TORONTO — New products and efficiency initiatives will ultimately help boost Maple Leaf Foods stock, but the food processor still has a ways to go before share prices return to levels they hit six years ago, the company’s CEO said Thursday.
“We have some momentum in the right direction but we have by no means completed this journey,” Michael McCain told shareholders at the company’s annual meeting.
“We think that it’s the right plan. We think it has the potential to deliver the returns that shareholders expect and it will carry us forward to 2014 before it’s fully implemented but we are highly optimistic today that that will be the outcome.”
Maple Leaf shares (TSX:MFI) were up 44 cents to $11.88 in late trading on the Toronto Stock Exchange Thursday. That’s compared to $18.49 in 2005.
The meat processor and baker’s shares haven’t fully recovered since a tainted meat incident in 2008 that left 21 people dead.
The shares also took a major hit last November when the Ontario Teachers Pension Plan Board sold its remaining 24 per cent stake in Maple Leaf at a discount, sending down the shares by $1.28 to $11.41.
The company, which is publicly traded but controlled by McCain’s father, is in the midst of a restructuring plan to reduce costs and improve profit as it grapples with weaker sales, higher ingredient prices and the high Canadian dollar.
McCain said Thursday that Maple Leaf is simplifying its operations, such as cutting the number of bologna meat recipes from 17 to 1, with that measure alone leading to $1 million in savings by improving assembly line speeds and order management processes.
“Collectively, these initiatives are reducing cost and improving efficiency across the board — they are one of the big drivers of near-term value creation,” McCain said.
The company is also focusing on changing customer demographics by introducing products like corn tortillas and rye breads, and targeting increasingly health-conscious consumers who demand lower sodium and fat content. It launched a new line of preservative-free meats this year and will start airing television ads for similar products under its Schneiders label on Monday.
In a conference call with analysts after the shareholder meeting, McCain said that consumers can expect further price increases in its frozen foods because of the timing of contracts.
“Not to get diverted by the main story here, the headline overwhelmingly in the first quarter of the bakery business is wheat,” he said, explaining the price has doubled in the past year.
Maple Leaf Foods Inc. already raised its fresh bakery prices by 20 cents per unit at the end of March as it battled the rising prices for ingredients. McCain predicted that the higher food commodity prices are here to stay, as more farmers sell their corn for lucrative ethanol production rather than food.
On Thursday, Maple Leaf reported a 47 per cent decline in first-quarter net earnings, but noted that adjusted earnings showed a big improvement and were “the most appropriate basis” to measure the business.
It said first-quarter net earnings were $10.5 million or eight cents per share, compared with $19.9 million or 14 cents per share in the comparable 2010 quarter.
Adjusted earnings were 18 cents per share compared with seven cents the previous year. Analysts had been expecting earnings of 17 cents per share on $1.14 billion in revenue, according to Thomson Reuters.
Adjusted operating earnings increased 61 per cent to $50.7 million compared with $31.5 million last year, mostly due to improved performance in the company’s meat processing business.
Sales declined to $1.14 billion from $1.19 billion, primarily due to selling off some of its businesses.
“Excluding these divestitures, and the impact of foreign exchange, sales increased by four per cent,” McCain said.
McCain said Maple Leaf’s eighth consecutive quarter of improved earnings included a “significant increase” in profitability from fresh and prepared meats under labels like Shopsy’s. It also makes breads under brands like Dempster’s.
Maple Leaf has closed several plants around Canada as part of its $1.3-billion restructuring plan and is on schedule to open a bigger one in Hamilton, Ont. in July. McCain said the high Canadian dollar allows the company to invest in new technologies that will help it fight American competitors.
“By aggregating our category volumes...we can match the landed costs of these large U.S. competitors and achieve a 60 per cent improvement in productivity,” he said
“Now that’s real and lasting change to the profitability of this business and the competitiveness in our industry.”
Maple Leaf recently ended a shareholder dispute by bringing the CEO of 11.4 per cent shareholder West Face Capital onto its board of directors.
West Face, which purchased some of the Teachers’ stock last year, had publicly complained the board is too big and alleged some directors are too closely involved with the McCain family members, who hold a controlling vote.
Meanwhile Thursday, Maple Leaf subsidiary Canada Bread Co. Ltd. (TSX:CBY) reported a first-quarter net loss of $966,000 or four cents per share on sales of $371.8 million.
That compared with a profit of just under $13 million or 51 cents per share on sales of almost $382 million in the 2010 quarter. The loss was largely due to $20.1 million in pre-tax restructuring costs, the company said.
Maple Leaf Foods has annual sales of some $5 billion and employs 21,000 people at operations across Canada and in the United States, Europe and Asia.