Volatile commodities and restructuring hits Maple Leaf Foods, but outlook positive

Tough market conditions and ongoing restructuring expenses led to a weak third quarter for Maple Leaf Foods Inc., but the company said it expected profitability to turn around as those headwinds eased in coming quarters.

“This is [a] challenging year by any measure; the story for the quarter reflects a consistent theme of volatile commodity markets throughout the year, colliding with the cost of change,” chief executive Michael H. McCain said during a conference call with analysts. “We are in the middle of no less than five simultaneous operational startups that have not been as smooth as expected, but are improving.”

The Toronto-based meat and bakery company is seeking operational savings as part of a seven-year restructuring plan that would improve the profits of the overall business, which is primarily focused on meat products.

Several plants have been shut down or sold, and Maple Leaf has also said it was exploring strategic alternatives for the bakery business, including a potential sale or some other transaction, which would include a majority stake in Canada Breads.

Maple Leaf recorded a loss of two cents per share from continuing operations, down from a year-earlier profit of six cents per share from continuing operations. Revenue was down about 2.5 per cent from a year ago, falling to $1.15 billion from $1.18 billion with declines in all of its major business segments.

Beyond the transformation costs, Maple Leaf said earnings took a hit from higher raw material and other inflationary costs, primarily due to an increase in fresh pork prices.

“Given this environment, it is entirely fair to say that in the middle of such intensity, we are clearly not performing at the top of our game by any measure,” McCain said.

RBC Dominion Securities analyst Irene Nattel said the weak results were expected, as the manufacturing transformation threatened to eclipse underlying progress.

“Although MFI is making progress on its strategic agenda, confluence of headwinds hit Q3 results from meat products harder than anticipated,” Nattel said in a note to clients. “Bakery earnings were the star of the quarter, suggesting that CBY could attract interest from potential buyers at higher multiples,” she said.

Canada Bread reported separately that it had $24.5 million of net earnings, or 96 cents per share in the quarter, up from $23.5 million or 93 cents per share a year earlier.

Canada Bread’s revenue fell to $392.5 million from $401.5 million.

Maple Leaf’s overall third-quarter profit was down sharply, falling to $15.5 million or nine cents per share from $26 million or 16 cents per diluted share in the third quarter of 2012.

Discontinued operations kept the company from an overall loss in the three-month period that ended September 30, contributing $15.5 million of net income.