Michael McCain, the president and CEO of Canadian food giant Maple Leaf Foods, has set out plans to make the processed meats and bakery firm a leaner business.
The company’s five-year plan, announced yesterday (6 October), has been drawn up to simplify the business, make it more efficient, drive down costs and, ultimately, boost margins.
Thanks to the strength of the Canadian dollar, Maple Leaf is facing increased competition in its own backyard from the US. But, thanks to a series of acquisitions, Maple Leaf has a vast network of plants across Canada and a cost structure that means it is difficult for the business to compete with its US rivals.
McCain’s plan is to consolidate some of those plants and to modernise its manufacturing to make Maple Leaf more productive so it can compete with the likes of Hormel Foods in protein and Aryzta in bakery.
The plan will involve capital expenditure of C$755m (US$739.7m) but McCain has told investors that the programme will eventually boost its EBITDA margin from a current level of 7.5% to 12.5% in 2015.
McCain believes that the programme, combined with the company’s “leading positions” in the Canadian protein and bakery sectors will mean it can achieve its margin target and surpass the levels currently seen at the likes of Hormel and Aryzta.
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McCain is Maple Leaf’s largest shareholder. The Maple Leaf chief is a member of the McCain family that holds around a third of the business.
That said, the company has faced issues elsewhere in its share roster. In August, The Ontario Teachers’ Pension Plan sold part of its 36.3% stake in Maple Leaf amid speculation that it was dissatisfied with the company’s progress.
The pension fund, which now holds just over a quarter of Maple Leaf, sold its shares to investment manager West Face Capital, a shareholder seen in Canada as an activist investor.
Neither Teachers nor West Face Capital have made any public comment on Maple Leaf’s
five-year plan although McCain has insisted the programme has won the unanimous approval of the company’s board.
However, yesterday’s announcement from McCain had already been signalled a year ago. Last September, Maple Leaf said it would look to ensure its business enjoyed “cost-competitiveness” with its US rivals and the company also noted the opportunity to “consolidate” its production footprint. The group also flagged up that it would implement SAP as part of its plans to improve efficiency.
McCain’s latest announcement put some meat on those bones – notably the EBITDA margin target, details on the level of capital spending and the plan for a new prepared-meats facility – but, in terms of broad strategy, it was pretty much what the investment community expected.
Michael van Aelst, vice president and director at investment bank TD Newcrest, said the five-year plan was “not materially different” from what Maple Leaf had already disclosed.
However, he said investors would “welcome” the specific margin targets and said Maple Leaf’s management had “a solid track-record” in recent years of restructuring.
Nevertheless, van Aelst indicated some investors could be apprehensive about the level of capital expenditure planned. “The substantial capex program planned is arguably an area of concern given that any additional material external headwinds could prevent Maple Leaf from achieving its profit targets,” van Aelst wrote in a note to clients.
“We can’t help but feel that the timing of the announcement – considering we are still over a month away from the November 18th Investor Day – is meant to pre-empt a potential proposal by West Face Capital. Some major shareholders are likely interested in seeing management do much the opposite – cut costs and capex to maximize short-term profit and cash flows.”
McCain has set out his stall to make Maple Leaf more competitive and to make the business more profitable. However, there remains a series of questions about how the company will meet its margin targets – phrases like “a series of plant consolidations” were not fleshed out.
The Maple Leaf boss did suggest that the company’s margins will improve through a series of “near-term” gains, including the “normalisation” of the company’s trade spend. Maple Leaf upped its trade expenditure to protect volumes in the wake of the 2008 listeria outbreak at one of its plants, which was linked to around 20 deaths and which dented consumer confidence in the company.
However, with any five-year margin targets, there remains uncertainty about whether they can be met. Some industry watchers may question what Teachers and West Face Capital would have made of the plans but, for Octagon Capital Corp. analyst Bob Gibson, a more pertinent question is whether McCain’s plan will attract future investors.
“The big question is what Teachers is going to do with the rest of its stake. Does the plan get other investors excited enough to buy that block of shares?” Gibson asked. Only time will tell.