Maple Leaf Sees Earnigs Rise on Meat Falling Sales

by 5m Editor
22 February 2008, at 9:22am

CANADA - Earnings from operations at Canadian pork and food processor Maple Leaf increased by 11 per cent in the fourth quarter and by 15 per cent for the year.

"While we are well positioned to offset a continued rise in input costs over time, heading into 2008 we may face some short-term volatility."
Michael H. McCain, Maple Leaf President and CEO

Maple Leaf said that price increases in both the Bakery and Meat Products Groups mostly offset rising input costs and, combined with improved operational efficiencies and the contribution of acquisitions in the U.K., had a positive impact on results for the quarter and the year.

The Protein Group operating earnings were up by 15 per cent in the quarter and 14 per cent for the year.

However, the company saw loses in its swine production and asnimal by products recyling.

In reporting its fourth quarter and annual results Maple Leaf said that it has successfully double shifted front end processing at its Brandon pork plant and also manged to complete the sale of non-core hog production operations early this year.

"The global food industry has been impacted by the ripple effect of an unprecedented rise in commodity grain costs over the past year. Our steady performance in 2007 reflects our efforts to manage this impact through reducing costs and raising prices," said Michael H. McCain, President and CEO.

"While we are well positioned to offset a continued rise in input costs over time, heading into 2008 we may face some short-term volatility depending on the precise timing of matching price action with cost increases, given the magnitude of the changes.

"However, we are making excellent progress in implementing structural changes in our protein operations that will substantially increase profitability and reduce currency and commodity exposure for the long term. This includes the recent sale of our Ontario and Alberta hog operations that will significantly reduce our losses in this business."

Sales for the fourth quarter fell by six per cent to C$1.3 billion compared to the same period last year, and year to date sales decreased by two per cent to C$5.2 billion. Although price increases and acquisitions have generated higher sales, total sales are lower due to the impact of the sale or exit of non-core businesses and the stronger Canadian dollar.

Meat Products Group

Meat Products Group sales for the fourth quarter declined by 13 per cent to C$820 million compared to C$942 million last year and for the year declined by eight per cent to C$3.5 billion compared to C$3.7 billion last year. This decrease was due primarily to exit of certain global businesses and currency changes.

Adjusted Operating Earnings for the fourth quarter increased by 12 per cent to C$42.4 million from C$37.9 million last year, reflecting improved earnings from the fresh pork business, driven by benefits related to the closure of the Saskatoon and Winnipeg pork processing plants in the second and fourth quarters of 2007 respectively, and completion of double-shifting front-end processing at the Brandon processing plant, combined with stronger industry pork processor margins. Further processed meat products benefited from increased pricing. These positive factors outweighed the impact of currency and lower poultry processor margins as increases in live bird costs exceeded fresh poultry market price increases.

Adjusted Operating Earnings for the year increased by 21 per cent to C$90.2 million from C$74.4 million in 2006, mainly driven by increased returns in the fresh pork and poultry businesses, benefiting from improved industry processor margins on average through the year, compared to 2006. The positive effect of these improvements were further reinforced by improved operating efficiencies resulting from primary processing plant optimization mentioned above and the closure of the Company's poultry facility in Atlantic Canada, which offset the impact of a strengthening Canadian dollar. While price increases implemented by the further processed meat business managed to offset rising raw material costs by the end of the year, the lag in the timing of pricing together with an increased investment in product development and marketing resulted in lower earnings compared to 2006. The Company has made significant investments to drive expansion in the chilled meals category, and over the past year has established market leadership in this higher growth market segment.

A cornerstone of the Company's new protein strategy is to significantly reduce the volume of fresh pork it processes to a level that supports internal requirements for further processed products, consolidated in one scale plant in Brandon, Manitoba. Supporting this strategy, the Company double shifted the front-end processing at Brandon in early September, reaching its target of 75,000 hogs per week during the fourth quarter. In 2007, the Company closed two pork processing plants in Saskatoon and Winnipeg, which processed a combined total of approximately 1.7 million hogs per year. The Company will invest further capital in its Brandon facility in 2008 to expand and double shift the back end 'cut' operation and proceed with the divestiture of its primary processing facility in Burlington, Ontario.

Agribusiness Group (swine production and animal by-products recycling)

Agribusiness Group sales for the fourth quarter decreased by seven per cent to C$60.5 million from C$64.8 million last year, and sales for the year decreased by two per cent to C$241 million from C$245 million. This decrease was primarily due to the restructuring of the hog production operations.

Adjusted Operating Earnings for the fourth quarter were a loss of C$9.1 million, consistent with the prior year. Significant increases in feed prices and the continuing rise in the Canadian dollar, compounded by lower hog prices had a negative impact on hog production margins. Increased earnings from rendering operations, along with benefits from short-term risk management programs helped offset these negative factors. Biodiesel production also contributed to performance benefiting from capital upgrades undertaken in the year that further enhanced product quality and consistency.

Adjusted Operating Earnings for the year were a loss of C$7.8 million compared to a loss of C$2.5 million in 2006. As noted above, rising feed costs and a strong Canadian dollar resulted in lower hog producer margins. Productivity was also affected earlier in the year by an industry-wide outbreak of circo virus. These impacts were somewhat mitigated by strong markets for rendered products that tracked rising commodity grain prices.

In January 2008, the Company sold most of its Ontario hog production operations and almost all of its hog production investments in Alberta. This, combined with progress in restructuring its operations in Manitoba, represents a significant milestone towards achieving the Company's new integrated business model. This materially completes the Company's exit from Alberta and Ontario hog production operations and the concentration of its production assets in Manitoba. The balance of the hog inventory in Ontario and Alberta will be marketed in the first quarter of 2008. As a result, after the first quarter of 2008, the annualized number of finished pigs produced by the Company is expected to reduce to approximately 750,000 hogs compared to the 1.3 million produced in 2007. At the end of 2007, the Company effectively owned 20 per cent of the hogs that it processed in its facilities.

In the first quarter of 2008, the Company completed the purchase of Central By-Products, a rendering business located near London, Ontario. This acquisition reflects the Company's ongoing commitment to the rendering business.

Further Reading

More information - You can view the full quarterly report by clicking here.

5m Editor