Thank you for standing by. At this time, I would like to welcome everyone to the Canada Packers Inc. third-quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. I would now like to turn the conference over to Annemarie Gerber, Director of Communications. Please go ahead.
Good morning, everyone. Thank you for joining Canada Packers' third 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. 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 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 the 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 third quarter 2026 financial results.
The press release, as well as our third quarter financial statements and management's discussion and analysis were filed on SEDAR+ and may also be accessed on the company's website under the Reports and Filings section of the Investors tab at canadapackers.com. We also posted this quarterly investor presentation to our website, which can be found on 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, Annemarie, and good morning, everyone. In the third quarter, we saw highly unusual market conditions across the industry. Spreads compressed sharply industry-wide, driven by what we believe are transitional headwinds caused by the combination of softer U.S. demand, slower exports, and high year-over-year U.S. inventories at a time of steady supply. This meant we did not see the seasonal improvement in pork values we would normally expect. Instead, cutout values declined approximately 15% from a year ago, and the weakness we experienced in Q2 continued through the third quarter. Against this challenging market backdrop, Canada Packers continued to demonstrate the strength of our differentiated business model. Our focus on sustainably produced premium value-added pork, combined with our established global customer relationships, allow us to create value beyond what commodity markets alone would suggest. We've consistently said that Canada Packers is built to perform through commodity market cycles.
In more normalized markets, we've demonstrated our ability to capture additional value. In Q3, despite significant industry-wide spread compression, we've demonstrated the resilience of our business and our ability to deliver positive adjusted EBITDA through difficult market conditions. From that perspective, despite the pressure on our financial results this quarter, I was encouraged by how our business performed operationally and commercially. We remained profitable on an adjusted basis, generated positive free cash flow, reduced debt, and supported our dividend. While commodity markets will always influence our financial performance, they do not fully define the value of our business. Our ability to produce differentiated products, serve customers across global markets, and maximize the value of every hog we process is an important part of what distinguishes Canada Packers. Across our farming operations, we continue to improve productivity and operating efficiency.
In manufacturing, we're focused on improving yields, managing costs, and strengthening operating performance. Commercially, we've leveraged our premium product portfolio and established customer relationships here at home and across the globe to maximize the value of our products and capture opportunities across different markets and sales channels. These are improvements and capabilities that remain with us regardless of where commodity markets move. They help support profitability during difficult market conditions and position us to capture additional value when conditions improve. Another important characteristic of our business is the transparency into the factors that drive our financial performance. Commodity markets can create significant earnings volatility, but many of the underlying market indicators are publicly available and provide visibility into those changes. Just as those indicators help explain the pressures we're experiencing today, they should also provide visibility as market conditions improve.
We don't need to predict when the recovery will occur. Our focus is on operating the business effectively through the cycle, continuing to strengthen our commercial capabilities, and positioning Canada Packers to benefit when conditions improve. Turning to our Chapter One strategy and our plans to capitalize on latent processing capacity within our existing facilities. As we increase hog supply, we have the opportunity to grow volumes and earnings while leveraging infrastructure we've already invested in, without the need to build new processing facilities. This quarter, volumes were affected by the timing of deliveries from our internal farming operations, weather-related impacts, and normal variability in our external supplier base. As a result, hog processing volumes declined approximately 1.6% compared to the prior year.
While quarterly volumes will fluctuate, we continue to expect full-year 2026 processing growth within our 2%-3% target range, including the additional week in our fiscal calendar. Looking ahead, we expect deliveries from our internal farming operations to increase as we move through 2027. We're also actively developing our external producer network, with new supply contracts expected to contribute additional volumes, particularly in the second half of next year. Building hog supply takes time, and growth will not be perfectly linear, but the opportunity to increase utilization of our existing process capacity remains unchanged. Our longer-term opportunity extends beyond simply processing more hogs. We're continuing to strengthen our commercial capabilities, improve our premium product mix, deepen relationships with customers across the global markets, and maximize the value of every hog we process.
Combined with improvements in our farming and manufacturing operations, these initiatives provide opportunities to grow earnings and create shareholder value over time. To sum up, the third quarter reinforced two important characteristics of Canada Packers, the durability of our business through difficult commodity markets and the financial flexibility to navigate challenging market conditions. Despite significant market pressure, we remained profitable, generated cash, and continued making operational and commercial improvements that will benefit us over the long term. We recognize that pork markets remain challenging, and we're not assuming an immediate improvement in those conditions. We cannot predict exactly when market conditions will improve, but one of the benefits of our business is that the factors driving those conditions are transparent. You can monitor them in real-time, just as we do.
While we can't control commodity markets, our attention remains squarely on how we operate, how we leverage our differentiated business model and our premium product portfolio, how we serve customers, how we allocate capital, and how we position the business for future growth. The underlying opportunity at Canada Packers remains intact. We have opportunity to grow hog supply and increase utilization of our existing process capacity, further strengthening our premium sales mix, maximize the value of every hog through our global customer relationships, and continue improving operating efficiencies across our business. Together, these initiatives provide a clear path to growing earnings and creating long-term shareholder value. With that, I'll turn the call over to Deepak to discuss our financial results in more detail.
Thank you, Dennis, and hello, everyone. As Dennis outlined, the third quarter presented a challenging operating environment characterized by industry-wide compression of both the packer and vertically integrated spreads. While market pressures weighed on our results, our execution remained strong , and our long-term strategy and earnings opportunity remain intact. As a quick reminder, we are comparing our quarterly results against estimated pro forma numbers for the same period last year. Total sales for the third quarter of 2026 were CAD 420.7 million, a decrease of 11.6%, or approximately CAD 55.3 million when compared to pro forma third quarter 2025 sales. The decrease in Q3 sales was primarily driven by lower pork cutout values, which did not experience the typical seasonal lift during the quarter, combined with continued foreign exchange headwinds related to the Japanese yen.
Q3 hog processing volumes were 1.02 million hogs, a decline of approximately 1.6% compared to the prior year. The decline was driven by a combination of timing of deliveries from our internal farming operations, weather-related impacts during the quarter, and normal variability in our external supplier base. In the third quarter, about 47.9% of hogs processed were internally sourced and 52.1% were purchased from external suppliers, compared to 47.3% and 52.7% respectively in the prior year. Year to date, hog processing volumes are up approximately 0.4%. With the benefit of the extra production week in the fourth quarter, we continue to expect full-year 2026 hog processing growth to be within our 2%-3% target range. Net loss for the quarter was CAD 28.1 million, compared to earnings of CAD 25.6 million in the prior year period.
Reported results included a CAD 47.6 million non-cash change in the fair value of biological assets versus a CAD 4.9 million change 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 31.5 million, representing a decrease of approximately CAD 24.5 million, or 43.8%, when compared to pro forma third quarter of 2025 adjusted EBITDA. The Q3 adjusted EBITDA margin of 7.5% was a 430 basis point decline from our Q3 2025 pro forma margin of 11.8%, and was below our normal annual range of 8%-12%. That range is designed to be viewed on an annual basis and is our target range based on normalized market conditions.
On a trailing 12-month basis, our adjusted EBITDA margin was approximately 9% within the range. Market conditions more than explained the year-over-year decline in adjusted EBITDA this quarter, and importantly, continued progress on the underlying drivers of the business helped offset a portion of that market. We benefited from operational improvements tied to on-farm and manufacturing performance and targeted sales to global customers, partially offset by higher SG&A due to the cost of becoming a standalone company. These factors demonstrated the resilience of our earnings and remained central to building long-term value over time. In the third quarter, we invested CAD 10 million in capital, compared to CAD 10.6 million in the same quarter last year. Free cash flow was CAD 14.7 million, which benefited from our receivable financing program, bringing year-to-date cash flow to CAD 52.4 million.
Onto the balance sheet, net debt at the end of Q3 2026 was CAD 428.7 million, including lease obligations of CAD 98.5 million, a decrease of CAD 4.1 million from the end of Q2, as positive free cash flow allowed us to repay CAD 10 million towards our bank loan. This resulted in a leverage ratio of 2.8x based on a trailing 12-month pro forma adjusted EBITDA within our strategic range of 1.5x-3 x. The increase from 2.4x last quarter reflects lower trailing adjusted EBITDA, not higher debt. We also had approximately CAD 199 million of unused capacity on our revolving facility. Since entering into the credit agreement on October 1st, 2025, we have repaid an aggregate of CAD 45 million, which are permanent reductions of our term loan.
We are also pleased to announce our Q4 dividend of CAD 0.23 per share to be paid out on January 4th, 2027. In closing, to reiterate, the third quarter demonstrated the resilience of our business in a very difficult market across the industry. We remained profitable on an adjusted basis, generated positive free cash flow, and continued to reduce debt with operational improvements and our diversified premium sales mix helping delivering market outperformance. I will now turn the call back over to Dennis.
Thank you, Deepak. As you have heard today, the third quarter was a challenging one for the North American pork industry. Despite significant market pressures, our business demonstrated its resilience. We remained profitable on an adjusted basis, generated positive free cash flow, reduced debt, and continued improving our operations. Our business offers both durability through commodity market cycles and transparency into the factors driving our performance. While we cannot predict when markets will recover, the same indicators that explain today's challenges should also provide visibility as conditions improve. The underlying opportunity at Canada Packers remains intact. We have meaningful available processing capacity, opportunities to grow hog supply, and the ability to continue improving our operating efficiency and commercial performance. These opportunities give us room to grow while strengthening our business through the market cycle.
We will continue building on what makes Canada Packers unique and delivering our commitment to be Proudly raised; Responsibly made. With that, we will open the call for questions.
Thank you. 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 one again. Your first question comes from Tamy Chen with BMO Capital Markets. Your line is open.
Hi. Good morning, Dennis and Deepak. I wanted to start with the weather that you mentioned. How did that impact the volumes from your internal farming side?
Well, simply, it was a warmer summer than it was prior years, so that impacts growth rates, which pushed some pigs from quarter to quarter.
I see. Okay. Can you elaborate when you mentioned you are expecting more internal deliveries from your internal farming as we go through next year, what is driving that? Are you expecting another leg up in improvement in your yields?
It is more of our operational performance on the farms. If you remember back to the beginning of this story, we really focused internally on operational excellence, getting more hog output through our farming operations. That comment is just a continuation of that same initiative.
Okay. Got it. I have another question on the actively developing the external supply network.
Right.
I am seeing that, I think hog numbers are growing in Canada. Are you seeing the same thing? Does this mean more contribution from this side in the second half of next year means that you have been able to onboard more external parties, and take advantage of this growing hog count in the country? Thanks.
Yes, that is exactly what that means. Remember, we have made this commitment to fill some of our latent capacity. The idea was get better at operating our operations and secure more outside supply. If you remember back, we have had quarters over 4% growth, primarily driven by our internal operations. What we are seeing now was the theory that we could sign up more external supply becoming real. There are multiple folks we have signed contracts with. There are many permits being pulled. What we are saying is, by the back half of 2027, it should become more regular, this growth. In between now and then, just expect it to be not perfectly linear because it is just really hard to make that an exact number. We are more confident than ever in the idea of filling that capacity over the next, say, four years or so.
Got it. Okay. Thank you. That was it for me.
Thanks, Tamy.
Your next question comes from Bahamin Abdolpanah with Ventum Financial. Your line is open.
Good morning, everyone. Thanks for taking my question. You've been through these cycles quite a few times in the past. On average, how long does it take for margins to normalize? And what in this cycle, in particular, would make you think it's going to take longer or shorter?
Yeah. We're careful to not predict markets. Here's what we will say. We have seen this before. I would say this is cyclical, not structural. If you look at sort of simply the numbers in North America, supply is up marginally, maybe 1% or less. This is more of a demand issue. If we kind of trace the demand story through the system, it seems like the U.S. needs some more packaged meats demand. The key categories there were off sort of high single digits. Exports were strong in the first part of the year, and they slowed down in August year-over-year, primarily Mexico and a little bit Southeast Asia. The headline for me is, "Seen it before. Cyclical, not structural." We have no idea when it will return, but we're confident that it will.
The only thing I would add to that, Dennis, is to Dennis's point, while we can't predict markets, what we can focus on is what we control, right? What we've demonstrated, particularly in this quarter and prior quarters, is our distinct strategy of our sustainably produced premium products sold to strategic customers around the world, our strong focus on execution on farms, plus in our supply chain. Those are all controllables that help us offset and mitigate a portion of that market impact.
Thank you. Very helpful. The weakness in hams and bellies, how much room do you have to place those cuts somewhere else instead of North America? Has there been any shifts in the past few months in how much you place in North America against other countries?
Yeah. That's what we're talking about when we say have a diversified premium sales mix, is we have the ability to pick the best market for those cuts. Our whole hog utilization is one of the things that differentiates us from the market. I won't talk specifically about where we could place them, just know that our size allows us to be nimble, and our premium sales mix allows us to outperform the market.
Thanks. One last one before I pass the line. Across the industry, some customers agree on a price for a period of time, and I assume that is true for you as well. With cutouts prices below, have you seen extra demand from these customers to lock in the lower prices, and how does this conversation go on your part?
Well, from a pricing perspective, we have a mix of formula-based pricing, long-term pricing, and short-term pricing. It is a key strategy for us to decide where we want to be longer term and short term. We do not really break out and communicate where we are at. Just know that is a key strategy, and it is a differentiator for us, so what exact pricing mechanism we use is a strategic advantage for us.
Thank you very much.
Your next question comes from Derek Lessard with TD Cowen. Your line is open.
Yeah, good morning, Dennis and Deepak. Maybe it is a slightly harder question to ask, but I guess, at what point do you guys, or maybe how long does current conditions have to persist before you say, "Okay, something in the industry has fundamentally changed, and maybe therefore we need to consider changes to how the business operates"? Again, I am not saying that you are even close to that, but curious on what guides that decision.
Yeah. Here's the way I'd answer that. The reason I consider it cyclical, one is I've seen it before multiple times. Two, it's the relationship between demand and supply, which happens in all businesses. It's pretty easy to kind of find our way through and say it's not necessarily a supply issue, it's more of a demand issue. In our business, we tend to say macroeconomics work, like low prices, fix low prices, and high prices, same thing, fix high prices.
Right.
Today, what we're seeing is low wholesale prices not necessarily translating their way into lower retail prices. So we think the people that can make that change, will make that change and get the system moving again. Again, what we keep pointing to is we're differentiated. If you compare the quarter we just announced with other public companies, you'll see our performance allows us to maintain our business while other people have to make the changes that will ultimately right the market.
Right. That's helpful. I guess maybe on that demand side, how are you seeing demand develop across your key markets, whether it's North America, Mexico, and Japan? Are there any differences? I guess, are the exports helping absorb that additional supply, or is softer domestic demand still setting the tone?
Yeah. The beginning of the year, exports were a bigger part of the story. In August, they slipped back, I think , 5% year-over-year. The reason we're pointing to U.S. demand is that's the most clear data that we can see. The key packaged meats categories, bacon, sausage, ham, are all down somewhere 5%-9%. That's what we're pointing at as that's a cyclical part of our business that can be remedied by pricing and promotions. We think that's what's ultimately going to get this relationship spreads between cost and price back on track.
Yeah. Thanks, Dennis. Good job in managing these conditions.
Yeah. Thanks, Derek.
Your next question comes from Luke Hannan with Canaccord Genuity. Your line is open.
Thanks, and good morning, everyone. I wanted to ask about the inception of the receivables factoring program , and I guess what the thought process was on that. Also, secondly, do you anticipate leaning into that more, just given, to your point, even though that base of adjusted EBITDA is, or rather even though net leverage is ticking up, it's not because necessarily you guys are taking on more debt; it's just because of that adjusted EBITDA base shrinking. Just curious to know if you envision on leaning on that a little bit more in the near term as you get closer to that 3x threshold. Thanks.
Yeah. Thanks, Luke. I'll answer that question. Per our credit agreement, we do have up to CAD 20 million worth of receivables that we can finance at favorable rates, and we took advantage of that in the third quarter, right? About CAD 12 million to CAD 13 million is what we executed against. It's positive for us from a cash flow perspective, as you know. The short answer is, yeah, we look to utilize that full CAD 20 million over the coming quarters.
Thanks. As a follow-up, I guess I just wanted to get a little bit more detail. I think you guys have done a good job of explaining what exactly is driving the softening in pork cutout values. I'm curious to know, you guys have spoken in the past about freezer stocks and that also being, I think, somewhat of a determinant of where pork cutout values are as well. I realize that demand is obviously playing into this, and it sounds like it's North America and also overseas in Southeast Asia specifically, but where do freezer stocks stand today, and how can we, or should we , be using that as a leading indicator to figure out where pork cutout values go from here?
Yeah. That's a great question, Luke. We look at freezer stocks. If you look at the North American freezer today, it's up over prior year. Bellies are almost exactly the same, up a negligible amount. We like that for our story next year because that means the fundamentals of the belly market could correct itself and get back on track next year. The largest category that's up in the freezer is hams. Hams is up because Mexico softened in August. If you think about it, roughly the same amount of meat produced. Exports were clearing a good piece of it. They cleared less in August. There's more in the freezer, but it's more of hams, which is mostly a Mexico item. The key categories in North America, packaged meats categories, haven't got to where they're driving the utilization of the rest of the meat.
We're clearing the meat through the market, just at much lower prices.
That is helpful. My last question, I will pass the line as well. Whether it is North America or Southeast Asia, do you have any sense of whether demand tends to be softer by channel? Specifically, is it softer in retail or food service, or is it, generally speaking, softish for both?
I would say generally. I am not going to get into stats that I have heard because obviously we read a lot of different things. I would say generally soft is the way I would describe it. Why we consider it cyclical is I think it can be fixed, and it can be fixed through pricing and promotions.
Got it. Thank you very much.
Yep.
That concludes our Q&A session. I will now turn the conference back over to Dennis Organ for any closing remarks.
Okay. Thank you, Morgan. I want to recognize our team for another strong quarter of operational and commercial execution. Their continued focus on excellence is what allows Canada Packers to deliver differentiated performance, even in challenging market conditions. We've built a solid business with strong competitive position, and we have meaningful opportunities to grow volumes, improve our premium sales mix, and drive further operational efficiencies. I'm confident in our strategy, our people, and our ability to continue building a stronger, more valuable Canada Packers. I look forward to updating you on our progress on our fourth-quarter call, and thank you for your continued interest in Canada Packers.
This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.