Maple Leaf Foods Inc. (OTCPK:MLFNF) Q2 2022 Results Conference Call August 4, 2022 8:00 AM ET
Company Participants
Mike Rawle – Investor Relations
Michael McCain – Chief Executive Officer
Curtis Frank – Chief Operating Officer
Geert Verellen – Chief Financial Officer
Conference Call Participants
Irene Nattel – RBC Capital Markets
Mark Petrie – CIBC Capital Markets
Michael Van Aelst – TD Securities
Peter Sklar – BMO Capital Markets
George Doumet – Scotiabank
Derek Dley – Canaccord
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Maple Leaf’s Second Quarter 2022 Financial Results Conference Call. As a reminder, this conference call is being broadcast live on the Internet and recorded. All lines have been placed on mute to prevent any background noise. Please note that there will be a question-and-answer session following the formal remarks. We will go over the instructions for the question-and-answer session following the conclusion of the formal presentation.
I would now like to turn the conference call over to Mike Rawle, Investor Relations at Maple Leaf Foods. Please go ahead, Mr. Rawle.
Mike Rawle
Thank you, Michelle, and good morning, everyone. Speaking on the call this morning will be Michael McCain, Chief Executive Officer; Curtis Frank, Chief Operating Officer; and Geert Verellen, Chief Financial Officer.
Before we begin, I would like to remind you that some statements made on today’s call may constitute forward-looking information and our future results may differ materially from what we discuss. Please refer to our second quarter 2022 MD&A and other information on our website for a broader description of operations and risk factors that could affect the Company’s performance. We’ve also updated our Q2 investor deck to our website, which includes support material for the quarter. As always, the Investor Relations team will be available after the call for any follow-up questions that you might have
And with that, I’ll now turn the call over to Michael McCain. Michael?
Michael McCain
Thank you, Mike, and good morning, everyone, and welcome to Maple Leaf Foods second quarter 2022 earnings call. So this past quarter is one of stark contrast, incredibly chaotic operating environment, yet a very sound business that remains, in our view, structurally on target. When we spoke to you last in May, we told you that we expected a significant recovery in our second quarter meat segment margins. I do recall highlighting the caveat that our capacity to predict in this environment is dubious at best. But obviously, the significant recovery did not come to pass. My goal this morning is to clearly and succinctly explain to you why and what we’re doing about it.
On a macro level, and I’m seeing this in almost every single sector of the economy, the post-pandemic economy is materially more challenging operationally than even during the pandemic itself. Of course, this is exacerbated by the conflict in Europe in our industry. But the core drivers of extreme labor instability, hyperinflation and unstable agricultural markets has created an historically unprecedented situation that I’ve not seen in my 40-plus year career in this industry. It would be incorrect — incorrect to ascribe this to normal cycles of our or any other industry. While we’ve not seen stabilization yet, I personally do not see this environment being with us for long either.
So let me be perfectly clear about the factors that impacted our meat protein results in the second quarter. We faced three core obstacles, people, pork and pricing. I repeat that, people, pork and pricing. On people, we created an absenteeism problem in Q1 for a vacancy problem in Q2 with a severe labor shortage in Canada and the country at essentially full employment, we struggled to fill over 1,500 vacancies. That’s over 10% of our workforce. The labor shortages and even worse, the continuous churn in our population, limited our ability to consistently meet demand for our highly valued products, it increased our reliance on overtime and temporary labor. It added cost to our onboarding and turnover, and it weakened our productivity.
On pork, we saw intense disruption in the global agricultural markets due to the ongoing impacts of COVID and the tragic conflict in the Ukraine. There was a confluence of forces at play, including the dramatic rise in feed costs, notably higher in Manitoba than other North American regions. Material contractions in the Chinese pork imports that placed pressure on other markets, high meat values, which disproportionately affect the Japanese market, a mainstay for the Canadian industry, a following Japanese yen, exploding ocean freight costs and weak pork packer margins. The fact that any of these occurred is not significant to us. The fact that they all played out at the same time, and they all persisted for considerable time is significant.
On pricing, I want to be crystal clear here. We have the ability to properly price for inflation in our business. We’ve demonstrated that. We have #1 brands and leading-edge revenue management skills. But what we do not have is the ability to increase prices speculatively for things that might happen or speculative cushion, so to speak, certainly in the short term. Our struggle has simply been to keep up with the magnitude of price increases required. We think we’ve nailed it at one moment only to realize the next wave. The pricing actions that we took in the second quarter successfully covered the inflation we anticipated, but we now know it was inadequate to cover the inflation levels that actually materialized new during the quarter, mostly in freight surcharges and costs, some in packaging ingredients and various overhead components.
So what actions are we taking? For sure, we are not standing still hoping, just simply hoping for a sunnier day even though we feel this environment is short term and transitional. For example, we have taken steps to materially increase our hiring capacity in a challenged people market such as this, the old suite of hiring tactics simply isn’t adequate, and we are accelerating our activity. It is getting better, but we have much more work to do.
Number two, while we cannot influence global markets that affect the pork business, we are taking steps to optimize our position inside these markets, including pricing action where it’s possible, freight cost optimization and moving volume to more lucrative opportunities where they can be found.
And number three, we are taking another round of pricing in our prepared meats business in Q3, another route.
Although we have no crystal ball and things are wildly unpredictable, the situation we are seeing is showing early signs of abatement. The global agricultural markets are showing some signs of stabilizing. In June, the economy shed jobs, and we expect this recessionary trend to increase our hiring capacity. To be very clear, a good recession is our friend at Maple Leaf Foods. And our volumes have held up incredibly well under the circumstances. I know we will catch up to a new stable level of inflation, even though the pricing action that we took has not been enough, it has been very effectively executed and absorbed, and we believe the next round will be also.
In the face of this volatility, as you can see, our meat protein performance fell short this quarter. Yet, I don’t want to lose sight of how successful the underlying strategies have been in our meat protein business over multiple years, including our focus on sustainable meats, our brand development and branded product market shares and expansion into the US markets.
These strategies are and will continue to drive us towards our meat protein target of 14% to 16% adjusted EBITDA margin structurally. It’s really important to recognize that from its inception, this target was based on normal market conditions. Since inception, this target was based on normal market conditions, including a pork complex in line with five year averages. We have not and we will not waver from that target. And we believe that as soon as conditions normalize, we will be on track to that target. While I don’t feel it would be responsible to predict when things will normalize and stabilize in these conditions, we do believe that we are seeing early signs of improvement.
I also feel it’s important today more than ever to focus on the long game here. Our Maple Leaf blueprint continues to create the structural improvement in the business that we aspire to. It continues to be relevant, and we’re doing what we can to accelerate and elevate every aspect of this blueprint.
Our business grew by 5.6% in the meat segment in the first half of 2022, and we produced over $200 million of adjusted EBITDA. I would encourage you to look at this in these conditions in historical context.
And number three, we are entering a new phase of harvesting the returns of several years of aggressive investment. We’re extremely proud of the resilience of our business despite an environment under deep stress.
Turning to our plant protein business. We are in full motion as we transition the business model back to one of profitable growth. I’d like to refresh you on the objective of this action. We used to believe in a transformational category outcome, and we used to believe in a transformational level of sustained growth towards that outcome. We built a business model and an investment plan around that premise. This transformational outcome did not materialize.
We now understand why it did not materialize, and we no longer believe that it will materialize. So we are altering our business model and dialing back our investment to reflect the goal of profitable growth and one that is actually in line with our views when we first acquired Lightlife in 2017. We are transitioning the business into profitable growth, which is essentially a straightforward exercise of sizing the shoe to fit a new foot, plus an overlay of revenue management in response to the current inflationary pressures.
There are three aspects to this: rightsizing the SG&A, rightsizing the manufacturing footprint and normalizing the revenue management, taking into account this inflationary environment. We plan to have SG&A right sized by the end of this year 2022 and have already taken steps to achieve that. So far, we decreased advertising and promotional spend to match projected category growth rates and have reduced the size of the Green Leaf organization by 25% already. These actions on their own — these actions on their own will close the gap on adjusted EBITDA by $50 million or about 50% of the journey that we need to complete.
We expect most of the manufacturing footprint will be in line by the end of the first half of 2023, as we migrate some of the excess capacity we have been holding for Greenleaf to growth opportunities in the meat business, particularly further processed poultry, and we are ramping up the new Tempeh facility in Indiana.
Finally, we are systematically making revenue management adjustments over the next 12 months, which gives us the back half of 2023 as a buffer to make fine-tuned adjustments towards the target of adjusted EBITDA neutral or better. Of course, the category itself has continued to struggle during the quarter. But we feel, along with others, that this is just noise and it will settle into the long-term growth rate of 10% to 15%, particularly supported by a robust innovation agenda.
So we live in interesting times today. Despite the extreme operating conditions across the board, we remain focused on advancing our strategies and controlling what we can and maintaining our focus on executing our blueprint to become the most sustainable protein company on Earth.
I’m now going to turn the call over to Curtis and Geert, who will unpack our operational and financial performance in more detail.
Curtis Frank
Thank you, Michael, and good morning, everyone. As you heard in our opening comments today, our second quarter results were clearly not at the levels we would like to see or expect of our business. However, as Michael pointed out, we do not operate in a vacuum. The transitory volatility of the current operating environment has, without question, impacted our business in the near term in the areas of people, pork and pricing.
As experienced operators, we have faced diversity and volatility in our past, and we have persevered. And this time is no different. Our blueprint has proven resilient. We will manage through these turbulent times, and we will, in fact, emerge stronger.
In the near term, our focus is set squarely on optimizing the short-term performance of the business. We are agile. We have adapted and we will continue to adapt. We have taken decisive actions to offset and to mitigate the impacts of a world that is under extreme pressure.
At the same time, we are not losing sight of the importance of executing our long-term strategies, operating targets or capital investment plans, and we remain completely confident that Maple Leaf Foods is well positioned to deliver value for the long-term. The success of our blueprint to-date is the foundation of that very confidence.
In meat protein, the strategy is threefold: continued investment in our market-leading brands while leveraging the sustained benefits of our brand renovation; growing our suite of sustainable meat offerings and expanding our geographic reach, particularly into the United States. Despite the chaotic environment around us, each one of these three core strategies is delivering and contributing to growth. Overall, our meat protein business delivered year-over-year revenue growth of 3.8% in the quarter. And importantly, this growth was led by our prepared meats business, which grew at over 8%. Overall, our packaged goods portfolio continues to perform extremely well in this inflationary environment.
Consumer demand for our products remain strong. We are not seeing much evidence of a trade-down effect and the volume response to our pricing in Q2 has been in line with or better than we had anticipated. Within prepared meats, we saw market share growth in our flagship Maple Leaf brand as well as our Mina Halal brand.
In poultry, our branded share grew nearly 200 basis points, also led by our Maple Leaf and Mina brands. This is a testament to the strength of not only our brands, but also the efficacy of our revenue management discipline. We also continued to see strong demand and growth across our margin-accretive sustainable meats platform, which contributed positively to our sales mix this past quarter.
As we have shared previously, our sustainable meats business is now generating over $700 million in annual sales, and our sustainable meat sales within prepared meats grew at 17% this past quarter. We delivered double-digit growth in the United States, led by our Greenfield brand, where sales nearly doubled within the quarter. We continue to see a long runway for growth within this high-margin category as sustainable meats represents only a fraction of the market today and is growing rapidly at double-digit rates in both Canada and the United States.
Lastly, we continued to build on a momentum in making deeper inroads into the U.S. market. In Q2, we grew our meat protein revenue in the U.S. by over 10% on a year-over-year basis. Over the past several years, we have steadily grown our business in the U.S., which is a large and lucrative market for us. We continue to grow our product distribution in the U.S. market. Our products are now available in over 18,000 U.S. stores and our Greenfield brand can also be found in over 13,000 stores in the United States retail market.
Turning to our plant protein business. After growing sales by just over 5% in Q1, we delivered a year-over-year decline of 18% in Q2. The refrigerated plant protein category continues to face pressure with POS sales declining at 12.5%, impacting our own results. Greenleaf POS sales this past quarter performed nearly exactly in line with the refrigerated category, declining at 12.4%.
Since Michael has already provided you with an update on the progress we have made towards achieving our commitment of an adjusted EBITDA margin of breakeven or better in the back half of 2023. I’ll simply summarize by echoing Michael’s remarks. We are, in fact, on track.
With the actions that we have already put in place, we are $50 million or about halfway complete on the journey to break even. And since we last met, we have taken a material step forward toward achieving our goal of profitable growth. Our expectation continues to be that we will achieve our adjusted EBITDA target in the back half of 2023.
Before handing the call over to Geert, I wanted to touch briefly on the progress we have made in advancing two of our most important capital projects, so that we ensure we do not lose sight of the transformative benefits that these projects will provide to Maple Leaf Foods and to our shareholders.
Our London poultry project has progressed tremendously, and we are extremely proud of how this world-class facility is shaping up. The level of planning that goes into a project of this size is nothing short of impressive, and we are thrilled to see our organization rally around this important milestone for our company.
The start-up of this plant is now in sight, and our teams are gearing up for the exciting phase of wet testing, which will begin later this summer. Through the combination of the cost reduction that comes with consolidating three facilities into one, creating additional capacity to grow our profitable value-added sales and investing in world-class technology to drive operational efficiency. The London poultry project will deliver an annual benefit of approximately $100 million of adjusted EBITDA or 200 basis points of EBITDA margin expansion once fully ramped up, which we expect to be complete by the end of 2023.
Similarly, our Bacon Center of Excellence is another strategic capital project that is now in the ramping up phase. With consumers ever growing demand for pre-cooked Bacon, we have completed the construction of $182 million, 73,000 square foot expansion at our Lagimodiere facility in Winnipeg, Manitoba. This will increase our in-house capacity, improve our operating efficiency and drive product innovation to allow us to meet growing customer and consumer demand for pre-cooked bacon products. Once fully ramped up in the second half of 2023, our Bacon Center of Excellence will add an incremental 60 basis points or $30 million to adjusted EBITDA in our meat protein business.
Over the past 2.5 years, operating in the COVID-19 pandemic has brought on what is seemingly a never-ending strain of disruption and stress to our operations and to our people. Together, we have faced a confluence of challenges unlike we have seen in our history. I continue to be proud of our team who have been unrelenting in their focus to protect the health and safety of our people to ensure the continuity of our business and to contribute to the communities in which we operate.
I’ll close by thanking and acknowledging the Maple Leaf team who have exhibited enormous resilience, commitment and creativity as we progressed on the path toward becoming the most sustainable protein company owners.
With that, I’ll turn things over to Geert.
Geert Verellen
Thank you, Curtis, and good morning, everyone. I will begin by discussing the Company’s consolidated performance during the second quarter. I will then turn to a more detailed look at both our meat and plant protein groups, and I will conclude by speaking to some key financial metrics, capital expenditures and our outlook for the remainder of 2022.
Sales in the quarter were $1.2 billion, an increase of 3.1% from last year as favorable pricing and mix in the meat business were partially offset by lower home volumes processed and lower plant protein sales. Pricing actions implemented at the beginning of the quarter to mitigate inflation, more than offset lower volumes.
Adjusted EBITDA was $74.1 million, a decrease of $31.6 million from last year. This decrease was driven by market headwinds, rising labor and production expenses due to inflation, lower gross profit in our plant business and higher feed costs, partly offset by price increases. The adjusted EBITDA margin was 6.2%, a decrease of 292 basis points from last year.
Net earnings in the quarter were a loss of $54.6 million or a loss of $0.44 per basic share compared to earnings of $8.8 million or earnings of $0.07 per basic share last year. I would like to unpack this net loss for a second as it is driven by a number of factors that we believe are not reflective of our underlying business and that we, therefore, exclude from adjusted metrics when talking about financial performance.
First and most notable is a $50 million noncash decrease in the value of our biological assets in the meat business, resulting from a decrease of hog prices in the quarter. These bio assets are mostly comprised of our hog stock and their value is based on the fair market value of similar hogs. As these markets go up and down, so does the value of our bio assets.
Second is a $19 million restructuring charge in our plant protein business, of which $60 million is a noncash asset impairment and $3 million is severance and other related costs. These are the result of the actions we are taking to turn the brand protein business to profitability.
Thirdly, we incurred start-up expenses of $11.3 million from the ramp-up of our newest capital projects in London, Winnipeg and Indiana, which are progressing smoothly. As mentioned in prior quarters, these start-up expenses are part of the respective solid business cases for each of these projects, and they are temporary in nature.
Finally, and partially offsetting the charges that I mentioned is an unrealized gain on hedging derivatives of about $11 million. We would like to point to Section 20 in our MD&A, non-IFRS measures for a summary of these outlooks. After adjusting for all of these elements, adjusted earnings were $0.00 per share for the quarter as opposed to the loss per share of $0.44.
I’ll now turn to a discussion of Maple Leaf’s two operating segments. As Curtis mentioned, sales in the meat protein segment increased 3.8% to $1.2 billion in the quarter. The increase was driven by pricing actions implemented in prior quarters to mitigate inflation and structural cost increases, and a favorable mix shift, including growth in sustainable meats partially offset by lower volumes in price-sensitive categories.
Meat Protein adjusted EBITDA was $104.1 million compared to $131.2 million in the prior year, representing a decrease of $27.1 million. This decrease was driven by market headwinds, labor and materials inflation and availability and higher feed costs, partially offset by pricing actions. Adjusted EBITDA margin for the meat segment was 9%, a 277 basis point decrease from last year.
Turning to plant protein. Sales were $40.8 million, a decrease of 18.4% in constant currency compared to the same quarter a year ago. The decrease was driven by lower retail volumes as consumers adjust to higher prices, partially offset by higher food service volumes, as well as, pricing action to offset inflation.
Plant Protein gross margin was a negative 24.7% in the quarter as a result of low sales volumes, low capacity utilization, raw material inflation and start-up expenses. As we mentioned in previous quarters, gross margin continues to be heavily impacted by the capacity investments we have made ahead of anticipated growth.
Gross profit for the quarter also included start-up expenses of $2.3 million associated with construction capital projects related to our Indianapolis Tempe facility, which are excluded in the calculation of adjusted operating earnings, as we just mentioned.
SG&A expenses and plant protein were $26.3 million, a decrease of approximately $3.5 million from a year ago, driven by lower advertising and promotional expenses, partially offset by higher consulting and people costs.
Turning to the balance sheet. On the balance sheet, net debt increased to approximately $1.4 billion. This debt primarily relates to the over $1 billion in fixed assets, we have invested in our Bacon Center of Excellence. Winnipeg, the new Tempe facility in Indianapolis and of course, the new poultry facility in London. Winnipeg and Indianapolis are in startup mode, and London will start testing later this summer. In short, after years of investing, funded with debt, we are confident we will start to see the cash flow benefits of these projects drive down leverage levels once again.
During the quarter, we invested another $90 million in capital expenditures. This investment included about $52 million in construction capital, primarily related to the almost completed construction of the London poultry facility.
Our outlook regarding our big capital projects remains unchanged from the prior quarter. We expect the London poultry facility to be completed by the second half of 2022. And when fully ramped up by the end of 2023, this facility is expected to contribute incremental adjusted EBITDA of about $100 million annually. This state-of-the-art facility will increase our processing capacity for value-added higher-margin poultry products. It would also add operating efficiencies through lower costs and consolidation of three sub-scale plants into one at scale facility.
The plant construction is going as planned and wet testing, as Curtis mentioned, is scheduled to begin later this summer. The Winnipeg Bacon Center of Excellence expansion started producing salable product early this year. Once the ramp-up is completed, which we anticipate in the second half of 2023, we expect this plant will begin to add incremental adjusted EBITDA of about $30 million each year. The benefits will come primarily from improved operating efficiency and incremental capacity to meet the growing demand for pre-cooked Bacon.
During the quarter, we renewed our NCIB to repurchase up to 10% of the public float of up to 7.5 million shares through May 2024. We view share repurchases as an important way to return capital to shareholders, and we will be opportunistic in our buyback program.
I’ll wrap up with an outlook for our business for 2022. Our expectations are based on certain assumptions, primarily normal market conditions, including a poor complex in line with the five year average. In meat protein, we expect mid to high single-digit sales growth driven by continued momentum in sustainable needs, brand leadership and growth into the U.S. market. In addition, we now expect to achieve adjusted EBITDA margin expansion to a 14% to 16% target range once markets normalize.
Our CapEx expectations for 2022 remain unchanged at a range from $400 million to $500 million. Approximately 50% will be construction capital, mainly related to the London facility and other projects to add growth and capacity in the prepared meats business.
I will now turn the call back to Michael.
Michael McCain
So thank you very much, Curtis and Geert. Clearly, as you can see, we are living in very uncertain times where the ability to predict and anticipate is next to impossible. But we are agile, I think, excellent operators, and we’re doing everything we can to mitigate the short-term impacts of this current environment without certainly impacting our focus and our long-term commitment to the Maple Leaf Blueprint and our success that drives.
On our meat protein strategy, which continues to be relevant and robust, we are executing and seeking to improve our underlying business to deliver best-in-class growth in adjusted EBITDA. And in the plant-based business, we’ve made the decisions and are taking the necessary actions to achieve a breakeven in the back half of ’23. So we’re confident in the structural health of our business and remain committed to the blueprint of shared value creation with our vision to be the most sustainable protein company on earth.
So with that, I’ll open the line to your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Irene Nattel.
Irene Nattel
I mean that was a very comprehensive and fulsome review of the quarter. I was wondering if you could talk about the relative contribution of the three factors that you cited in terms of the pressure on profitability in meat. And how much of those can be mitigated by self-help measures?
Michael McCain
Of the three components, people, pork and pricing, I would argue the vast majority, if not all of that, is to some degree, connected and interdependent on market conditions. Certainly, we’re not the only organization in our society that’s struggling with people availability. I mean, I’m sure you’ve traveled recently or been to an emergency room recently, and you’ll see exactly the same thing. We are taking steps to improve our hiring capacity, but the ability to predict the time lines attached that are challenging. I would take you solely to the point that in our business, oddly, recession is our best friend, particularly in our ability to hire people and staff our supply chains.
In the case of the pork markets, they’re all, to some degree, uncontrollable, but I do think that there are things that we can and are doing to optimize it within that, within the pork markets. Things like negotiating different freight architectures, and we are seeing ocean freight rates and freight rates in general start to normalize and dial back, trying to optimize where we tap into the most lucrative markets in the world is part of the optimization. But the pork market conditions, whether it’s with a feed cost, the meat values, the Japanese yen weakening by over 20%. And all of these factors, Irene, are sort of — are out of our control.
In the case of the pricing, I’m pretty confident we’re going to get it sooner or later. We can’t price ahead of inflation, but we can price for inflation. We clearly got it wrong the last quarter in that we didn’t price enough for what actually occurred, but we’re executing another round of pricing in the third quarter, and that will catch up, whether it’s this quarter, I believe — I will always say — I believe we’ve gotten enough. I’ll always answer the question. Yes, I believe we have gotten enough. But from what we see today, but what happens in the next quarter from an inflationary perspective could be different.
Now most economic reports that I read, particularly those that are calling for some recessionary trend are also suggesting an abatement in that inflationary pressure. So I believe that we’ll catch up on that one. So teasing out the difference between the — between the — is very challenging, because they’re also interdependent [indiscernible] would be misleading for us to try and tease it out to give, but they’re all — all three of them are connected singularly to the environment that we operate in.
Irene Nattel
Understood. So let me try and get at this a different way. This is two quarters in which you’ve had a 9% margin. We understand that structurally, you should still be able to achieve the 14% margin. Unfortunately, we’re in a position where we need to forecast the trajectory from here to there. So based on what you’re saying, it sounds as though probably not much easing in Q3, maybe hopefully a little bit in Q4, but the words are pushing, let’s say — we’re pushing out the 14% by a year. Is that the best way to think about it? And again, Michael, as I understand the challenge, but this is what we need to get our minds around.
Michael McCain
Well, I know and Irene, I totally empathetic to your challenge. We felt that it would be irresponsible for us to offer predictions for you in this environment. I know that you have financial models that you would — that you need to try and make those predictions in. But our predictive capacity is fully impaired at the moment. And I just feel that whatever I tell you is going to be wrong. And we felt that, that was irresponsible to offer that up.
So we’re very confident that when this — when the conditions that underpin this in the pork markets in the broader economy normalize. We are structurally on track in our margins. And it’s very challenging for me to provide that predictive ability right now. And I know that’s frustrating for you. I understand that. I’m empathetic to that. But I’m going to resist offering an answer to that question.
Operator
Your next question comes from Mark Petrie.
Mark Petrie
Maybe, Michael, we could just hear a bit more about the volume trends in meat protein in Q2. Any details you can share? And also just perspectives about how shoppers are adjusting their purchase patterns and trading down amidst the elevated inflation?
Michael McCain
So we’re — it’s a great question, Mark, and it’s one that gives us really good confidence in the steps that we’re taking. We did see some volume contraction in the third quarter, as you can imagine, when you — the first quarter — the second quarter. When you can imagine the pricing — the magnitude of pricing that we took, there’s always an immediate volume implication in the short term. We saw that occur both in our primary pork business for different reasons, actually. We had the supply chain — the supply chain implications in the quarter affected our ability to process all of the hogs that we expected to. So we had a hog supply restriction in the quarter, which impacted our volumes in pork.
But in our core central packaged meats business, we did see some modest single-digit — low single-digit volume contraction in the quarter. But interestingly, so far in the third quarter and late into the second quarter and what we’re experiencing now in the third quarter is that’s been fully recovered. And in fact, coming into the mid-summer regions, we actually saw a tiny bit of growth, which is — which gives us great optimism at the market’s ability to absorb the price levels. I think that’s a reflection of the macro environment where these inflation rates are existing everywhere. So our relative value proposition hasn’t changed.
Mark Petrie
And can you comment at all about the volume trends with regards to between brands and private label? I know you’re prevalent in [indiscernible] category?
Michael McCain
Yes, brands is very much — we’re seeing no trade down.
Mark Petrie
And then also just with regards to the plans for the price increases, any commentary about how these vary across categories, and if you anticipate any difference in the reaction versus the other moves you’ve made over the last 18 months?
Curtis Frank
It’s Curtis. I’ll maybe take that one. In terms of execution in the marketplace, we’ve been — as Michael said earlier in his comments, we fully executed the pricing in line with our expectations in the second quarter and earlier in the year. And we don’t expect any materially different outcome in the third quarter. Pricing is moving forward. We’re having the appropriate discussions with our retail partners as we always do from an execution point of view and fully expect that by September, we’ll have implemented all of the pricing into the market that we had anticipated and pushed forward.
Operator
Your next question comes from Mike Van Aelst.
Michael Van Aelst
Just on the last pricing question, can you just clarify what the price increase was in meat at the beginning of Q2 and then what it is — what you’re pricing in September?
Michael McCain
It was in and around 5% in the second quarter in April, Mike and just under 4% in Q3.
Michael Van Aelst
The leverage ratio with three quarters of kind of tough earnings and continued CapEx, your leverage ratio looks like it’s around 4.8%, I believe. Can you help us understand where your covenants are, and what your — how your lenders are reacting to this and the less certain short-term outlook? And are you going to need some waivers to get through the next few quarters?
Geert Verellen
Mike, it’s Geert. The short answer to that is, no. The leverage ratio depends on what EBITDA you’re using. That’s number one. Number two is, we are in compliance with all the covenants. So we’re not worried about that. And number three, I would say, is the confidence of the lenders is evidenced in the fact that we have extended our credit facility just last month. So that’s one thing. Looking ahead, as we have mentioned a couple of times, our cash flow profile is going to change substantially. If you think about the heavy CapEx projects and CapEx project years that we’ve gone through over the last couple of years that is going to go away and then going to be exchanged for the cash flow that will be generated by those projects as they come online. So we look at that with a lot of confidence and there’s no need for waivers or anything else that you mentioned.
Michael McCain
Michael, the only color that I would add to reinforce what — because I’m not worried about it a bit. Our covenant today is — which you’re aware of, is net debt to capitalization and as another leverage ratio. So that’s an important fact. Number two is from a relative risk perspective, the debt that we have on the balance sheet, the vast majority of that debt is related to currently unproductive assets that are just in startup mode. It’s not structural debt that you would think of in a normal context of an operating business that is realizing its EBITDA potential against a structural debt load. It’s — the vast majority of that debt is connected to construction capital, which is by most risk managers lens is a significantly lower risk profile than normal structural debt. So well within our covenants and it’s important to understand the interpretation of that debt.
Michael Van Aelst
Okay. I understand the — where the debt is and what the outlook is for the margins. I’m not overly concerned about that part. I just don’t know exactly what your covenant is and what parts they look through?
Michael McCain
We’re very comfortable with that.
Michael Van Aelst
Okay. I’ll follow up after for some details, hopefully. On the labor situation, have you seen any progress since the end of Q2? Like when you talk about accelerating your activity and your efforts, what exactly are you doing? And then what’s the long-term solution to this, if, yes, an economic slowdown would — could help you, but then when the economy recovers, maybe you get that coming those labor — those employees leaving again to green or faster. So when — can you give us a bit more on your labor strategy?
Michael McCain
The labor strategy is to improve our hiring capacity. Hiring capacity is the critical unlock here. We have a team that is fully dedicated to accomplishing this. We are, for example, for the first time ever in our history actually, we launched in the first week of August, a very aggressive communication strategy to simply communicate broadly in the marketplace, what a great place Maple Leaf is to work with. So it’s active public recruiting for employment, something we’ve never done before in my entire history. We have — we are working on a range of access strategies like transportation systems, bussing things of that nature, Michael.
We are we have — we’ve — it ramped up our foreign temporary worker programs and access to those programs. Those are a few examples, but there is hundreds of very local initiatives as well that are being brought to bear. So the focus of effort is increasing our hiring capacity in these conditions. I think, and you and others in your industry, Michael, would probably be better at this than I, but I believe that most economists are anticipating some relief in a recessionary trend over the course of the next 12 months. As I said in my comments, we saw some initial signs of that in the month of June when the economy actually shed jobs.
And so, there’s obviously a lag time in our ability to react to that. And I think if you — whether you looked at it from a travel industry perspective or health care industry or quick service industry or food industry, I think everybody would hope that we would return to some kind of a normalized economy in that regard sooner rather than later. I hope that we would not conclude that this is the world that we know forever. Again, I would hope that’s not the conclusion. But finally, I would tell you that we are making the progress — we are making some progress. I think empirically, we’ve closed about 30% of the gap, 30% as we speak, but we still got more work to do.
Michael Van Aelst
And when you — just to clarify, when you’re saying improve your hiring capacity, are you just talking about the amount of people in HR that actually have the process applications and to onboard them or…?
Michael McCain
Correct. All of the above. That’s part of it. But hiring capacity is just like historically, we had people showed up at the door and we hired them. Right? In the new world, you have to go out and actively recruit people and find them and then make it easy for them to access your facility and educate them as to why this is a great long-term place to learn to work. So it’s a bit of a different environment in the near term, Michael.
Operator
Your next question comes from Peter Sklar.
Peter Sklar
Michael, in your discussion, you outlined the major factors — the agricultural market factors that are having a negative impact. Just wondering if you could go through the major ones. And explained fundamentally what’s your interpretation of what’s happening in markets to cause these issues and where we stand today, have things improved or they’re similar to where they were in Q2. And when I talk about the major factors, I mean, you highlighted feed prices, which is having a impact on hog prices. And I guess, the packer margins. So if you could just review those and give us your thoughts on where you think we’re going and where we’re at now?
Michael McCain
Sure. Well, I’ll start with the core drivers, the post-pandemic economy, compounded by the war in Ukraine. The impact of the Russian invasion in the Ukraine on the grain complex Peter has been profound, particularly through the second quarter. That’s — those two factors are the core drivers. So what is the consequence of that? Number one, dramatic rise in the feed complex — all the grain complex that you’ve seen in the second quarter. It was exacerbated in Manitoba. The local markets in Manitoba were worse than the rest of North America. So that’s the front end of that value chain.
On meat markets, the U.S. market, which defines the world economy in meat is an exporting nation. Exports into globally, exports into China in the second quarter were down over 65%. The aggregate net exports of the U.S. industry were down over 25%. So you have feed costs ballooning, inflation ballooning and a U.S. industry that is an exporting industry down 25% in their exports — the net exports. A combination of that unstable agricultural market, the hyperinflation and the labor instability was what we saw.
So your final question is what’s the outlook on those? And I’m — as I said to, I mean and others, we have an impaired ability to predict in these conditions. I believe the labor instability will normalize as the economy normalizes, AKA recession. We are seeing some signs of abatement in the inflationary environment.
Just look at the charts on grain complexes, and you’ll see a big portion of that. And most people are reporting signs of inflationary abatement in other sectors of the economy. China actually is coming back into the market in this summer actually. We’ve seen some improvement in the export market conditions as the summer is unfolded. The local feed implications in Manitoba, whole new crop, whole new market conditions on a relative basis starting in September. So these are all, as I said, early signs of abatement. But how they all come together, Peter, is very challenging for me to [indiscernible].
Peter Sklar
And how are you experiencing then you would know the packer margin in the current quarter to-date?
Michael McCain
The packer margin as one of those ingredients, and it’s only one of those ingredients that packer margins started to show signs of improvement in July.
Peter Sklar
I just have a couple of other questions. I’ll move on. Just going to the plant based. So I believe that your sales were down 14% in local currency. And you’re going — as you said, you’ve cut your marketing and promotional spend. So aren’t you concerned that there’s not going to be enough marketing support, like with the higher level of marketing spend, you experienced a 14% decline. So like how do you know where the right balance is? And how do you know that when you withdraw like now that you’ve drawn the marketing promotional support that you won’t experiencing revenue declines that are even more severe?
Michael McCain
Most of that was brand development focused activity as opposed to short-term consumer promotional identity. And the advertising and promotion calculus is a relative game either everybody’s dialing it back. And so, relatively speaking, what marketing speak would describe it as share of voice as opposed to absolute spend. And in the case of share of voice, with everybody dialing it back, it doesn’t give me great cause for concern.
Of course, the category didn’t perform well in the quarter, really, really important, not to pass judgment in the middle of all of this noise. Some people may want to pass judgments in the middle of the noise. That’s not our — that’s — we don’t believe that’s the right thing to do. There was a tremendous amount of noise in the quarter — in the first half of this year, that related to the inflationary environment, the impact that, that has in this category and other categories and how consumers react in that category at the moment.
Our actions, Peter, are to size the shoe to fit. Of course, the obvious question is, well, what if it’s a different foot — if it is, then we get a different shoe, right? And we’re perfectly capable of doing that. I can make any size business profitable, any. I just need to stabilize it at that size level. We’re confident in the long-term hypothesis of 10% to 15% growth rates once the conditions normalize, the consumers normalize, the inflationary and the extreme inflationary environment is sort of passed. We’re confident in that. So if it’s different, if we’re wrong, we resize the shoe and fit a different foot.
Peter Sklar
Okay. And then, Geert, I just have a financial question for you. You’re taking these ramp losses at the three facilities that you’re ramping as an adjustment. Can you tell us like kind of what is the duration? And what is the magnitude? How are these ramp losses going to unfold?
Geert Verellen
Peter, there’s a bit more disclosure on this in the — I think in Q1 of this year and Q4 of this year. These ramp-up losses or start-up expenses, as we call them, they will continue until the factory is fully ramped up. And we have earlier disclosed for London, for example, roughly a magnitude of $100 million that we will incur before the plant is fully operational. That’s the biggest one. And around $40 million for the Bacon facility, and since their transitory, since they’re one-off and not for us a part of how we measure the underlying performance, that’s why we take them out of adjusted earnings, as you can see in the reconciliations in all our documents.
Peter Sklar
And what’s the number for the Tempeh plant?
Geert Verellen
For the Tempeh plant, we had CAD 2.3 in this quarter, and we had 2.2 in the quarter before, so roughly, let’s say, 5 million year-to-date.
Michael McCain
For emphasis, Peter, even though those things come through the income statement, we fully build in these numbers in our investment decision-making. So part of — this is investment strategy in plans. So it’s very planned. It’s part of our investment thesis, and it’s included in our return on net asset calculations and making the investment.
Peter Sklar
Okay. And sorry, one last thing, I can’t recall the 14% to 16% target under normal Ag market conditions, on a consolidated basis? Or is that for the meat protein segment?
Michael McCain
Meat protein.
Operator
Your next question comes from George Doumet.
George Doumet
I want to get a little bit of clarity on these higher feed prices in Manitoba versus North America. Can you maybe talk a little bit about what’s going on? And I guess more importantly, your outlook on maybe when you expect that gap to normalize?
Michael McCain
We expect that gap to normalize in the back half of 2022, actually, new crop. They’re very — all grain markets. There’s a macro context and then there’s a local basis. And the local basis in Manitoba, which is just defined by supply the very localized supply and demand environment.
And clearly, there are markets around the world, particularly coming into the second quarter of 2022 that compared the supply and demand locally in Manitoba. And that — we have a historically high basis. It’s, I think, 4x to 5x what the — 4x to 5x what the five-year average is in the basis of feed costs in Manitoba. But that base of component corrects every new crop. And I think weather conditions in Western Canada are very favorable to a bumper crop actually.
George Doumet
Okay. I think Walmart the other day, they called out a trading effect of private label and some categories like Bacon, [daily lunch]. I know you haven’t really seen that in a meaningful way, but just wondering when you layer in additional pricing that you’ve taken in Q3, maybe give your outlook on maybe that actually potentially happening or your views there?
Michael McCain
We haven’t seen it to-date. Maybe the CPG brands in North America have taken between five and seven price increases in a single year. If you think about that five to seven price increases in a single year, most CPG brands in North America, and we’re not an exception to that. I’m sure there are markets and categories where there might be some evidence of some trade down, we’re not experiencing that to-date. If that experience to-date is any indicator, then I can — I would say that I wouldn’t anticipate that going forward.
But — in the Canadian marketplace, we’ve got great brands. I am hugely grateful for the work that we did in 2017 to invest in our — the strength of our brand strategies. That has served us incredibly well since that time. And we continue to earn the confidence of Canadian consumers. So I don’t — all I can tell you, actually, George, is that it’s — we’ve not experienced it to-date, and I have no reason to believe there will be any different in the next round.
George Doumet
Okay. Moving over to the plant, is there a baseline level of revenue that we would need to maybe generate in order to obtain those 30% gross margin levels?
Michael McCain
We have a $150 million business today. We acquired Lightlife at a $40 million business. So it was order of the size. And if we had those margins then when it was a $40 million business, actually higher. I think were margins when we acquired Lightlife in 2017 were mid-30s. So structurally, that’s where that category — then there’s a whole bunch of financial reasons why that’s so. But structurally, that’s why that margin rate is both reasonable and expected for the category. The reason it’s not there today is because we overbuilt the capacity and the size of the organization. We were expecting transformational growth. It didn’t materialize. Now we’ve got to resize the shoe to hit a new hypothesis.
George Doumet
Okay. And just one last one from me maybe [indiscernible]. Can you just maybe give us a new share a preliminary CapEx number for next year, please?
Michael McCain
We’ve not completed our planning there, George. So what I would say is what I said in previous quarters is that we would be at a significantly lower level than what we had in the last couple of years. So let’s say, roughly $300 million to $400 million at the max, but still going through the planning phase. So it’s too early to knock off from that. But you will see a substantial shift from the past years of investment, clearly.
Operator
Your next question comes from Derek Dley.
Derek Dley
Just a quick one from me. You mentioned the price increases of 5% in Q2 for roughly 4% in Q3. Can you just comment on what you saw in terms of inflation within your input costs? Like what was the magnitude of that?
And then secondly, as it relates to labor shortages, I think last quarter, you quantified it at, in some cases, about 1/3rd of your employees were way due to vacancies. What was that number like in Q2?
Michael McCain
I don’t know what is the third. Our total employment base is at full capacity is 13,500 people. And we had a peak — we were over 1,500. In fact, I think it peaked out at about 1,800 people in terms of vacancies in Q2 which is not a dissimilar number to what we experienced for different reasons in the first quarter. The first quarter was mostly absenteeism related to kind of pandemic-related effect as opposed to post-pandemic kind of economy effect in Q2. So I’m not sure where the 30% number came from [indiscernible] and reflect on that. I don’t know where that came from. But it’s roughly the same number, but very different root cause.
Clearly absenteeism is one problem area to deal with. It’s unplanned an unplanned in the marketplace. The vacancies that we’re seeing today have a particularly challenging aspect to it in that it’s not just vacancies, but it’s also churn. So you’re constantly training, retraining, filling in and so on and so forth. So that’s the structural difference between the two. I am reminded by one of my colleagues here that the 30% number was a sum plant at its peak, up to 30%. So it’s not a total — across the total company at 30%. We had some plants at its peak, they had absenteeism levels of 30%. So just a different metric.
Derek Dley
Okay, that’s helpful on the labor front. Just on the inflation, like do you have a number of what you saw for your input inflation during the quarter?
Michael McCain
I don’t have the numbers at my fingertips. Obviously, it was higher than the 5% that we price. So with higher, but I haven’t pieced that out.
Operator
Ladies and gentlemen, that’s all the time we have today for questions. I would now like to turn the conference back to Mr. McCain for closing remarks.
Michael McCain
Okay. Well, thank you very much. Obviously, these are chaotic times. We don’t pass any judgment on our strategies or our business or our people in the middle of this chaos, and we’re confident that this too will pass — are obviously coveting stable waters ahead, but we’re not going to offer predictive capacity to tell you when exactly that occur. I appreciate your patience. Certainly, we are, and we’re focused on the long ball in our organization and achieving the targets that we expected.
So thank you for your participation today, your patience, and we’ll look forward to connecting and updating you in the next quarter. Have a good day.
Operator
Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank you all for your participation and ask that you please disconnect your lines.
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