food manufacturing in canada
TRANSCRIPT
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
The burning platform: input costs
Wheat (Weekly Price Chart)
6
The burning platform: input costs
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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The cheese pricing problem
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 cheese pricing problem
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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The cheese pricing problem
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.
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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!