Maple Leaf Foods raises prices, closes plants
A Maple Leaf Foods employee handles food products inside the company's meat facility in Toronto on Monday, December, 15, 2008. (Nathan Denette / THE CANADIAN PRESS)
TORONTO - Maple Leaf Foods (TSX:MFI) is raising prices and closing some of its plants as part of a major efficiency drive to offset the drag of rising commodity costs and a strong Canadian dollar.
"It is the largest cost reduction effort in the history of Maple Leaf, ever," president and CEO Michael McCain said on a conference call with investors Wednesday.
"Its purpose is to significantly reduce costs and improve productivity to bring our plant structure on par with large U.S-scale processors."
Maple Leaf, which produces the Maple Leaf and Burns brands and also is Canada's largest baker through its Canada Bread subsidiary, said Wednesday it aims to improve efficiency as the company emerges from a period of "adversity," marked by the negative impact of a rising loonie, and a "tragic" tainted meat recall.
Like most food processors, Maple Leaf has been squeezed by rising commodity prices -- for everything from flour used to bake bread to sugar for pies and pastries and pork, beef and chicken for cold cuts and hot dogs. The company also faces rising energy costs.
It plans to spend $755 million on the major reorganization starting this year and running through 2013. The cost reduction efforts are expected to boost profit margins by 75 per cent over the next five years.
The company said it will open a new large-scale prepared meats plant, with construction expected to start in 2012. It currently has prepared meats factories across Canada, but some will be closed or sold in the streamlining. It has previously announced a similar strategy in its bakery business that will consolidate three Toronto-area bakeries into a massive plant in Hamilton.
It is also hiking prices of both its bakery and meat products and ending promotions implemented to boost sales in the wake of a massive product recall sparked by a Listeria outbreak at its Toronto plant that left 22 people dead in 2008. The result was a 50 per cent drop in packaged meat sales.
The efficiency improvements will make it easier to compete against U.S. food processors, whose market share in Canada has doubled as the loonie gained value over the past five years, McCain said.
A rising Canadian currency, now near par with the American dollar, makes imports of food from the United States cheaper for Canadian consumers.
Meanwhile, he added, the currency fluctuation exposed a productivity gap at Maple Leaf, whose current plant network is "fragmented, small scale and low-technology."
"A 65 cent dollar tends to mask those kind of challenges, but when the currency migrated to parity, all of a sudden it is a problem, and the solution is scale, which is consolidating those facilities into larger, more efficient lower cost plants, but equally technology," McCain said in an interview Wednesday.
The company started on the path toward efficiency improvements when it first began to feel the burden of a rising Canadian dollar in 2007, he said.
"Unfortunately the product recall, which occurred in 2008 set us back by a couple of years and we had to defer all of the very important initiatives that we had under way," McCain said.
Maple Leaf's plan to revamp its supply chain, which accounts for 87 per cent of the company's costs, was approved by the board of directors last September and Maple Leaf has been working on the best way to improve efficiency for the past year, McCain said.
The company is still working through details of implementing the long-term plan, but is increasing prices and getting rid of heavy promotions in order to cut costs in the near-term.
"There are some natural price increases that we are compelled to pass on to consumers due to the inflation that exists in the food industry over the course of the past six months and you're seeing that in all meat products and all bakery products," McCain said.
The company has been dealing with inflating costs of raw materials including the impact of higher wheat costs on its bakery business and hog prices driving meat costs higher, he added.
McCain says the company has narrowed down where it might put that new plant, but added it won't announce where until it notifies its employees and unions.
He said it's too early to comment on possible job losses due to the consolidation and did not immediately provide details on how many plants it aims to close.
"We're going to do it project by project and as those projects firm up with specific plans for that individual facility then we will discuss it with our unions first," he said.
Maple Leaf has been working to revamp its bakery operations, an initiative announced in March to replace three smaller bakeries, which it described as aging and unable to expand. The company considers a massive new bakery in Hamilton set to open in the middle of next year as part of its broader reorganization.
The reorganization is the first major announcement from Maple Leaf after the company gained a large new investor, West Face Capital Inc., a Toronto-based investment firm known for cracking down on the operating costs of companies in which it invests.
West Face bought the stake in August from the Ontario Teachers' Pension Plan, one of the company's largest shareholders, which has said it is open to selling its remaining 25 per cent interest at the right price.
McCain said the company will finance the reorganization through cash and debt without issuing any equity.
Maple Leaf employs about 23,500 people at operations across Canada, the U.S., the U.K. and Asia.
Bob Gibson, a retail analyst at Octagon Capital Corp., says it's difficult to discern where the move will send the company's stock price in the near-term as it has not yet provided enough details.
"I need more information on how they're going to achieve those margins," he said, adding that its estimate that the move will improve margins by 75 per cent is "huge."
"They said there's going to be $100 million in cash restructuring costs, but we need to know what the non-cash restructuring costs will be."
Maple Leaf shares traded Wednesday at $12.18, down twenty cents on the Toronto Stock Exchange.