Maple Leaf Reports Financial Results for Q2 2008

by 5m Editor
30 July 2008, at 7:24am

CANADA - Maple Leaf Foods' report to 30 June 2008 includes adjusted earnings (loss) per share of ($0.01) compared to $0.13 last year, as higher grain and fuel costs outpaced price increases. Restructuring of protein operations are on track, with Brandon plant expansion ahead of plan. Benefits from restructuring, stabilization of commodity markets and pricing are expected to improve earnings in the second half of 2008.

"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." said Michael H. McCain, President and CEO.

"We are focused on persevering through these unprecedented market conditions, maintaining our focus on executing the structural changes we have committed to and passing on price increases to offset the effects of commodity inflation. While the first half has been pressured, we believe the second half of 2008 will show a substantial recovery as markets stabilize and the early benefits of restructuring are realized."

Earnings from continuing operations before restructuring and other related costs ('Adjusted Operating Earnings') decreased by 64.1% to 18.9 million Canadian dollars ($) for the quarter. High wheat and fuel costs compressed margins in the Bakery Products Group as price increases implemented earlier in the year were not sufficient to cover high input costs.

Hog production operations continued to be affected by lower hog prices and higher feed costs. In the protein business, declining poultry processor margins and a higher Canadian dollar were only partly offset by improved pork processor margins. Also included in earnings for the quarter were costs of $3.1 million (2007: $0.4 million) related to consulting and systems conversion initiatives.

Earnings per share from continuing operations before restructuring and other related costs and certain non-recurring tax adjustments ('Adjusted EPS') for the quarter were a loss of $0.01, compared to earnings of $0.13 last year. Year-to-date earnings per share, on a comparable basis, were $0.03 compared to $0.25 last year.

Business Segment Review

Meat Products Group

Second Quarter: 2008 $5.7 million; 2007, $15.0 million; Change (62.0%)
Year-to-date: 2008 $30.7 million; 2007 $36.5 million; Change (15.8%)

This includes value-added processed packaged meats; chilled meal entrees and lunch kits; value-added pork, poultry and turkey products; and global meat sales.

Adjusted Operating Earnings for the second quarter were $5.7 million compared to $15.0 million last year, primarily due to a decline in fresh poultry margins as a result of higher feed and related live bird costs and the effect of a stronger Canadian dollar, which offset improvements in pork processor margins. In the fresh pork business, although results improved over last year, the Company did not realize the full benefit of improved industry margins due to volatility of hog prices in the period. The packaged meat and meals business was impacted by inflationary pressures and costs of investment in innovation. The Company will continue to increase prices to manage rising costs.

The restructuring of the Company's protein operations, which involves significantly reducing the size of 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. Early benefits were realized from lower manufacturing overheads due to the closure of three sub-scale processing plants, double-shifting the front-end processing at the Brandon pork plant, and reduced administration expenses. 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.

A key element of the restructuring is the consolidation of six pork processing plants into one double-shifted operation in Brandon, Manitoba, which will supply raw materials for the Company's packaged meat business. In 2007, 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. In July 2008, the back-end "cut" operations were commissioned, thus finalizing the double-shift expansion of this factory. In the first month of operations, the facility has been running at target volumes with a smooth startup. This expansion will enable the closure of another facility in Winnipeg at the end of the third quarter of 2008. The Company has also commenced marketing its pork facility in Burlington, Ontario, which processes over two million hogs annually. By consolidating these operations in Brandon and reducing the number of pigs processed, significant cost reduction, scale efficiencies and margin improvements are expected to be realized. The successful start up of the Brandon second shift will also result in the cessation of duplicate and start up costs of this project that have so far been charged to earnings, primarily in the second quarter.

Concurrent with the Brandon expansion, expansion at the Lagimodiere Road plant in Winnipeg has established an efficient operation for boning all of the hams produced at the Brandon plant. The Lagimodiere plant will meet all the Company's input requirements of boned hams for production of value-added packaged meat products.

Two new distribution warehouses in Western Canada were commissioned during 2008, allowing the consolidation of existing warehouses and third party storage into these facilities, in Coquitlam and Saskatoon. Although start-up costs associated with the commissioning of these facilities are expected, reduced costs and improved efficiencies should contribute to earnings towards the end of the year.

Agribusiness Group

Second Quarter: 2008 $7.6 million; 2007, $4.7 million; Change 62.2%
Year-to-date: 2008 $4.8 million; 2007 $5.5 million; Change (12.5%)

This group includes swine production and animal by-products recycling.

Adjusted Operating Earnings for the second quarter were $7.6 million compared to $4.7 million last year. The Company's rendering operations achieved strong results in the quarter, benefiting from higher commodity prices, and increased contributions from its biodiesel operations as higher fuel prices and an increase in volumes contributed to profitability. The Company's biodiesel facility in Montreal is now operating at full capacity.

Hog production losses for the period increased by $2.2 million compared to last year, an improved performance compared to the first quarter of 2008. North American hog producers benefited from an improvement in prices in the second quarter, however, Canadian hog producers were disadvantaged by a decline in the US dollar which reduces net revenues for finished hogs.

The Company continues to reduce the size of its hog production operation, marketing 299,000 finished hogs during the quarter compared to 332,000 last year and 338,000 in the first quarter of 2008. Following the sale of its Alberta and Ontario investments, this number will decline to approximately 212,000 hogs per quarter by the end of July 2008.

Restructuring of the core hog production operations in Manitoba is materially complete and the Company benefited from cost reductions in these operations during the quarter.

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.

Further Reading

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5m Editor