Maple Leaf Foods Inc. Business Information, Profile, and History

Company Perspectives:

The Maple Leaf Foods management team is committed to a vision of becoming a global leader in the pork and poultry value chains, and a North American leader in the bakery business.

History of Maple Leaf Foods Inc.

Maple Leaf Foods Inc. is Canada's largest food processor and is one of Canada's largest rendering operations. The company employs more than 13,000 people at operations across Canada, in the United States, Europe, and Asia. Maple Leaf Foods produces fresh and processed pork and poultry products for retail and wholesale sales, as well as pet and livestock foods. The company also produces frozen dough for bakers and fresh and frozen baked goods and fresh pasta and pasta sauces.

The Early Years: Mergers and Acquisitions

Maple Leaf's origins stem back to 1836, and its history covers more than a century of mergers and acquisitions. The completion of the Welland Canal in 1833 initiated the beginning of industrial-scale milling in Canada. In 1896, Grantham Mills, the forerunner of Maple Leaf Mills Limited, was built in St. Catherines, Ontario. The Maple Leaf Brand first appeared in 1898.

In 1901, Grantham Mills and Thorold Mills merged to form the Hedley Shaw Milling Company. The Maple Leaf Mills Company was incorporated under the Dominion of Canada letters patent in 1904. In 1907, the Maple Leaf Flour Mills Company acquired the Hedley Shaw Milling Company and Grantham Mills, and the Maple Leaf Milling Company Limited was formed to take over the assets of the Maple Leaf Flour Milling Company. The Canada Bread Company Limited--later to play a major role in Maple Leaf's History--was founded in 1911 through the amalgamation of five companies.

The 1920s were a time of consolidation for Canadian meat packers who, increasingly, were relying on the export market to survive. In the latter years of the 19th century, miners and settlers had provided an expanding market for packers, but this demand leveled off around the turn of the century. However, worldwide demand for meat increased, and Canadian production increased correspondingly. Meat production grew yet again to meet the demand created during World War I. Unfortunately, at war's end, the demand for Canadian meat dropped when Canada was cut off from the European Market. Demand dropped again in 1921 when the United States imposed a tariff on Canadian beef. Within a few years, Canada was facing severe competition for the market in the United States from such countries as Argentina and Australia. The decreased demand for Canadian meat lead to a decrease in the number of meat-processing plants in the country.

Meanwhile, the Harris Abattoir Company of Toronto had succeeded during the 1920s by lowering production costs. In 1927, Canada Packers Limited was formed as a holding company when Harris purchased Gunns Limited and Canadian Packing Company Limited and then merged with William Davies Limited. J. Stanley McLean, secretary-treasurer of the Harris Abattoir Company McLean became the first president of Canada Packers Limited and held the post for 30 years. Canada Packers realized a profit of more than C$1 million during its first year of operation.

After the merger, the four companies that made up Canada Packers remained as separate operating units and continued to compete with each other until the Great Depression forced a change in their operations. Meat prices were high, and a drought in the prairies resulted in high unemployment and a decreased demand for meat. The William Davies Toronto plant closed in 1931, and the four companies formed a single company in 1932. By 1933, operating expenses had been cut by C$7 million annually.

The company revived during the mid-1930s, largely due to the Ottawa Agreements that allowed Canadian packers to export 280 million pounds of bacon a year to England. At the same time that production was increasing for the meat-packing side of the business, the by-product division began to sell a mixture of scraps as a feed concentrate for animal food. This was a new venture and one that was to prove extremely profitable. Animal feed consistently remained a reliable division of the company.

Canada Packers began expanding in 1936 with the building of a meat-processing plant in Alberta and the acquisition of a tannery in Ontario. In 1938, the company opened an additional packing house and renovated other plants. The capital investment between 1935 and 1938 came to more than C$2.5 million.

During World War II, Canada continued to supply meat to England, doubling the export of bacon. Despite a labor shortage, the number of people employed by Canada Packers doubled to more than 11,000. The war years and those that followed heralded two significant events for Canada Packers. First, driven by a need for increased efficiency during wartime, the company established a research laboratory, which lead them into the production of synthetic vitamins, gelatin, synthetic detergents, and dairy products. By 1946, the chemical application of animal by-products was playing such a significant role that it was awarded the status of a separate division.

Second, in 1943 and 1944, workers at Canada Packers were organized by the United Packinghouse Works of America, later to become the Canadian Food and Allied Workers Union. This event was to have an impact on earnings for years to come. In 1947, a nationwide strike involved 16,000 meat packing workers across the country. Canada Packers negotiated new contracts two months later.

Anticipating a recession, Canada Packers stepped up its diversification efforts. The expected recession, however, did not materialize. Population growth coupled with an era of prosperity led to an increased demand for meat and meat products. The research laboratory began to focus on improved production methods, and automated slaughtering operations replaced the manual process. Similarly, the company applied new technology to the mass production of poultry. Canada Packers' sales were greater than those of its two closest competitors combined.

In the 1950s, per capita consumption of poultry doubled and continued to increase in each decade. Through investments, acquisitions, and the development of a feather-cleaning company, Canada Packers began to expand its operations in the poultry industry. In 1954, William McLean became president of the company.

In 1955, the company purchased two packers, initiating a dispute with the Restrictive Trade Commission. However, Canada Packers was able to make the case that industry-wide competition had increased and that the purchase would have no restraining effect.

Also in the 1950s, Canada Packers reorganized its many interests into separate divisions--feed and fertilizer, consumer products, and canned and frozen vegetables. By 1958, only 55 percent of sales were from meat.

Dramatic Changes in the 1960s--70s

In 1961, Maple Leaf Mills Limited was officially formed from the amalgamation of the Maple Leaf Milling Company Limited, Toronto Elevators Limited, and Purity Flour Mills Limited. Maple Leaf Mills Limited grew to be a prominent force in the production and distribution of flour-based products in Canada.

Withing Canada Packers, expansion and diversification continued. The company built two poultry plants in New Brunswick and Quebec, expanded operations in Ontario and Manitoba, and purchased a plant in Alberta. By 1963, livestock production accounted for only 36 percent of the company's assets.

The 1960s brought about the most dramatic changes that Canada Packers had seen to date. International distribution became more commonplace, and production became more specialized. North American beef was spending more time in transit than any other meat, due to the specialized processes of raising and producing beef. During this decade, Canada Packers created the largest private-food research facility in Canada, including new data processing centers in Edmonton, Winnipeg, Toronto, and Montreal. Also, Canada Packers sold its fertilizer sector, and the feed operation became known as the Shur-Gain division.

The 1960s were a time of international expansion. Canada Packers purchased meat packers in England, West Germany, and Australia. It set up trading companies in London and Hamburg and increased trading operations with the United States and Southeast Asia. At the end of the decade, exports accounted for C$145 million, or 16.5 percent of sales.

Labor disputes arose again, with a national strike in 1966 that hit Canada Packers the hardest of all the packing companies. A second strike followed in 1969. The strikes had an impact on earnings, but Canada Packers continued to increase capital spending throughout the 1970s.

In this decade, the meat packer expanded its facilities at a cost of C$137 million and purchased two additional Australian meat processors. The subsidiaries did not perform well for several years, but were expected to ultimately fill the growing demand in Asia.

Canada Packers continued to diversify during the 1970s. It separated the management of its meat packing from its other food-production groups. The fruit and vegetable segment was given division status in 1970, poultry in 1971, and edible oils and dairy in 1975. In 1975, Harris Laboratories was established to develop pharmaceuticals for human use. This enhanced the operations of the chemical division. The division also created MTC Pharmaceuticals for the veterinary-product industry.

Although the economic climate was not the best during this decade, Canada Packers continued to maintain acceptable earnings. The nonfood sector was the only one to show significant increases in the early 1970s. Animal feeds grew steadily, but the meat division was experiencing an earnings drain.

In 1978, Valentine N. Stock became president of Canada Packers. By the time of his death in 1987, the company had experienced a continued decline in beef demand and completed a ten-year consolidation. Stock turned Canada Packers towards the more profitable areas of fish farming, processed foods, salad oils, and pharmaceuticals.

1979 was a bad year for food packers in Canada. Costs increased and a seven-week labor dispute affected the industry, closing some plants. At the same time, McCain Foods, Canada Packers' major competitor, increased its holdings in Canada Packers to 10.3 percent. Fearing a takeover, Canada Packers repurchased 3.5 percent of its shares. No takeover occurred.

Canada Packers strengthened its nonfood exports when it acquired Delmar Chemicals Limited for C$18.2 million. Delmar joined the existing pharmaceutical division. Also in 1979, the Ontario government gave Canada Packers a C$4 million grant to construct a canola processing plant.

As the decade came to a close, profit margins were less than 1 percent for the third year in a row. Sales values had increased, adding to higher-cost inventories. Because the company had C$34.7 million in long-term debt, it grew through acquisitions and through higher profit margins through packaged meats. As consumer demand rose for convenience foods, meat processing was the only growth area.

The Troubled 1980s

For a variety of economic reasons, the 1980s were the most difficult time for the company since 1927. Thanks to geographic and product diversification, Canada Packers was able to withstand the serious blow to its beef business that occurred during this decade.

The year 1981 looked promising&mdash′ofits had reached a record C$30 million. However, the industry is cyclical. Pork operations were disappointing, carcass prices rose, consumer demand lowered, and industry competition eroded earnings.

In 1983, scandal touched Canada Packers when the Canadian government investigated five companies, including Canada Packers, for price fixing. Although some companies pleaded guilty, Canada Packers was eventually exonerated.

In that same year, profits plunged, while sales continued to grow. Expenses associated with plant closings, poor performances in fresh meat operations, and foreign subsidiaries eroded the bottom line. Processed meat remained profitable, but the packing house division performed the worst in its history. Canada Packers responded by cutting hundreds of jobs in the fresh meat division and earmarking C$50 million for structural improvements in the profitable areas.

Surprisingly, nonfood products showed a profit decrease in 1983. The company realized that meats were its core products. Despite fiercely competitive profit margins, meat realized a proven cash flow.

Another labor strike occurred in 1984. Involving 3,700 employees in the company's 12 plants, the labor action cost the company C$7.5 million. The strike prevented the Maple Leaf Brand from appearing in retail markets and effectively strengthened the competitor's products. Earnings declined.

Between 1984 and 1985, the company undertook the largest and most costly reorganization of its history. Canada Packers sold a number of unprofitable businesses, while purchasing meat plants and oil refineries. Over the next four years, earnings climbed at record rates to more than C$38 million. A joint venture with SEA Farm of Norway brought the company into fish farming. By decade's end, Canada Packers had fish production facilities on both coasts and was optimistic about the future of its fish farming activities.

Another strike loomed in 1986 but was prevented by reducing the scope of nationwide bargaining. The company managed to keep negotiations on a provincial and single-plant level. Two years after Valentine Stock's death in 1987, A. Roger Perretti became CEO. Perretti planned further acquisitions beyond the meat industry, and as Canada Packers approached the new decade it had exited the beef businesses and was focusing on pork and poultry.

The 1990s: Maple Leaf Foods, Inc.

An economic recession was on its way. Market sluggishness contributed to a drop in net income to C$12.59 million from sales of over C$3 billion. To counteract these losses, the company again reorganized. The majority owner, Hillsdown Holdings, consolidated its consumer-foods division by closing plants and updating existing equipment. Hillsdown merged Canada Packers with Maple Leaf Mills to form Maple Leaf Foods, Inc. in 1990. Nonperforming divisions were closed, and the company entered a period of top-to-bottom reorganizing.

When the North American Free Trade Agreement (NAFTA) was signed with the United States, Maple Leaf increased its focus on international operations. The company followed a strategy termed 'in-filling'--buying strategically placed companies that fill holes in the core business of processed meats and baked goods. By 1994, Maple Leaf generated 8 percent of its sales from the United States, while subsidiaries in Britain, Germany, and Japan were showing promising results.

Margins were lean during the early 1990s, but the company continued to show a profit and maintained a market share of almost half of all Canadian meat packing. Despite sluggish sales, the company realized profits through cost cutting.

In 1995, the McCain Capital Corporation and the Ontario Teachers Pension Plan Board acquired controlling interest in the company from Hillsdown PLC.

Following a contentious fight for control of the family business (Maple Leaf's rival, McCain Foods), Wallace McCain was expelled from joint command of the family empire, but remained as vice-chairman. Stating he saw no conflict of interest in the arrangement, McCain then launched a billion-dollar debt-propelled bid for Maple Leaf Foods. Backed by the Ontario Teachers Pension Plan Board, the McCain bid offered a combined stock-and-cash offer for Maple Leaf. In a deal referred to as a leveraged buyout, Maple Leaf Foods would go from holding over C$100 million in cash to owing about C$575 million in long-term bank debt. The British owned Hillsdown PLC announced its interest in selling its 56 percent of shares, hoping to raise cash for European investments. Hillsdown stated it would sell to McCain if no better offers came along. After looking fruitlessly for better offers, Maple Leaf's shareholders voted to accept Wallace McCain's takeover bid.

Wallace McCain assumed the position of chief executive officer of Maple Leaf. The CEO believed that he could wring more profits from Maple Leaf Foods than had previously been realized. His strategy was to turn Maple Leaf into a lean, low-cost maker of high-value top market foods.

Richard Foot, writing for Chatham Newspapers, quoted Julian Den Tandt of the Ontario Pork Board as saying, 'The first thing we saw when the McCains took over Maple Leaf was a very strong switch from a production-driven company to a market-driven company.'

Michael McCain succeeded his father as CEO. Under the McCains's leadership, the company continued to expand in the United States. Initiating a strategic thrust into the specialty bread-and-roll market in the United States, Maple Leaf built a C$30-million bakery in Virginia, bought bakeries in New Jersey and California, and purchased a bagel plant in Brooklyn, New York. Michael McCain indicated that the bakery business in the United States was to be the most significant growth area.

In 1997, following a strategy of focusing on core business categories, Maple Leaf divested the last of its flour-milling operations. The bakery products group remains, including majority ownership in the Canada Bread Company and Maple Leaf Bakery USA.

McCain's strategy of keeping profits high by reducing operating expenses lent to a period of bitter labor disputes. In 1997, the workers at Gainers, a 91-year old slaughtering plant in Edmonton, went on strike. Michael McCain followed through on his promise to shut the doors of the old plant if a strike occurred, stating his intent to build a massive new production complex in Brandon, Manitoba. About the same time, two meat-cutting plants in Ontario struck, while 200 butchers in Saskatchewan were locked out over a wage and benefit dispute.

Also in 1997, McCain attempted a hostile takeover bid to gain control of rival company, the Schneider Corporation. In 1998, Maple Leaf Foods formally abandoned its bid and announced an intent to sell its controlling stake in the Ontario company to Smithfield, a hog producer in the United States. Later, in 2001, Maple Leaf acquired Schneider's fresh pork operations in Manitoba.

1998 proved to be Maple Leaf's worst year since the McCain takeover. Weak earnings in the bread division, combined with labor disputes at Maple Leaf Meats and expenses associated with firing staff, led to the worst annual performance since 1995. However, in May of 1999, the shareholders were told that the company was back on track, posting its best first-quarter profit and announcing the sale of a coffee shop chain. CFO Tom Muir said that Country Style operations had shown consistent profitability, but did not fit in with Maple Leaf's core business strategy.

Maple Leaf initiated efforts to recruit, train, and motivate managers and others with executive capabilities. In 1999, it launched the Maple Leaf Leadership Academy, conducted in alliance with the Richard Ivey School of Business.

Nevertheless, in 2000, profits fell to C$36.8 million compared to C$77.2 million in 1999. McCain attributed the reduction to the decline in the pork business itself. The Brandon plant, opened in 1999, lost C$20 million in the first quarter of 2000, but was expected to show a profit once it passed the startup stage.

Faced with considerable debt, a long history of labor disputes, and in a slow economic market, Maple Leaf faced potentially tough years. However, some divisions remained profitable, and once the operating costs of the Brandon plant were covered, the company profited from this area.

Principal Subsidiaries: Canada Bread Company Ltd. (68%); Maple Leaf Bakery (U.S.A.).

Principal Operating Units: The Meat Products Group; The Bakery Products Group; The Agribusiness Group.

Principal Divisions: Maple Leaf Pork; Maple Leaf Consumer Foods; Maple Leaf Poultry; Maple Leaf Foods International; Shur-Gain; Landmark Feeds; Rothsay Rendering.

Principal Competitors: ConAgra Foods, IBP, Tyson Foods.

Chronology

• Key Dates:

• 1898: The Maple Leaf Brand first appears.
• 1904: Maple Leaf Flour Mills Company Limited is incorporated.
• 1907: The Maple Leaf Flour Mills Company acquires the Hedley Shaw Milling Company and Grantham Mills.
• 1910: The Maple Leaf Milling Company Limited is formed to take over the assets of the Maple Leaf Flour Milling Company.
• 1911: The Canada Bread Company Limited is founded.
• 1927: Canada Packers Limited is formed through a merger of other companies.
• 1961: Maple Leaf Mills Limited is formed from the amalgamation of the Maple Leaf Milling Company Limited, Toronto Elevators Limited, and Purity Flour Mills Limited.
• 1990: Maple Leaf Mills and Canada Packers merge to form Maple Leaf Foods.
• 1995: McCain Capital Corporation and the Ontario Teachers Pension Plan Board acquire controlling interest.
• 1997: Maple Leaf Foods divests the last of its flour-milling operations.
• 1999: Company establishes a leadership academy in partnership with the Richard Ivey School of Business.