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5 Reasons Maple Leaf Foods Will Rebound

Last week, Maple Leaf Foods (TSX: MFI), which has operations across Canada and in the U.S., Europe, and Asia, reported a higher quarterly net loss. This was because of higher costs and restructuring charges. Maple Leaf Foods president and CEO, Mr. Michael H. McCain, noted that the company’s losses are partly due to a hog virus that increased pork prices.

Maple Leaf Foods is a well-known company that specializes in meats products including sliced deli meats and fresh chicken. The company has weathered previous business storms, including listeriosis found in its North York, Ontario plant in 2008. Here are five reasons I expect it to rebound again.

1. Sales growth

Despite market challenges, Maple Leaf Foods did have sales growth for Q1 2014 (ended March 31, 2014). Its sales from continuing operations was $711.3 million for Q1, an increase of 3.2% from the prior year. The increase is 2.1% after adjusting for the impacts of foreign exchange. Its Meat Products Group sales for Q1 increased 4.0% to $705.4 million. This increase is 3.0% after adjusting for the impact of foreign exchange.

A meat products competitor to Maple Leaf is Tyson Foods (NYSE: TSN). Tyson is among the world’s largest processors and marketers of chicken, beef and pork. Tyson produces, distributes and markets chicken, beef, pork, prepared foods, and related products. It provides products and services to customers across the U.S. and approximately 130 nations. In fiscal 2013, the company had record sales of $34.4 billion.

2. New Hamilton, Ontario facility

Maple Leaf closed its wiener production plant in Hamilton in April. It is moving operations to a larger plant in Hamilton (Heritage facility). This is a 402,000-square-foot prepared meat processing facility. The company is continuing to build sliced meats and wiener production at the new facility. It will be one of the biggest and most technologically advantaged plants of its type in North America.

3. Its long-established Maple Leaf and Schneiders brands

Maple Leaf Foods sells its products to retail, foodservice, industrial, as well as convenience outlets. Its Meat Products offerings include prepared meats, lunch kits and protein snacks. Products also include value-added fresh pork, poultry and turkey products.

The company’s Maple Leaf and Schneiders brands take up significant shelf space in Canadian supermarkets. Moreover, Maple Leaf exports substantial amounts of its products to consumers outside of Canada.

In 2004, Maple Leaf Foods closed the acquisition of Schneider Corp. (Schneider Foods) from Smithfield Foods, Inc. Schneider Foods is one of Canada’s largest producers of premium branded quality food products. Its specialty is packaged processed meats, poultry, and grocery products.

Maple Leafs trusted brands include Maple Leaf Prime Naturally, Tenderflake, POM, Shopsy’s, Mitchell’s Gourmet Foods, Ben’s,  and Chevalier, among others

4. Establishment of a low-cost meats supply chain and upgrades

The company’s strategy is to have a low-cost meat supply chain of 13 meat plants rather than 22. It also wants two distribution centres as opposed to 19. In October 2013, Maple Leaf announced it would spend $560 million in infrastructure and technologies over three years. This includes the new Hamilton plant.

Other consumer goods companies are focusing on cost containment and efficiencies. Hormel Foods (NYSE: HRL) in Canada is a varied business throughout numerous channels. The company’s products in Canada include grocery, food service, and refrigerated items. In processed meats, it offers its Hormel deli tray and Hormel snack tray, and Spam. In fiscal 2013, Hormel experienced performance increases and expense reductions in its live production supply chain. For fiscal Q1 2014, the company’s Grocery Products segment profit grew 13% and sales grew 20%.

Tyson Foods also runs ongoing R&D activities to automate manual processes in its processing plants and grow-out operations. It has its Discovery Center, which includes 19 research kitchens and a U.S. Department of Agriculture (USDA)-inspected pilot plant. This center allows the company to bring new market-leading retail and food service products to the marketplace efficiently and quickly.

5. Sale of its interest in Canada Bread

Maple Leaf Foods has a 90% interest in Canada Bread (TSX: CBY). It has agreed to sell Canada Bread to Grupo Bimbo of Mexico. Maple Leaf will net gross proceeds of approximately $1.65 billion for its share in Canada Bread. The expectation is that the transaction will close this second quarter.

With the proceeds from the Canada Bread sale, Maple Leaf Foods will pay down debt, assist growth in its consumer prepared meats business, and return capital to its shareholders. The company is focusing on cost savings and its meat products. On April 30, 2014, Maple Leaf declared a dividend of $0.04 per share.

A strong future ahead

Essentially, Maple Leaf is focusing on developing its leadership in the consumer packaged meats business. The company is consolidating operations for efficiency, which will contribute to a stronger bottom line once its seven year restructuring completes. Maple Leaf, with its storied brands, will, I believe, continue to provide returns to stakeholders now and in the future.

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Fool contributor Michael Ugulini has no positions in any of the companies mentioned in this article. 

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