TORONTO - Canada's largest baker and food processor plans to raise prices to offset rising commodity costs as the company also embarks on the biggest efficiency drive in its history, a streamlining effort that will lead to plant closures and significant new investments.
"It is the largest cost reduction effort in the history of Maple Leaf, ever," Maple Leaf Foods president and CEO Michael McCain said on a conference call with investors Wednesday.
"Its purpose is to significantly reduce costs and improve productivity to bring our plant structure on par with large U.S.-scale processors."
Maple Leaf, which produces the Maple Leaf and Burns brands and also is Canada's largest baker through its Canada Bread subsidiary, said Wednesday it aims to improve efficiency as the company emerges from a period of "adversity," marked by the negative impact of a rising loonie, and a "tragic" tainted meat recall.
Like all food processors, Maple Leaf has been squeezed by rising commodity prices — everything from flour used to bake bread to sugar for pies and pastries and pork, beef and chicken for cold cuts and hot dogs.
As a result, it will raise prices on many of its products. But McCain could not say how much consumers would see prices rise on products in the grocery aisles.
"There are some natural price increases that we are compelled to pass on to consumers due to the inflation that exists in the food industry over the course of the past six months and you're seeing that in all meat products and all bakery products," McCain said.
The company has been dealing with inflating costs of raw materials including the impact of higher wheat costs on its bakery business and hog prices driving meat costs higher—a phenomenon that is putting pressure on food processors around the world, he added.
The company also faces rising energy, shipping and other costs as well as the impact of a rising loonie, which has opened the door to increased competition from U.S. produced foods exported to the Canadian market.
Maple Leaf did not say how many of its 23,000 employees in North America and abroad would be affected by the cost-cutting efforts.
In its restructuring announcement, Maple Leaf said it plans to spend $755 million on the major reorganization starting this year and running through 2013. The cost reduction efforts are expected to boost profit margins by 75 per cent over the next five years.
The company said it will open a new large-scale prepared meats plant, with construction expected to start in 2012. It currently has prepared meats factories across Canada, but some will be closed or sold in the streamlining. It has previously announced a similar strategy in its bakery business that will consolidate three Toronto-area bakeries into a massive plant in Hamilton.
It is also hiking prices of both its bakery and meat products and ending promotions implemented to boost sales in the wake of a massive product recall sparked by a Listeria outbreak at its Toronto plant that left 22 people dead in 2008. The result was a 50 per cent drop in packaged meat sales.
The efficiency improvements will make it easier to compete against U.S. food processors, whose market share in Canada has doubled as the loonie gained value over the past five years, McCain said.
A rising Canadian currency, now near par with the American dollar, makes imports of food from the United States cheaper for Canadian consumers.
Meanwhile, McCain added, the currency fluctuation exposed a productivity gap at Maple Leaf, whose current plant network is "fragmented, small scale and low-technology."
"A 65 cent dollar tends to mask those kind of challenges, but when the currency migrated to parity, all of a sudden it is a problem, and the solution is scale, which is consolidating those facilities into larger, more efficient lower cost plants, but equally technology," McCain said in an interview Wednesday.
The company started on the path toward efficiency improvements when it first began to feel the burden of a rising Canadian dollar in 2007, he said.
"Unfortunately the product recall, which occurred in 2008 set us back by a couple of years and we had to defer all of the very important initiatives that we had under way," McCain said.
Maple Leaf's plan to revamp its supply chain, which accounts for 87 per cent of the company's costs, was approved by the board of directors last September and Maple Leaf has been working on the best way to improve efficiency for the past year, McCain said.
McCain says the company has narrowed down where it might put that new plant, but added it won't announce where until it notifies its employees and unions.
He said it's too early to comment on possible job losses due to the consolidation and did not immediately provide details on how many plants it aims to close.
"We're going to do it project by project and as those projects firm up with specific plans for that individual facility then we will discuss it with our unions first," he said.
McCain said the company will also improve its product mix to drive short-term growth.
"For example, we partnered with a major retailer in the country to revamp our wiener lineup ... and we'll roll this approach out to other customers and categories over the next number of quarters."
Maple Leaf has been working to revamp its bakery operations, an initiative announced in March to replace three smaller bakeries, which it described as aging and unable to expand. The company considers a massive new bakery in Hamilton set to open in the middle of next year as part of its broader reorganization.
The reorganization is the first major announcement from Maple Leaf after the company gained a large new investor, West Face Capital Inc., a Toronto-based investment firm known for cracking down on the operating costs of companies in which it invests.
West Face bought the stake in August from the Ontario Teachers' Pension Plan, one of the company's largest shareholders, which has said it is open to selling its remaining 25 per cent interest at the right price.
McCain said the company will finance the reorganization through cash and debt without issuing any equity.
Maple Leaf employs about 23,500 people at operations across Canada, the U.S., the U.K. and Asia.
Bob Gibson, a retail analyst at Octagon Capital Corp., says it's difficult to discern where the move will send the company's stock price in the near-term as it has not yet provided enough details.
"I need more information on how they're going to achieve those margins," he said, adding that its estimate that the move will improve margins by 75 per cent is "huge."
"They said there's going to be $100 million in cash restructuring costs, but we need to know what the non-cash restructuring costs will be."
Maple Leaf shares closed Wednesday at $11.97, down 41 cents, or three per cent on the Toronto Stock Exchange.