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When Michael McCain stepped into the Maple Leaf boardroom in the late 1990s after his family took a controlling stake in the Canadian food group it seems unlikely that he could have been aware of the challenges that lay ahead. The company, which is in the midst of a major overhaul to address the structural shortcomings of its meat and bakery businesses, is struggling to tread water in the current climate of high costs and declining consumer spending. And while McCain remains upbeat on Maple Leaf’s long-term outlook, some industry watchers are less optimistic, Dean Best reports.

Michael McCain, boss of Canadian food giant Maple Leaf Foods, calls it “Destination 2010”.

Two years ago, the company, Canada’s largest food processor and maker of brands including Maple Leaf hot dogs and Dempster’s bread, launched wide-ranging plans to overhaul its meat business, a programme designed to create a more “focused company” by 2010.

The revamp came as McCain sought to breathe fresh life into a business his family won control over more than a decade ago. McCain’s father, Wallace McCain, snapped up a majority stake in Maple Leaf in 1995 just months after he was ousted from McCain Foods, the French fry company he co-founded, after a bitter dispute with his brother Harrison.

Michael McCain moved into the Maple Leaf boardroom with his father in the spring of 1995 and became president and COO. Four years later, in 1999, McCain was appointed CEO.

However, a shift in the global economy and the sharp rise of the Canadian dollar in the 2000s meant that a business based on “selling fresh pork to the world” as McCain said in 2006, had to change.

Maple Leaf wants to create more value from its meat business, which accounts for two-thirds of revenue but under half of profits. The restructuring, which involves consolidating its pork processing and focusing on higher-margin businesses, has also taken in Maple Leaf’s bakery operations, which has closed a site in Canada but also made acquisitions at home and abroad.

McCain believes the programme will result in nothing less than the “transformation” of Maple Leaf. “Our business will be simpler, more focused and easier for people to understand,” McCain says. “We will have the benefit of higher growth rates and stronger brands, backed up by a heavier emphasis on innovation. We will have more control over our destiny, with every intention to pursue a global growth agenda.”

Such an overhaul was always likely to be problematic but to take place while commodity prices have soared in recent months has left Maple Leaf wilting. Yesterday (24 July), the company posted a slump in underlying earnings for the first half of 2008 – that is, once restructuring charges are excluded from the numbers – and pointed to soaring grain and fuel costs. Sales were helped by price increases but turnover still fell, dipping almost 3%.

McCain said he fully expected a “difficult” first half of the year due to higher feed and wheat costs but said Maple Leaf would push ahead and believed its revamp would stand the company in good stead. “We believe the second half of 2008 will show a substantial recovery as markets stabilise and the early benefits of restructuring are realised,” he said.

Some industry watchers, however, are slow to share McCain’s optimism. Cherilyn Radbourne, an analyst at Scotia Capital, has expressed concern at the “commodity-related headwinds” facing Maple Leaf and describes the short-term outlook for the business as “very challenging”. Maple Leaf’s meat business is under pressure from feed costs, while margins at its bakery operations, which comprises the company’s 89% stake in Canada Bread, will remain under a cloud for longer than expected due to higher fuel costs – despite easing wheat prices. This outlook led Scotia Bank, even before Maple Leaf issued its half-year numbers, to reduce its earnings per share estimates on the company for 2008 and 2009.

However, upon cutting her earnings estimates, Scotia Bank’s Radbourne insisted that there remains some value in Maple Leaf’s shares, given its leading market shares in categories like hot dogs, ham and bacon. Question marks remain, however, over how much those commodity headwinds will blow McCain and Maple Leaf off course as they carry on with their journey to Destination 2010.