitments we have made to all stakeholders. As we continue to execute, how we do it matters. proudly raised responsibly made is our purpose, and it guides the decisions we make across the business. We will continue to run a transparent business focused on durable earnings, conservative financial management and doing exactly what we said we would do. With that, we will open the call for questions.

[Operator Instructions] Your first question comes from Irene Nattel with RBC Capital Markets.

A couple of questions just sort of around the production itself. So the target for this year is 2% to 3% increase in hogs processed. We had 2% in Q1. How should we be thinking about the evolution as we go through the year? And then secondly, just in terms of operational efficiency and initiatives there, if you could talk us through where you are at this point in the year and how -- what we should be expecting as we move through the year?

Irene, yes, so hog volumes, remember, it's going to be a little lumpy just because of the timing to bring in live animals and things like that. We're really comfortable with our 2% or 3%. The thing we want to remind you is Q4 has an extra week. So Q4 will be even higher this year. But feel good about the total number, and there could be some shift back and forth in quarters, but we're in really good shape for that in that number. Operational efficiencies, the way I would think about it is mostly -- lots of initiatives, but mostly inflation offsetting initiatives at this point. We're not signing up for any significant cost reduction things, but well in line, feeling really good about our internal improvements and new management team coming together.

That's great. Can I just -- can I ask a follow-up on the inflation offsetting? How should we be thinking about the increase in fuel prices and any impact on the business?

Yes. So fuel, we knew this question was coming. And so it shows up in a couple of different places. So one, there will be some short-term pressure on fuel when it comes to customer deliveries and the fuel we use on the farms and we'll sort of talk more about that as it plays out, working really hard to pass on what we can, and there's some -- just some realities about timing there. Two, as far as the impact that it will have on the feed, the input futures, I guess I would just -- or the input, I would just point you to the futures because that will tell you sort of what the market is thinking, and that's the best indicator going forward. And the other place that can show up as an inflationary pressure is on packaging items. But we feel like this is some short-term positioning over the next -- this quarter and maybe the next as we figure some things out, pass on what we can. There'll probably be some short-term impacts that will overcome long term and then some of the bigger things you'll show up -- you'll see show up in the futures market.

Your next question comes from Luke Hannan with Canaccord Genuity.

Dennis, I wanted to follow-up on that last line of questioning, I guess, just on the futures. We know, of course, that corn is a big input for you guys. We have seen corn costs or the corn futures pick up a little bit from here. We know that you have a pretty robust risk management program in place. But can you just, I guess, explain for us or help us understand, even though corn costs are higher, you guys are a little bit hedged. But what else are farmers contending with beyond just higher cost of corn? In other words, what other potential levers would they have to offset higher cost of corn that could ultimately maybe make the spike in corn costs come in lower than expected?

Yes, that's a great question because one thing we say is a structural differentiator that we have is our location. So we're located in the prairies around feed and around a lot of supply. So where that shows up is our ability to procure grains in close proximity to our production is an advantage. Their ability to get more bushels per acre or plant more acres. I guess what I would point to is look at Manitoba acres planted year-over-year, you'll see some positive things there. Look at bushels per acre, you'll also see a lot of positive things there, all with the potential to offset any cost impact. Productivity could potentially offset all cost impact.

Your next question comes from Etienne Ricard with BMO Capital Markets.

It's interesting to see the increase in internally processed volumes this past quarter. Can you help us understand what is driving this improvement between better farming practices relative to procurement efforts?

Yes. Okay. That's exactly it. So our goal is to grow at 2% or 3%. We've always said we feel really comfortable about that. Most of the early wins are operational improvements over the last so many years showing up in the marketed hogs. We also feel just as equally positive about our ability to procure incremental hogs going forward. So short term or the most recent quarters have been internal operational excellence, but we also feel good about our ability to procure outside things as well.

And is the 49% achieved in Q1 a sustainable rate going forward?

I wouldn't get so fixed on that mix. Roughly right, it's the mix that we want. It can be somewhere between 45% and 55% up to obviously 49%, 51%. It's timing. It's going to have the biggest impact on those. I think the thing to think about is we need to make sure that we're raising hogs in a competitive way, and that is showing up in the markets that we have. And in order to achieve our plan, we need to be able to procure hogs on the outside, and that is happening as well. So don't get so focused on exactly that number, especially on a quarter-over-quarter basis because it will float a little bit. But we're in the neighborhood we want to be in.

Okay. And longer-term question, we know Packers is targeting utilization north of 90% over time. What are the implications from a labor perspective? As I presume this implies adding some shifts or maybe making additional hires. So what is your confidence level that Packers will have the labor force to achieve this target over time? And how do you think about the marginal labor cost?

Yes. Let me be clear on this. The reason it's such a compelling growth, it's a capital-light growth, meaning we will not have to invest capital, and it's causing inefficiencies today because the labor is there and it's not fully utilized. The reason it's so compelling to capture this growth is the cost is for the most part, already there. We're not committing to any number where this initiative is going to end. We're really comfortable that this 2% to 3% growth is going to continue for the next 3 years or so. We'll continue to revisit to make sure that it's accretive to our cash flow generation desires. But it's really a unique opportunity for pork company, a public pork company, especially in North America. It's something that significantly differentiates us from the other offerings.

Your next question comes from Michael Van Aelst with TD Cowen.