Maple Leaf faces $9M loss in Q2

FBC staff 7/24/2008

Grainews

Further price hikes and benefits from the restructuring of its meat business are expected to help Maple Leaf Foods recover from what's so far been a cash-losing year.

The Toronto food processing giant on Thursday posted a loss of $9.35 million on $1.36 billion in sales in its second quarter (Q2) ending June 30, down from a loss of $1.67 million on $1.32 billion in sales in the year-earlier period.

"We fully expected the first half of 2008 to be very difficult for Maple Leaf due to the extreme inflation and volatility in commodity markets," CEO Michael McCain said in a release, but added that "we believe the second half of 2008 will show a substantial recovery as markets stabilize and the early benefits of restructuring are realized."

Fresh poultry margins declined due to higher feed and related live bird costs, the company said, while the effect of a stronger loonie offset improvements in pork processor margins. Maple Leaf said it "will continue to increase prices to manage rising costs."

The restructuring of the company's meat ("protein") operations, which involves paring back its hog and fresh pork operations and expanding its value-added meat and meals businesses, is "proceeding on schedule and is expected to be completed by the end of 2009."

That restructuring, which began in October 2006, has so far resulted in "lower manufacturing overheads due to the closure of three sub-scale processing plants, double-shifting the front-end processing at the Brandon (Manitoba) pork plant, and reduced administration expenses."

As per its restructuring plan, the company announced Tuesday that it formally began the process to put its pork slaughter and processing plant at Burlington, near Hamilton, Ont., up for sale. The company has shut or sold other processing and slaughter plants and several related businesses.

"The financial benefits from these initiatives have to date been offset by start-up costs, but management expects the restructuring to contribute on a net basis to earnings in the second half of the year," the company said.

Six Maple Leaf pork processing plants across Canada have been consolidated into one double-shifted operation at Brandon to supply raw materials to its packaged meat business. Last year, Maple Leaf said, the front-end processing at Brandon was increased from 45,000 to 75,000 hogs a week on two shifts, enabling the closure of two older facilities in Saskatoon and Winnipeg.

Earlier this month, the back-end "cut" operations at Brandon were commissioned, finalizing its double-shift expansion. "In the first month of operations, the facility has been running at target volumes with a smooth startup" and will allow the company to carry out the previously announced closure of another Winnipeg plant in the next quarter.

Pig production

The company, which has also exited the hog production business in most parts of Canada outside Manitoba, reported that its Q2 hog production losses for the period increased by $2.2 million compared to last year, an "improved performance" compared to its 2008 Q1.

North American hog producers gained on improved prices during the company's Q2, although Canadian hog farmers took a hit from the declining value of the U.S. dollar, cutting their net revenues for finished hogs.

As Maple Leaf keeps cutting back its company-owned hog production, its marketings dropped to 299,000 finished hogs in Q2 compared to 332,000 in the year-earlier period and 338,000 in its 2008 Q1. "Following the sale of its Alberta and Ontario investments, this number will decline to approximately 212,000 hogs per quarter" by the end of this month, Maple Leaf wrote.

Restructuring of Maple Leaf's hog production in Manitoba is "materially complete," it said, and it gained from cost reductions in these operations.

"High feed prices and related production losses are resulting in some herd liquidation in North America that should improve supply and demand dynamics and contribute to improved hog production margins later in 2008 or early in 2009."

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