April 27, 2011

Hog, grain prices to pressure Maple Leaf margins

The impact of higher input costs, especially grain prices, on Maple Leaf's bakery and meat products divisions is likely to affect its margins in the near term as the company embarks on extensive restructuring plan.

Irene Nattel, analyst with RBC Capital Markets, forecasts earnings of 13 a share for the quarter, a 60% jump compared with eight a share in the same period last year when the company reports its results on April 28.

"It should be noted that the sharp run-up in grain prices that is driving higher feed costs and hog prices could hit margins over the near-term. We expect this to be a topic of questioning on the conference call," she said Tuesday (Apr 26).

For the first quarter, margins in Maple Leaf's meat products division are actually expected to widen by 100 basis points, driven by price increases and cost-containment initiatives but offset by higher raw material costs including less fresh pork.

"In prepared meats, which is the business that investors are willing to pay the highest multiple for and want to see recovering, the benefit of price increases to offset rising input costs should be partly offset by a reduction in volumes and profitability due to negative operating leverage as consumer demand continues to adjust to higher prices," she said.

One other factor is the company will be gradually shifting production at its three existing facilities to a new, centralised baking facility as part of its consolidation plan unveiled last year. At the moment, forecasts do not reflect this change as timing and magnitude are uncertain, but it certainly bears watching.