Good morning, everyone. Thank you for joining Canada Packers' second quarter 2026 financial and operating results conference call and webcast. My name is Annem arie 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. All lines have been placed on mute to prevent background noise.
Following the speaker's 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 investors@canadapackers.com. This call contains forward-looking information within the meaning of applicable Canadian securities law relating to activities, events, or developments the company believes or expects will occur 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 regulator 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 second quarter 2026 financial results.
The press release, as well as our second 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 to our website, which can be found under the Investor 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, Annem arie. Good morning, everyone. When we launched Canada Packers as a standalone company last year, we set out to build a business capable of generating durable profitability and consistent free cash flow across a range of market conditions. The second quarter tested that model. Despite challenging market conditions, we operated a profitable business and delivered strong free cash flow and generated continued operational progress.
During the second quarter, pork cutout values remained below both the prior year and typical spring levels, which put pressure on industry processing spreads. Despite those conditions, we remain focused on executing our key initiatives. Our results demonstrated the value of our operating model, the quality of our execution, and the benefits of maintaining discipline through normal market variability. Our quarterly results will naturally fluctuate as market conditions change. What matters most is whether the underlying drivers of the business continue to improve.
During the quarter, we made further progress on hog volumes, operating performance, product mix, free cash flow, and debt reduction. Those are the factors that build long-term value over time. Turning to the operating drivers of our performance. We continued to utilize the latent capacity within our facilities and increased hog processing volume during the quarter, supported by operational improvements, stronger plant execution, and effective supply chain management.
As we have discussed previously, quarterly processing volumes will fluctuate due to normal seasonality and hog availability. While we remain committed to capacity utilization over time as an important driver of earnings, it is only one part of the opportunity. We also continue to improve on-farm performance, optimize the value of the whole hog, and strengthen our product and market mix. Together, these are the operating improvements that will continue to build the business's earning power over time.
Our commercial execution remains an important driver of performance. We continue to optimize our product mix by increasing the proportion of premium value-added products we sell while maximizing the value of the whole hog by placing each cut with the customer and geography that delivers the greatest return. That disciplined approach allows us to consistently improve mix and maximize value as market conditions evolve.
Our operating performance also translated into consistent free cash flow. We use this cash to continue reducing debt, bringing our leverage ratio to 2.4x , which is within our range of 1.5x-3x . Chapter one is about steadily improving the underlying economics of the business. We are doing that by filling our plants, improving operating performance, optimizing product and market mix, generating consistent free cash flow, reducing leverage, and returning cash to shareholders. Together, these priorities strengthen our business, improve cash generation, and increase our financial flexibility for future growth opportunities. I will now pass the call over to Deepak to discuss our financial results in more detail.
Thank you, Dennis, and good morning, everyone. I'm pleased to report on our financial results for the second quarter of 2026. As Dennis discussed, this quarter demonstrates the continued resilience of our business model throughout normal market variability. 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 second quarter of 2026 were CAD 431.7 million, a decrease of 5.3%, or approximately CAD 24.3 million, when compared to pro forma second quarter 2025 sales. The decrease in Q2 sales was primarily driven by pork cutout values that did not experience the same seasonal strength as the prior year, combined with continued foreign exchange headwinds related to the Japanese Yen.
Our Q2 hog processing volumes improved to 1.05 million hogs, a 0.5% increase compared to the prior year. In the second quarter, about 48.1% of hogs processed were internally sourced, and 51.9% were purchased from external suppliers, compared to 47.2% and 52.8% respectively in the prior year. Net loss for the quarter was CAD 28.4 million, compared to earnings of CAD 23.4 million in the prior year period.
Reported results included a CAD 48.3 million non-cash decrease in the fair value of biological assets versus a CAD 8.1 million decrease in the prior year. As this fair value adjustment is non-cash in nature and is excluded from the calculation of adjusted EBITDA, it does not reflect the underlying operating performance of the business. We reported adjusted EBITDA for the quarter of CAD 34.9 million, representing a decrease of approximately CAD 10.1 million or 22.4% when compared to pro forma second quarter of 2025 adjusted EBITDA.
The Q2 adjusted EBITDA margin of 8.1% was 170 basis point decline over our Q2 2025 pro forma margin of 9.8%, but was within our targeted EBITDA range. While market conditions naturally influence year-over-year profitability, the quarter also reflected continued progress on the underlying drivers of the business. We benefited from higher hog processing volumes, operational improvements tied to on-farm and manufacturing performance, and targeted sales to global customers, which were partially offset by higher SG&A due to the cost of becoming a standalone company. These factors supported the resilience of our earnings and remain central to building long-term value over time. During the second quarter, we invested CAD 8.7 million in capital, compared with CAD 7.8 million in the second quarter of prior year, while generating free cash flow of CAD 22.9 million.
Onto the balance sheet, net debt at the end of Q2 2026 was CAD 432.8 million, including lease obligations of CAD 101.9 million, as strong cash flow from operations allowed us to repay CAD 10 million towards our bank loan. This resulted in a leverage ratio of 2.4x based on trailing 12 months pro forma adjusted EBITDA and is within our strategic range of 1.5x - 3x . We are also pleased to announce our Q3 dividend of CAD 0.23 per share to be paid out on September 30th, 2026. In closing, our consistent execution and continued focus on key initiatives once again supported our resilient profitability this quarter, allowing us to generate strong free cash flow and deliver value to shareholders despite external market pressures. I'll now turn the call back over to Dennis.
Thank you, Deepak. Our second quarter results demonstrate the consistency of our execution and the durability of our business model. Despite a more challenging external environment, we continue to improve on-farm and plant performance, grow hog processing volume, optimize the value of the whole hog, and generate strong free cash flow. Looking ahead, we remain focused on executing chapter one of our growth strategy by filling our plants, improving operating performance, and strengthening our balance sheet. This will increase our financial flexibility and better position Canada Packers to evaluate future growth opportunities. We continue to do this with our purpose, proudly raised, responsibly made, guiding how we operate and make decisions. And with that, we'll open the call for questions.
We will now begin the question- and- answer session. If you would like to ask a question, please press star then the number one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star then the number one again. Your first question comes from Luke Hannan with Canaccord Genuity. Your line is open.
Thanks. Good morning, everyone. I just wanted to maybe start on the pork cutout values. You had mentioned in the press release they had softened during the quarter. Just wanted to confirm, was that supply or demand driven? Also, what are you seeing as far as Q3 to date? How is seasonality there?
Yeah. It's both, really, demand and supply. 1% less sows in U.S. are producing 2% more pigs is kind of the story for this year. Exports stayed strong, domestic demand couldn't consume all that product. We didn't get the run-up that it looked like was likely to happen with our freezer stocks as low as they were. Now it still seems to be remaining, that balance seems to be remaining soft.
Okay. If we were to go back to last quarter as well, you talked about the fact that there were, excuse me, higher fuel prices, higher freight costs that was showing up as far as your on-farm operations. Curious to know what that looks like, also, how that showed up during the quarter, if it was in line with expectations, what you're seeing in the business today.
It's in line with expectations. Going forward, we're positioned well as far as we can pass things on to the customer. We made those moves prior and are in a good position.
Got it. Thanks. I'll pass along.
Yep.
Your next question comes from Tamy Chen with BMO Capital Markets. Your line is open.
Hi. Good morning. I was just wondering if you could give an update on the utilization, the hog volumes, some of the initiatives you were talking about. A year ago, for example, procuring more, I think it was sows or hogs, as well as expanding the amount of land that you have, just to further drive the volumes you put in your facilities. How's that been trending these last couple of quarters? Thanks.
Yeah. Again, remember that the idea is that I've been referring to it as latent capacity. It's a capital-light growth strategy, just filling up the plant, the Brandon, the largest facility that we have. How it's been trending and how it is trending. The idea is we're still committed to the idea. We've always given ourselves the license somewhere down the road to continue to evaluate to make sure that it makes sense, both that it generates incremental EBITDA dollars and it's not overly dilutive to our range.
Still committed to that destination, but I want to make sure we're clear about the journey. The theory about signing up outside supply today is no longer a theory, right? We continue to sign contracts. Folks are getting permits and doing what they need to do to provide us those extra hogs from the outside. It just will not be linear over the next two or three years. There'll be some quarter-to-quarter moves.
There's always some quarterly things going on, like the heat this summer. Let me just reiterate, it's still the first initiative in our chapter one growth story. We're still committed to it over a three or four-year timeline as a capital-light way to generate some more dollars. It's becoming more and more real as we sign contracts. It's not necessarily going to be linear. There'll be some quarterly giveaways, but the way I would describe it is on track and more real now than it's ever been.
Okay. Got it. Thank you.
Your next question comes from George Doumet with Ventum Financial. Your line is open.
Yeah. Good morning, guys. I just want to talk a little bit about the hog volumes. They came in a little bit lighter, kind of versus our 2%-3% growth a ago. Can you just maybe give us a little bit of color there? Was it more demand-driven? Was it more supply-driven? I would appreciate it.
Yeah. Again, think of this as a four-year initiative. Don't assume every quarter is going to be linear 2%-3%. There will be some up and down. Things that are happening right now would be weather was a big impact. It was really warm in the prairies, and that put some pressure on some hogs. We're not going to do short-term things either. There's always ability to chase extra pigs and pay up, and we're staying disciplined to this long term. We're going to walk towards this goal. We're not running. Again, I wouldn't model a constant 2% or 3%. I would model the idea that if we're CAD 180 million base business today, this initiative over the next three to four years will increase that dollar amount, but there will be quarters up and down as we move through there.
Okay. This is maybe a bit of a crystal ball question, Dennis, but looking where we are today, would you expect Manitoba feed prices versus U.S. benchmarks to improve, to hold, or to compress over the next 12 to 18 months?
Boy, I'm reluctant to even I guess I would point you to futures, because that's not only a crystal ball, it's a guess. Futures, I think, are largely the best place to look.
Okay. Just one last one for me. Sorry. For Deepak. Can you quantify the impact of the higher fuel and the packaging cost in the quarter?
Relatively flat. Deepak, do you hear that?
Mr. Bhandari, you may be on mute.
Yeah, I don't. Here's what I'd say. It's not significant. It's relatively flat. Deepak, sorry, guys. Deepak's traveling right now. There we go. I hear you, Deepak.
There we go. Sorry, guys, just some technical difficulties. What I would say, George, is that although we don't quantify the impact of the fuel or the packaging increases tied to fuel, we were able to successfully pass on
The impact to our customers. While there was a little bit of margin compression in the quarter, just based on the timing of when that pricing was realized, it wasn't material in the quarter.
Okay, thanks. Appreciate it.
Your next question comes from Derek Lessard with TD Cowen. Your line is open.
Hey, guys, it's Evan in for Derek. Most of my questions have been answered, but I guess just one. Can you talk a little bit about any changes in pork demand trends that you're seeing in your main markets? Specifically on Japan, has the weaker yen impacted the demand in that market at all?
Yeah, no. Again, what I would describe, I don't see anything materially moving in any market. Things are relatively normal. There is the supply-demand balance like we discussed, Most of that is the domestic North American demand hasn't been able to keep up with that supply. Now, here's the good thing long term. There's 1% less breeding herd. That structurally is moving the potential down. Although, through better performance, the industry was able to market more hogs.
It is telling you that the breeding herd is shrinking, which is potentially tailwinds in the future. There's nothing, I would say, market-driven across the globe that I would say is important to call out. The big story has really probably been Mexico's increased demand. We think that that's relatively sticky because it has to do with average minimum wage moving up and things like that. I wouldn't have any specific demand comments across the globe.
Okay, great. Thank you.
Your next question comes from Irene Nattel with RBC Capital Markets. Your line is open.
Thanks. Good morning, everyone. Just listening to your commentary, how should we be thinking about where you are right now in terms of sort of executing on the chapter one? Would you say, are you on plan? If so, are you 25% of the way there if it's a four-year plan? Are you maybe a little bit behind plan? Can you just share any color with us, please?
Yeah. Here's the way I think about it. It's nice to have another good quarter. The reason I call this another good quarter is we did what we said we would do. We keep describing this business as resilient through market cycles, so we don't get too distracted on where the market goes up or down, because the longer you follow, it will do both. Internally, we've been really focused on operational excellence thing, on-farm performance, manufacturing, lowering our total delivered cost.
I would tell you we're right on track. I just keep trying to get people to understand that that long-term growth is a three or four-year initiative. There will be some ups and downs, but it's a great part of chapter one in that it's capital light, that we will continue to move the businesses CAD 180 million base up. I would describe it on track. It's nice to have another good quarter in our story. We're proving what we said we would be all along, which is a cash generation story and a good steward of the shareholders' capital by returning it consistently and being real smart users of it. On track is what I would say, Irene.
That's really helpful. Thank you.
Yeah.
Just sort of coming back to some of the commentary so far on the call. As we think about we're at the, I guess, right now in this quarter, we're at the low end of your 8%-12% normalized range, and that's fine. To your point, we need to expect both of them.
Right.
I guess, what would have to happen for you to get below the 8% where we are today? The second question, Dennis, is, what would be your best idea around when we start to see the cycle kind of reversing and the pendulum swinging back toward the upside?
Those are good questions. Again, the reason we describe ourselves as durable, it takes a series of events to drive us over our range or under our range. It would be hard for me to describe what it would take to take us under the range now that would be more punitive than sort of where the markets are at today in even currency. But something like more depressed cutout. It's hard to move raising costs. I guess, let me just say it again. It's hard. It's really difficult to move us out of that range. It's durable. It's really durable, both sides.
As far as predicting, I don't know. I do know, like I said, there's more pigs in North America than we thought and a little bit softer demand. That's okay. We just don't get so worried about that. What I'm really focused on right now in chapter one is generate cash and be smart with it. Again, another quarter of generating cash. No indications that the out quarters are going to be anything but in our normal range. Predicting what side of it, I don't know, but I feel really good about the durability. We're going to generate cash. We're going to take care of long-term shareholders.
That's it. Then last question, I promise. I guess we're coming up to one year of Packers being a separate entity. Is it reasonable to think, just to reaffirm, that chapter two is still a little bit of a ways out?
We're working hard on it. Again, here's what I'd say is, if you're going to be a good place for long-term shareholders, we're really careful to not manufacture things. We have items in chapter two that we're dying to explain, but we just need a little bit more work there. That's fair. Is it a little ways out? It's a ways out. It's not this next quarter, for sure, but we're working actively on it. There's things that we can do next that are going to continue to drive this CAD 180 million up. We have ideas that we know you guys will like and appreciate. Again, all that does is take us right back to chapter one and say what we got to do is focus on executing our operating plan today, generating cash, paying down debt.
That'll give us all the flexibility in the world to do some of the good ideas we have next.
That's great. Thank you.
Yeah. Thanks, Irene.
Your next question is a follow-up from George Doumet with Ventum Financial. Your line is open.
Yeah, hi, guys. Just a quick one for Deepak. A really strong free cash flow in the first half. I think we did just shy of CAD 38 million. Should we be able to generate a similar level of free cash flow in the second half? Just maybe any considerations around seasonality that we should be modeling? Thanks.
Yeah. It is a good question. The short answer is yes, I think our cash flow should be relatively consistent in the back half. Keep in mind, some of the drivers of our cash flow benefit in Q2 were things around better collection of receivables, et cetera, that help drive that. We do expect that to continue. There will be some seasonality, in general, around just the value of the meat as it starts to decline in the back half, particularly in the fourth quarter. That will have some impact on that, but largely, we should be able to generate that free cash flow fairly consistently.
Thanks.
That concludes our Q&A session. I will now turn the conference back over to Dennis Organ for any closing remarks.
Okay, thank you. In closing, I am proud of how our team performed during this quarter. We operated through a more challenging market environment while continuing to grow volume, improve operating performance, generate cash, and reduce debt. I look forward to our next call to update you on our third quarter results later this year. Thanks, everybody, for your support of Canada Packers. Have a good day.
This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.