CEO Michael H. McCain faces lean times ahead at Maple Leaf Foods Inc.

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DERWIN GOWAN
TELEGRAPH-JOURNAL

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Michael H. McCain believes he can guide Maple Leaf Foods Inc. (TSX: MFI) through "a difficult patch" he expects to end later this year.

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Jeff De Booy/the canadian press

‘What we are facing today is a classic case of pass-through economics for the food industry,’ said Maple Leaf Foods president and chief executive officer Michael McCain in a conference call Thursday. ‘And there are four phases, that in my 30 years in this business, have always existed in that pass through economics.”

Second quarter operating earnings, for the three months ended June 30, dropped to $19 million compared to $53 million for the same quarter last year, the Toronto-based food processor reported Thursday. Maple Leaf lost a penny per share over the quarter, compared to earning 13 cents per share in the same period last year.

"We expected this from the onset, and discussed it accordingly in prior quarterly reviews, that this would be a difficult patch for this organization, and surely it is," McCain, Maple Leaf's president and chief executive officer, told business analysts in a conference call on Thursday.

"Extreme never-seen-before inflation rates in grain and energy costs, economic conditions that are in flux, and capital markets that are in some form or another of crisis" caused much of this trouble, the native of Florenceville said.

Prices for wheat increased by 116 per cent, oil 91 per cent, while hog prices went up and down, he said.

He has been there and done this before over 30 years in food processing - first at McCain Foods, now at Maple Leaf - he said. Maple Leaf will land on its feet if focuses on managing the current crisis and the restructuring program underway in its meat-packing division.

"What we are facing today is a classic case of pass-through economics for the food industry, and there are four phases that in my 30 years in this business have always existed in that pass through economics," he said.

Phase one, the company accepts the cost increases. Phase two, the company passes higher prices to consumers. Phase three, consumers balk, causing what McCain calls "short term volume adjustment." Phase four he calls "normalization," when grumbling shoppers come back.

"And in my 30 years in this business it's always behaved in that fashion, those four phases of pass-through economics," he said. "We don't believe that this is much different, other than the magnitude of the price changes that we are facing today in such a short period of time."

"Over time we don't believe that there's any significant impact as a result, he said.

Back in April, Dave Wilkes, senior vice-president of the Canadian Council of Grocery Distributors, tied a 9.9-per-cent increase in the price of bread to a 128-per-cent increase in the cost of baking-grade wheat.

"It's a global situation, well beyond the control of any Canadian company in the market place," he said in an interview from Toronto on Thursday.

The price of grain and corn affects McCain Foods as animal feed, and as raw material for its baking division.

High prices for these commodities benefit New Brunswick in one way, by increase the demand for the fertilizer component potash. On Thursday, the Potash Corp. of Saskatchewan, which is developing a new mine at Penobsquis, announced record quarterly profits.

Costs increased beyond the "pass through" increases in prices to consumers, McCain said, but he expects grain prices to moderate in a few weeks as farmers begin to harvest this year's crop.

"We expect to be through this storm of short-term volatility and inflation over the next few months, so we believe today that our second half will actually be substantially better than the first," he said.

The restructuring program to which McCain referred includes consolidating pork processing at expanded facilities in Brandon, Man., selling the pork plant in Burlington, Ont., reducing live hog operations, and building two distribution warehouses in western Canada.

Maple Leaf Foods employs over 22,500 people in Canada, the United States, Europe and Asia. It's three main segments include meat, bakery products and agribusiness.

On Thursday the company declared a dividend of four cents per share payable Sept. 30 to shareholders of record on Sept. 8. Maple Leaf shares closed at $9.60 in Toronto, down 31 cents on a volume of 128,135 shares.