Sales of $1,107.0 million for the fourth quarter slipped 2.1 percent from last year, or 0.7 percent after adjusting for the impacts of divestitures and foreign exchange, due to lower volumes, which were partly offset by higher pricing. For the year ended Dec. 31, 2013, sales decreased 3.2 percent from the prior year to $4,406.4 million, or 1.6 percent after adjusting for divestitures and foreign exchange, due to the same factors.
Meat Products Group sales for the fourth quarter declined 1.1 percent to $742.7 million from $751.4 million last year. Increased prepared meats volumes and higher pricing in fresh pork more than offset lower pricing in fresh poultry and lower fresh pork volumes.
Full-year sales declined 4.0 percent, or 2.1 percent after adjusting for the impact of divestitures and foreign exchange, primarily due to lower volumes in the fresh pork and prepared meats businesses. Partly offsetting this was the benefit of higher commodity prices in fresh pork, price increases in the fresh poultry and prepared meats businesses and higher fresh poultry volumes.
Adjusted operating earnings for the fourth quarter declined to a loss of $42.6 million compared to adjusted operating earnings of $42.6 million last year. Company executives report the business is in a peak phase of completing its prepared meats strategy, designed to establish a low-cost supply chain and achieve structural margin expansion. Earnings were significantly impacted by the cost of commissioning five new facilities, resulting in transitional costs of approximately $15 million during the quarter and approximately $50 million for the full year. Start-up costs at newly expanded facilities in Winnipeg, Manitoba and Saskatoon, Saskatchewan, decreased compared to the third quarter of 2013; however, this was offset by higher overhead costs associated with commissioning the newly constructed plant in Hamilton, Ontario. In addition to transitional costs, the company also experienced other manufacturing and distribution inefficiencies associated with operating legacy plants in parallel until production is fully transferred to newer, more efficient facilities in 2014.
Prepared meats margins were also compressed by higher raw material and other input costs, as well as inflationary costs that were not fully offset by pricing. Selling, general and administrative costs were higher than last year, due to comparatively lower variable compensation expense last year. During the fourth quarter of 2012, the prepared meats business recognized $5.9 million in provision reversals related to re-assessments of environmental remediation costs on facilities planned for closure that did not re-occur in 2013. Higher volumes in the fourth quarter of 2013, particularly in the branded retail category, partly offset the above earnings impacts.
Earnings in primary pork processing were negatively affected by lower export margins, primarily to the Japanese market, lower volumes and declining values for by-product sales. These reductions were partly offset by lower selling, general, and administrative costs. Earnings in fresh poultry declined due to lower primary processing spreads and inflationary costs that were only partly offset by higher earnings from value-added sales.
"We are in a peak phase of executing our prepared meats network strategy, which added tremendous costs and inefficiency in the quarter as we ramped up five new facilities while continuing to operate our parallel older plants," iterated Michael McCain, president and CEO. "As expected, this is causing short-term earnings volatility, which was compounded by weak protein markets."
"For three years we have been building a new plant network, which entered a peak period in December of 2013 as we began commissioning Maple Leaf's single largest facility in Hamilton," McCain added. "Now the focus changes. From here on, our job is to get the new plants running at peak performance, transfer production from older, high-cost plants to new, low-cost plants, and close the older plants down. Once completed, later this year, we expect to start seeing significant structural margin expansion. We also expect more normal market conditions to unfold in 2014. Combined with our plans to pay down debt, invest in the business and return excess capital to shareholders, we believe Maple Leaf will be very well positioned to drive profitable growth and deliver strong shareholder value."
