TORONTO – Canadian shoppers will face another hike in meat prices this month as Maple Leaf Foods Inc. (TSX:MFI) responds to the widespread impact of a virus in the U.S. hog industry.
The Toronto-based meat processor, which makes bacon, hot dogs and deli meats, said Thursday that rising costs have forced it to act quickly to improve its margins.
“We are reasonably confident that the entire market will react in similar ways, in the first instance, because the cost increases are an industry-wide issue,” president and CEO Michael McCain said in a conference call with analysts, noting that hog costs spiked 60 per cent in the quarter.
It will be the second price increase Maple Leaf has put through in response to the Porcine Epidemic Diarrhea Virus, which has killed millions of piglets since it was discovered last year.
The virus does not affect humans or the food they consume, but is estimated to have wiped out about 10 per cent of the U.S. pig population and has been blamed for recent increases in bacon and pork prices. Farmers have struggled to control the virus, because little is known about how it spreads and there is not yet a federally approved vaccine in the U.S.
McCain, 55, said the widespread effect is unlike anything he has seen before.
He cautioned about the impact on shoppers’ habits and the possibility that people could buy bacon and other pork products less frequently over the longer term.
“What we don’t know, and becomes highly unpredictable, is what the demand response will be from that new higher pricing,” he said, after the company reported its latest financial results.
The company announced the price increases as it reported a loss of $124.6 million in the first quarter, or 89 cents per share, as it dealt with costs from a massive seven-year revamp of its operations. That compared with a loss of $30.6 million, or 22 cents per share.
Sales rose more than three per cent to $711.3 million from $689.4 million.
On an adjusted basis, the losses were 24 cents per share, deeper than the expected loss of 17 cents from analysts, according to the average compiled by Thomson Reuters.
Costs from moving its operations into new locations have been higher than initially forecast, McCain said, because the company required extra weeks of production at the older facilities during the transition period. The costs to close the old plants were also higher, he added.
Maple Leaf announced last month that it has closed its wiener production plant in Hamilton as part of a broader plan to move the operations to a bigger plant in the same city. It plans to close four other meat plants by the end of the year.
The company has said once its restructuring plan is finished, it will operate 13 meat plants instead of 22, and two distribution centres instead of 19.
“We do not expect a material decrease in transition costs until the third quarter, followed by a further substantial decline in the fourth quarter,” he said.
RBC Capital Markets analyst Irene Nattel said Maple Leaf still faces uncertainty that could affect its share price this year, as it works to get its new facilities up and running in time.
“In the interim, investors should expect messy financial results and likely ongoing operating losses,” she wrote in a note.
In February, Maple Leaf agreed to sell its 90 per cent stake in Canada Bread to Grupo Bimbo, a Mexican company that is offering about $1.83 billion to buy out Maple Leaf and minority shareholders.
Maple Leaf also sold its Rothsay rendering business, which had operations in several provinces, to Texas-based Darling International, and found buyers in Ontario for its commercial turkey farms, hatchery operation and breeding farms.
The company has about 18,000 employees across North America, the United Kingdom, and Asia.
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