food manufacturing in canada

Food Manufacturing in Canada:Go Big or Go Home?

Presentation to the 2011 Dairy and Food Processing Outlook ConferenceEdmonton, March 30, 2011

Rory McAlpine, Vice President of Government and Industry RelationsMaple Leaf Foods Inc.

2

Outline

The burning platform: currency, cost, competitiveness

What Maple Leaf is doing

The implications: scale matters

The cheese pricing problem

Conclusion

33

The burning platform: currency shift

4

The burning platform: input costs

Corn (Weekly Price Chart)

5


Wheat (Weekly Price Chart)

6


Soybean Oil (Weekly Price Chart)

7

The burning platform: productivity shortfall

$0 $100 $200 $300 $400 $500 $600

Other Food Manufacturing

Bakeries and Tortilla Manufacturing

Seafood Product Preparation and Packaging

Meat Product Manufacturing

Dairy Product Manufacturing

Fruit and Vegetable Preserving and Specialty Food Manufacturing

Sugar and Confectionery Product Manufacturing

Grain and Oilseed Milling

Animal Food Manufacturing

C$ (000s)

Value Added per Employee in Food Manufacturing, Canada and US (2008)

US

Canada

Source: George Morris Centre

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The fallout: Ontario food plant closures

Humpty Dumpty Brampton 2005

Iroquois Water Cornwall 2005

Paquette Fine Foods St. Isidore 2005

Nestle Chesterville 2006

Unilever Belleville 2006

World's Finest Chocolate Campbellford 2006

Saputo Harrowsmith 2006

General Mills Trent 2007

Imperial Tobacco Guelph/Alymer 2007

Cadbury‐Schweppes St. Catharines 2007

Maple Leaf Foods Toronto 2007

General Mills Trent 2007

Delta Foods Brockville 2008

Forfar Dairy Forfar 2008

CanGro Foods Inc. Exeter 2008

CanGro Foods Inc. St. David's 2008

Horiz Milling Port Colborne 2008

Kraft Foods Toronto 2008

Kraft Foods Cobourg 2008

Hershey Smiths Falls 2008

DeMets Candy Company Toronto 2008

Pepsi QTG Trent 2008

Campbells Listowel 2009

E.D. Smith Cambridge 2009

ANR Foods Belleville 2009

Unilever Peterborough 2009

Grand River Poultry Paris 2010

Lakeport Brewery Hamilton 2010

Saputo Brampton 2010

Stoney Creek Dairy Stoney Creek 2010

Kicx Nutrition Guelph 2010

Pure Fun Confections Toronto 2010

Everything Maple & More Orillia 2010

J.M. Smucker Delhi 2010

Source: OMAFRA

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The fallout: rising food imports

Canadian Imports of Food, Feed, Beverages and Tobacco - 2006 - 2010 ($ billions)

2.202.40

2.682.78 2.79

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2006 2007 2008 2009 2010

Source: Statistics Canada

1010

Strong Brands

Top‐performing North American consumer packaged food companies deliver:

What Maple Leaf is doing: becoming a top‐performing CPG firm

#1

#2

#3

Leading Market Shares

Competitive Cost Structure

1111

Source: Nielsen MarketTrack, Composite Group of 500 UPCs, National All Channels. 52 Weeks Ending March 31, 2010.

We have built leading Canadian food brands…

Maple Leaf Ranking in Canadian Retail Sales

543552572580

724775810

1,0001,0061,066

1,2331,2661,297

1,5091,553

2,4162,882

3,259

DanoneCampbell

WestonHeinz

L'OrealKelloggAgropur

Coca-ColaGeneral Mills

J&JParmalat

NestleUnilever

Maple Leaf FoodsSaputo

Pepsi / Frito LayKraftP&G

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…and leading market shares

Category Market Position

Commercial Branded Bread ‐ Canada (1) #1

Retail Par‐Baked Bread ‐ North America (2) #1

Fresh Pasta ‐ Canada (3) #1

Fresh Sauce ‐ Canada (3) #1

Bagels ‐ UK (4) #1

Bacon ‐ Canada (1) #1

Deli, Sliced Meats & Ham ‐ Canada (1) #1

Wieners & Sausages ‐ Canada (1) #1

Leading Brands and Market Shares #1 bakery business#1 bakery business

#1 retail par‐baked bread#1 retail par‐baked bread

#1 prepared meats business#1 prepared meats business

#1 fresh pasta business#1 fresh pasta business

(1) AC Nielson ‐ 52 weeks ended July 3, 2010(2) Estimate as of November 2009 ‐ AC Nielsen data not available(3) AC Nielson ‐ 52 weeks ended April 10, 2010(4) TNS ‐ 52 weeks ended July 11, 2010

#1 UK bagel business#1 UK bagel business

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Board‐approved strategy to invest in

network infrastructure

Creates a cost‐competitive, viable and sustainable business

Many different configurations and capital profiles considered; highest return on investment option chosen

Delivers shareholder value far in excess of other alternatives

Many alternative strategies for creating shareholder value considered …

Investing in current plants and optimizing

current business

Operate Bakery and Protein operations

separately

Does not solve the productivity gap or create a sustainably competitive business

Puts business at risk of share loss over time

Will not realize the full profit potential of the business or maximize returns to investors

Maple Leaf is a highly integrated business; not a holding company

Separating integrated businesses would create negative synergies estimated to be roughly $65 million and expected to grow, primarily in shared costs, purchasing, and revenues

No material trading value multiple difference; Impairs shareholder value

Shareholder Value Alternatives

Assessment

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Brandon, MB – scale and efficiencies in primary processingBrandon, MB – scale and efficiencies in primary processing

Laval, Quebec – Our largest and lowest‐cost Fresh Bakery Laval, Quebec – Our largest and lowest‐cost Fresh Bakery

Rotherham, UK – Lowest cost bagel plantRotherham, UK – Lowest cost bagel plant

Processes 86,000 hogs/week, resulting in overhead per KG 23% and71% lower than Maple Leaf’s smaller 45,000 hogs/week and 9,000 hogs/week plants, respectivelyToday Brandon is one of the most efficient processing plants in North America, providing a high quality, low cost supply of pork for Maple Leaf’s prepared meats business

Produces triple the output of Maple Leaf’s other fresh bakeries, at 30% lower overhead cost per unitNew Hamilton, Ontario bakery will further enhance scale advantage by eliminating 3 plants

Maple Leaf’s flagship bagel plant was commissioned in 2005; labour costs per unit are now 29% lower than in 2004Largest and lowest cost bagel factory in the Maple Leaf network, and the most efficient in the UK bagel industry

Roanoke, VA – Showing the benefits of scale in Frozen BakeryRoanoke, VA – Showing the benefits of scale in Frozen Bakery

Success with strategic investments

Seven production lines and 245,000 square feet of production and distribution spaceOverhead cost per case nearly 15% lower than Maple Leaf Frozen Bakery’s other multi‐line plants over the past four years

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We are also driving growth through innovation

Case Study: Natural Selections Deli Meats

Maple Leaf launched Natural Selections packaged sliced meats in early 2010

Made with all natural ingredients, Maple Leaf was first to market meeting consumer demand for healthy convenience sliced meat products

8 ingredients or less, all pronounceable

Health & Wellness Convenience Shifting demographics

Natural Selections product line has grown Maple Leaf market share in category by +35%

Margin trending at 2.5X retail branded deli category average

Maple Leaf’s top 4 selling sliced meats SKUs – and all among the top 30 out of 600+ in Canada

The Results

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Implications

The Opportunity“Enhancing the productivity of labour now depends on business capital expenditures, which are far more affordable with our strong and rising currency.”

Sherry Cooper, Chief Economist, Bank of Montreal

“The bulk of productivity growth comes from shifting market sharetoward more productive plants – existing and new…The more dynamic industries differ from declining ones by their investment in newproductive capacity (e.g., plants, factories, infrastructure).”

Don Drummond, Chief Economist, TD Financial Group

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Implications: the benefits of scale

Reduced Total OverheadFewer facilitiesLower per unit cost

Ability to Invest in TechnologyIncreases volume to supportROI not possible in multiple small plants

Reduced Manufacturing Complexity

Longer runsFewer formulations, SKUsEnhanced food safety

Other Economic BenefitsDistribution efficienciesProcurement savings

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Implications: government policy matters

Canadian food manufacturing cannot be taken for granted by governments, farmers or consumers (no Canadian companies among the world’s largest food processors – Fortune)

Governments must support (at least not undercut) sub‐sectors and firms that can truly raise the bar in terms of technology, process and people.

Governments must think and act beyond “farm policy”, e.g. Growing Forward II is a critical opportunity to repair the legislative/regulatory system that currently fragments markets, stalls innovation and adds supply chain cost to food manufacturing.

Governments should encourage the formation of scale plants and firms with the capacity to be globally competitive while supporting SME’s that cluster around them.

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Maple Leaf Foods - Total Dairy Spend 2011 - $ millions

Butter $2.10

Cheese $18.50

Fluids $2.50

Powders $3.10

Total $26.20

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The Special Milk Class Permit Program (SMCPP) was supposed to keep us competitive, but ….

Cost of Cheese: % difference Canadian over U.S. prices

Feb 11 Apr 10 Nov 07

Ricotta Lean 34% 37% 34%

Mozzarella 13% 24% 20%

Cheddar 28% 32% 28%

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The cheese pricing problem: dairy industry concentration

Source: Statistics Canada, Annual Survey of Manufacturing and Logging, special tabulation.Note: *CR4 measures the share of sales accounted for by the top four largest firms in the sector.

Source: Statistics Canada, Annual Survey of Manufacturing and Logging, special tabulation.Note: *CR4 measures the share of sales accounted for by the top four largest firms in the sector.

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Actions since Dairy Industry Working Group: further import restrictions (milk protein concentrates) and compositional standards for cheese.

Maple Leaf Foods actions to date: 5% “Strategic Value Partnership Initiative” – dairy contribution $86,000 out of $26.2 million spend (0.33%)!

SMCPP: a small part of the problem; cheese manufacturing in Canada: a big part of the problem (especially specialty cheeses).

Limited domestic competition (# of firms, control of quota), no meaningful import competition, insufficient industrial milk supply.

The status quo is not sustainable – for farmers, for dairy processors for food manufacturers – especially with $ Cdn above parity.

2323

Conclusion: building a world class food company in Canada

Maple Leaf is committed to delivering significant and sustainable value.Maple Leaf is committed to delivering significant and sustainable value.

We have an achievable, measurable and affordable plan for competitiveness and productivity.We have an achievable, measurable and affordable plan for competitiveness and productivity.

Our approach involves meeting the challenge from foreign producers head on, by innovating, modernizing, and investing in scale.

Our approach involves meeting the challenge from foreign producers head on, by innovating, modernizing, and investing in scale.

Plan expected to deliver excellent return on assets now and through 2015, even if the dollar is significantly above parity.Plan expected to deliver excellent return on assets now and through 2015, even if the dollar is significantly above parity.

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Conclusion: we need a team effort

Governments can help by shedding “scale phobia”, reducing obstacles to competitiveness and creating better incentives.Governments can help by shedding “scale phobia”, reducing obstacles to competitiveness and creating better incentives.

Input suppliers – including dairy processors – must help food processors manage costs.Input suppliers – including dairy processors – must help food processors manage costs.

Farmers, processors and retailers can help by working together to create sustainable value chains.Farmers, processors and retailers can help by working together to create sustainable value chains.

Canadians can help, by celebrating our food industry champions!Canadians can help, by celebrating our food industry champions!

food manufacturing in canada

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