Maple Leaf Foods launches value-creation plan

by Bryan Salvage
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TORONTO – Maple Leaf Foods announced a comprehensive plan to significantly increase near- and longer-term shareholder value. Unanimously approved by the company's Board of Directors at its annual strategy review, the plan builds on a strategic direction previously approved by the Board in September 2009 and includes, among other things, simplifying meat product formulations, plant consolidations and building a new prepared meats plant with construction scheduled to begin in 2012.

Maple Leaf expects the plan will deliver substantial earnings growth in each of the next five years. Specifically, the company expects its plan will increase EBITDA margin by more than 75% over the next four to five years -- from a current level of 7% to 9.5% in 2012, and 12.5% in 2015.

The plan includes several initiatives expected to increase margins in the near term, of which several require little or no capital investment. Many of these near-term initiatives are well underway, including pricing and normalization of trade promotional activity, simplification of meat and bakery products formulation and manufacturing, early facility rationalization and the implementing an integrated SAP system that will provide a base to enhance business performance and further reduce administration and processing costs.

The plan also contemplates a series of plant consolidations, coupled with strategic capital investments in new manufacturing capacity and technology. This will include construction of a new prepared meats facility, with construction planned to commence in 2012. These investments are expected to materially increase the profitability and competitiveness of Maple Leaf's manufacturing facilities and its distribution network.

"After a thorough review of management's plan and other alternative value creation opportunities, the Board concluded that this plan is the best path to deliver substantial earnings growth and shareholder value,” said James Hankinson, Chair of the Governance Committee of the Board. “It is achievable and measurable, with well-defined performance milestones. The Board will remain deeply engaged, working with management to ensure we realize that value."

"Maple Leaf Foods has a clear and achievable plan to deliver significant earnings growth now and through the next five years, yielding a very substantial return to shareholders," said Michael McCain, president and CEO. "The primary driver of this earnings growth will be increased efficiency throughout our manufacturing network, which represents the largest portion of our total cost structure. We expect to achieve this by reducing complexity, consolidating plants and investing in scale and technology. We intend to finance these initiatives through internal cash flow and debt capacity without issuing equity, while maintaining an investment grade balance sheet throughout the process."

The significant increase in earnings accruing from the plan will result in returns on assets employed well in excess of the company's weighted average cost of capital. Management is confident it will achieve these targets, with the majority of these gains coming from well-defined cost reductions.

The strategic capital expenditures necessary to deliver the plan will be incurred over the next three to five years. The pace of the program will be balanced with margin improvement, with interim targets achieved before committing to new levels of investment, in order that the company has the underlying cash flow and balance sheet strength required to support the investments with no incremental requirement for new capital from shareholders.
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