Maple Leaf Foods chief executive Michael McCain has suggested the company’s falling earnings are the “cost of change” as the Canadian meat and bakery group invests in improving its business.
The company today (31 July) revealed net earnings fell to a loss of C$14.7m in the six months to 30 June, down from a net profit of C$20.2m in the comparable period of last year, while adjusted operating earnings dropped by more than two-thirds in the period, sinking to C$30.35m.
Maple Leaf blamed the decline on problems at its protein business, which has been hit by weak global pork markets, poor hog returns and commodities volatility.
Significantly, the company said the bottom like was also hit by the investments it is making in its meat processing factories and distribution network. Maple Leaf said it has stepped up the level of investment year-on-year as it implements its strategy to increase “scale, productivity and profitability” in its prepared meats business. During the second quarter, the group got three “large plant expansions” in Sascatoon, Winnipeg and Brampton under way, resulting in higher costs.
During an conference call following the results release, Maple Leaf management insisted that – although profits have taken a near-term hit – the group expects these investments to reap long-term rewards.
While chief executive McCain conceded Maple Leaf’s results have felt the negative impact of “protein market headwinds”, he emphasised the “prepared meats transformation on track” and that the group expects “increased costs through the start-up phase” to subside.
In his presentation to analysts, McCain attributed 88% of Maple Leaf’s earnings drop to “declining protein markets” and “transition costs”. The company has been hit by higher feed and rain costs, lower poultry margins, hog production losses and the declining Japanese yen.
However, the company has been working to build top-line growth in prepared meats. Through a focus on quality and NPD, Maple Leaf intends to “build a protein snacking platform – a major opportunity for growth”. McCain added the prepared meats business saw some volume recovery in the second quarter, after price increases to offset higher input costs drove down volumes in Q1.
While Maple Leaf’s results have been depressed by issues in its meats business, the group’s bakery operations grew earnings by 5% thanks to increased efficiencies, a “steady” performance from its frozen bakery operations in the US and volume growth in bagels and croissants in the UK. The company also closed a Toronto bakery in June, eliminating overhead costs of C$5m in the first-half of the year.
According to Canaccord Genuity analyst Derek Dley, the closure of the facility – which should mean the final quarter of duplicate bakery costs – is likely to result in a 50 basis point increase in YoY EBITDA margins to 11.7%.
However, Dley emphasised management’s efforts to improve efficiency will face a lag as they feed through to the bottom line.
“We continue to view 2013 as a transition year, with the bulk of the benefits related to the company’s strategic plan expected to begin to show up in results during the back half of 2014,” he predicted.