Maple Leaf plan aimed at bolstering margins

by Josh Sosland
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TORONTO — A restructuring plan aimed at significantly reducing costs and improving productivity was unveiled Oct. 5 by executive leadership of Maple Leaf Foods Inc. Michael H. McCain, Maple Leaf president and chief executive officer, described the plan as the “largest cost reduction effort in Maple Leaf history.”

Crafted in close consultation with the Maple Leaf board of directors, the Maple Leaf plan targets earnings growth in each of the next five years with EBITDA margin growing by more than 75% over this period. EBITDA margin climbed to 7% in 2010 from 5.8% in 2008, and the company is aiming for further gains to 9.5% by 2012 and 12.5% by 2015.

The improved margins will be achieved through a combination of cost cutting and capital investments, the company said.

“Management has benchmarked its facilities to best in class operations in North America and intends to deliver returns that will achieve sales margins consistent with the large branded consumer packaged food peers in the United States,” Maple Leaf said.

For the company’s baking business, margins are expected to widen to 12.5% from 9.2% currently, while the protein business is expected to reach 12.5% from the 6.2% margin at present.

“Maple Leaf is committed to creating significant and lasting shareholder value,” Mr. McCain said. “This plan will enable Maple Leaf Foods to further address what we believe is a structural shift in currency that has caused a productivity gap for Maple Leaf — and indeed, many large Canadian manufacturing companies — relative to U.S. competitors. Management is implementing both near and longer term initiatives to improve productivity, deliver higher margins consistent with U.S. branded foods companies and establish sustainable competitive advantage. Our focus is to deliver on our commitments and execute the plan with excellence.”

In an Oct. 6 conference call with securities analysts, Mr. McCain outlined the strategic thinking underpinning the plan.

He said the plan’s purpose is to bring Maple Leaf’s plant cost structure in line with large U.S competitors, and he described the plan as “clear and simple,” based on the premise that both scale and technology were needed to compete.

“Our plan is to consolidate the plants that we have and from that invest in new technologies previously just not accessible to the company” because of the smaller scale of the Maple Leaf’s plants.

The plan is “achievable” and features targets and milestones against which the program may be judged by the investment community,” Mr. McCain said. He devoted considerable time to discussing the capital requirements for the project, much of which will be spent in 2012 and 2013.

“Our plan is affordable as we expect no new equity, we expect to continue an investment grade balance sheet and improving so, and continued improvement in our leverage ratio,” he said.

Maple Leaf has an “exceptional” track record of success executing targeted cost reductions, he said.

“It is based on known, identifiable cost reduction opportunities that have been studied in granular detail, resulting from an increase in scale and investments in technology that are currently widely used throughout the United States and the European industry,” he said.

Many of the initiatives that make up the plan already are under way, including “pricing and normalization of trade promotional activity, simplification of bakery and meat products formulation and manufacturing, early facility rationalization and the implementation of an integrated SAP system that will provide a base to enhance business performance and further educe administration and processing costs,” Maple Leaf said.

At the heart of the plan is a series of plant consolidations, coupled with strategic capital investments in new manufacturing and technology.

“(Anticipated productivity improvements have) been very precisely measured,” Mr. McCain said. “(They) will increase by a factor of 1.5 times from 50 kilograms per person to approximately 80 kilograms per person, and that is a very significant enhancement in the productivity of our total supply chain.”

In addition to a new baking plant in Hamilton, Ont., expected to be commissioned by the middle of 2011, Maple Leaf also is planning to build a prepared meats facility, with construction set to begin in 2012.

All told, the plan features strategic capital investments in new manufacturing and technology totaling C$775 million.

“The pace of the (strategic capital investments) program will be balanced with margin improvement, with interim targets achieved before committing to new levels of investment in order that the company has the underlying cash flow and balance sheet strength required to support the investments with no incremental requirement for new capital from shareholders,” the company said.

The degree to which the plan was driven by the strengthening of the Canadian dollar over time was detailed further by Mr. McCain in the conference call.

“If you ask any economist, they would tell you that the currency shift is a formidable challenge for all Canadian manufacturing, causing them to do as we have, rethink our business, our assets and our productivity levels all in what is a relatively short amount of time,” he said.

The final plan proposed Oct. 5 represented the culmination of an intensive study in which a wide range of alternatives were considered, Mr. McCain said.

These alternative plans included the separation of the baking and protein units into separate businesses, a possibility that he said has been “under consideration for nearly 15 years.”

“We completed a very detailed third-party analysis, the conclusion of which was that separating the protein and the bakery business would actually erode shareholder value,” he said.

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