Interview With Michael McCain
Posted by admin on October 17, 2010
Maple Leaf Foods Inc. has been in the news recently after unveiling a new five-year strategic plan to revamp its business and after a 30% jump in its stock price since August when a shareholder agreement ended between the McCain family and the Ontario Teachers Pension Plan and investment firm West Face Capital Inc. bought one-third of the Pension’s stock holding. CEO Michael McCain spoke this week with The Financial Post. His family owns 32% of Maple Leaf and also one-third of privately-held global french fry giant, McCain Foods Limited of New Brunswick.
Q Teachers sold why?
A “Teachers sold one-third of their position which means they own 25%, the family 32% and West Face 10%. Teachers is in the asset allocation business and they have been doing selling recently. I’m in the food manufacturing business, not asset allocation. West Face is in the investment business.”
Q How has Maple Leaf stock fared?
A “Our stock’s been flat and that’s not good, but the S&P500 is worth less than it was 12 years ago and the stocks of our two main US competitors, Kraft Foods and Sara Lee Corporation, have gone down even though they did not suffer a currency problem or a product recall crisis as we did. I tell our employees this is cold comfort but it’s the context.”
“We’ve dealt with four years of adversity. The economic impact of the higher Canadian dollar costs Maple Leaf Foods in excess of $130 million a year, and the product recall [the listeriosis outbreak in 2008] is costing $80 million a year. In 2009, that’s a total of $210 million against cash flow of $344 million, or 60%. The recall’s effects, which are recoverable, resulted in an immediate 55% reduction in volumes in our premium brand and the entire category went down by 25%. We have been recovering those volumes and are at 90% of pre-recall levels. To do this, we have had to compress margins.”
Q Have you suffered any negative effects from the financial collapse of 2008-09?
A “We are a rather recession-proof industry, but the collapse in markets hurt our pensions which is costing the company $30 million a year out of earnings. Even so, earnings in 2010 should be ahead of last year by 8% to 10%.”
Q What’s the strategic plan and background to it?
A “The plan, costing $1.3 billion, is to close the productivity gap. It includes our normal capital spending of $175 million a year but also includes strategic capital. We have a productivity gap, the legacy of a 65-cent dollar and now we have the opportunity to close this and we need shareholder support.
“Fifteen years ago, when we got into this business, we spent the first ten years making 30 acquisitions in the protein and bakery segments, brought their products into either number one or number two positions in the markets and finished our industry rollout in 2004. We hoped to harvest all our hard work but it didn’t happen. The Canadian currency began to appreciate and between that year and 2010 the dollar increased by 50%.”
“Our acquisitions were spread across the country which were competitive only at a 65-cent dollar. We were making hot dogs for 34 million people in Canada in six locations and our competitor Kraft was making hotdogs in two or three locations for 307 million people. The productivity gap is, for instance, if a new technology comes along and I want to invest $20 million, I have to buy six of those technologies. If the six plants are closed and one large-scale plant replaces them I have to buy the technology only once.”
“We began restructuring in 2007 because of damage from the stronger dollar then the product recall tragedy happened. We would have been having this conversation two years ago but the crisis set us back a couple of years. For a couple of years, we have been sending teams of engineers to do cost benchmarking in the US and Europe and they found that our manufacturing costs were 15 to 25% higher than the best in class, in a thin margin business. We had to invest in scale and in technology. Every economist in this country has been chiding business to solve this productivity gap and our plan will do that. So why shouldn’t capital markets support that?”
“The average plant size in the US is 2.2 times’ bigger. Our plan, which will give us scale, through new facilities and technology and simplified product lines, will greatly improve our results, based on dollar parity. By the way, the higher Canadian dollar has one benefit. It makes the new technologies to enhance productivity more affordable because these are imported from the US and Europe. What would cost C$20 million today for US$20 million in technology would have cost C$30 million [of 65-cent dollars] to buy US$20 million in technology.”
“We are undertaking product portfolio simplification which has marketing and operational aspects. Consumers are clearly telling us that simplifying our categories is a preference, there are too many complications in the shopping experience. We have well over a dozen combinations of a single product based on size and diameter. We don’t need that. We can consolidate with no difference to the consumer. Obviously this simplification means higher volume batches which enhances productivity too.”
Q I understand you have also taken a hit from American exporters as our currency increases and theirs decreases?
A “In the protein business the US manufacturers have doubled their market share from 4% to 8% since our dollar began to rise. In the past two years, 25 food manufacturing plants in Canada have closed involving 5,000 jobs. The J.M. Smucker Company shut two plants and moved operations to a bigger and better plant in Ohio. Food manufacturing is bigger than auto manufacturing and employs 200,000 Canadians so fixing our productivity gap is critical to stop jobs from going south. It also affects the farmers and suppliers.”
Q Should Canada peg the dollar to the US to stop these problems?
A “I’m not an economist and I’ve not talked to anybody, who understands economics, who thinks that’s a good idea. We cannot rely on a strategy of hope, or shift in policy, concerning the dollar. Our plan is a good news story because we have an opportunity to solve the currency problem. It’s not a plan of misery. This is clear, simple, achievable and affordable.”
Q I know I’ve asked before but will Maple Leaf Foods and McCain Foods merge some day?