Maple Leafs Foods Inc. 2012 Annual Report

In late 2010 we announced that we were implementing a strategic plan to step-change our profitability and competitiveness from 2011 through 2015. Throughout 2012 we were unrelenting in our execution of this plan and our determination to accelerate our position as one of Canada’s leading food companies.

The past 12 months have been marked by escalating food inflation, challenging food companies globally. Despite this, I am pleased to report that we made solid progress in both our base businesses and our strategic initiatives.

During 2012, we achieved an EBITDA margin of 8.6%, compared to 8.0% in 2011 and 7.2% in 2010. We also maintained a strong balance sheet and a debt to EBITDA ratio of 2.8x. We remain confident that we will achieve our long-term EBITDA margin target of 12.5% in 2015.

Our adjusted operating earnings were $280.0 million compared to $259.0 million in 2011. Adjusted earnings per share were $1.06 compared to $1.01 last year. While we know we are doing the right things and our strategies to increase profitability are working, we did not fully deliver the targets we set for ourselves last year. Our performance was significantly impacted by challenging pork markets and lower consumer demand in fresh bakery. We achieved solid improvements in almost every other aspect of our consumer-facing businesses. Throughout the year we strengthened our ability to expand margins through innovative products and marketing programs – strengths that are fundamental to our long-term growth.

WHAT’S AHEAD IN 2013

We have an aggressive agenda for 2013. Our key planks for earnings growth include improvements in bakery and prepared meats, underpinned by strong innovation, marketing and sales execution, and continuing the steady execution of our strategic plan.

Over the coming year, we will significantly increase our capital investments as we continue to build scale and deliver margin growth across the Company. We plan to spend approximately $485 million in 2013, primarily to complete the construction of our new prepared meats facility in Hamilton and the new Eastern Distribution Centre.

We anticipate continued major growth in our prepared meats business driven in part by our transformation initiatives, but also by the contribution from higher value innovation and category expansion. Product extensions hit the stores early in 2013 as we continue to expand our very popular Maple Leaf® and Schneiders® Country Naturals™ lines into other categories. Commissioning of our expanded facilities in Winnipeg and Saskatoon will also continue, with production transferring from other facilities, and our plant in North Battleford scheduled to close in the first half of 2013.

While we have invested significant time and resources to determine and implement the best path to optimize value in our Protein Group, our Bakery Products Group has not benefited from the same comprehensive strategic focus. We are developing a strategic blueprint to realize the full growth and earnings potential of our Bakery Products Group. This includes growth platforms, geographic diversity, category diversification and cost reduction opportunities. This plan will establish a clear path to realizing higher levels of growth and profitability across these businesses.

We will also launch our transition to a business services model, which is where the most tangible near-term gain from our SAP implementation will occur. Today we provide essential internal services to support our businesses from multiple locations. Over the next couple of years, we expect to realize significant and sustained business and financial benefits through centralizing and enhancing how we deliver many of these services.

Embedded within many of our transformation initiatives are opportunities to advance our sustainability platforms: creating a safe and rewarding workplace, reducing our environmental impact, improving the safety and quality of our food products, increasing our scale and competitiveness, enhancing the nutritional benefits of our products, and engaging with our communities. To establish a benchmark and build upon the transparency that is one of the hallmarks of our values, we are publishing our first sustainability report in 2013. The discussion of our accomplishments, challenges and opportunities is supported by data on a wide range of areas that advance our sustainability. I encourage you to download our report at www.mapleleaffoods.com/sustainability.

DELIVERING A STRONGER RETURN TO SHAREHOLDERS

Over the past four years we have successfully transformed our hog and pork processing business, executed strategic transformation initiatives across our bakery businesses and rolled out an integrated SAP system across a large portion of our Company. In 2012 we launched a number of initiatives within our value creation plan, primarily in the prepared meats business. We expect much of the construction phase of that plan to be completed by the end of 2013.

The final year of our plan, 2014, will be one of consolidation. We will close four prepared meats plants and consolidate higher volume production into four scale manufacturing facilities – Brampton, Hamilton, Saskatoon and Winnipeg – and distribution centres in Saskatoon and Guelph.

We’ve already seen the results of our ambitious plan, driven by higher productivity and yields and lower aggregate overhead:

Consolidating production at efficient scale facilities will continue to increase productivity to levels consistent with those achieved by global consumer packaged food companies
New technologies and equipment are increasing yields and supporting innovation and food benefits
Overhead costs will decline further as we consolidate operations at multiple smaller facilities and migrate to a centralized shared services model

We’ve said consistently that we are committed to maintaining an investment-grade balance sheet and a disciplined approach to capital investment. We have sufficient capacity to fund our base and strategic capital requirements and provide acceptable levels of liquidity, supported by continued earnings growth. The maturities on our debt extend beyond the plan’s peak spending periods, with the next significant maturity in 2014.

While cost reduction will yield the greatest improvement in our near-term margin expansion, growing our market share through innovative products, compelling marketing and excellent sales execution is critical to driving profitable growth over the longer term. We have developed much deeper bench strength and focus in these areas, which will accelerate our earnings growth well beyond 2015.

LOOKING FORWARD

We are heading into a challenging year, in part because of the sheer magnitude of the task that lies ahead of us as we continue our transformation. We know that we have the right plan for our Company and that our strategies are working. But these complex change initiatives are not without challenge or risk. We have identified potential threats and developed mitigation strategies for each one. Our execution to date has been very successful.

At the same time, we are also entering a period of escalating food costs. The USDA has predicted a potential 3% to 4% increase in food costs in 2013 as a result of the worst drought in the U.S. Midwest in 50 years. This will be a challenging, but manageable, issue. We’ve faced significant food inflation before and we’ve demonstrated that we can manage rising input costs through strategic buying, responsible price increases, innovation and diligent cost management.

The transformational changes underway at Maple Leaf are essential to our business, but will impact many people who have committed their loyalty and hard work to our Company. We deeply regret the consequences and will treat them with utmost respect and fairness, while working with affected communities to create other sources of employment and taxation.

The final phase of our strategic plan is the most significant contributor to earnings growth. The culmination of our efforts will be a significantly more profitable and competitive company. We acknowledge daily the trust our shareholders place in us and we are committed to rewarding that trust with results.

Sincerely,