Michael McCain, President and CEO of Maple Leaf Foods, is photographed in his Toronto office on August 12, 2010.Sarah Dea/The Globe and Mail
Michael McCain is sticking to his strategy of making massive investments in Maple Leaf Foods plants, even in the face of shareholders who say he should cut back.
Without the revamp, the company will inevitably lose business to U.S. rivals that can produce bread and meat products more cheaply, the chief executive officer of Canada's largest publicly-traded food company said in an interview.
The spending plans are perhaps the biggest potential flashpoint as Mr. McCain faces a new major shareholder in West Face Capital Inc., a Toronto hedge fund known for pushing companies to improve their performance and share price.
West Face bought a 10-per-cent stake in the company this week, and while it has been quiet about what it views as the best path for Maple Leaf, the hedge fund is believed to want the company to rethink its plan to invest as much as $1-billion, mostly in meat plants.
Other shareholders have questioned the wisdom of the plan, saying Maple Leaf has a bad record of generating returns from big investments. The company spent more than $900-million on plants and equipment between 2005 and 2009, yet its profits have been volatile and its share price is down 40 per cent in five years.
Facing an activist shareholder is a new challenge for Maple Leaf, which had been essentially controlled by the McCain family with the backing of Ontario Teachers' Pension Plan for 15 years. That changed when the pension fund let lapse an agreement to work with the McCains and sold a portion of its stake to West Face.
In an interview at Maple Leaf's Toronto head office, Mr. McCain said there's no choice but to invest for Maple Leaf, which makes Dempster's bread and Maple Leaf and Schneiders brand meat products.
"If someone can show me how we can compete without a competitive cost, without spending the capital, I'd be happy to consider that, but I think that's defying economic gravity," said Mr. McCain, who sported his trademark tie-free look, the collar of his monogrammed blue shirt open.
"I've studied that more than we've studied any other business problem in my professional lifetime because I have no interest as a shareholder in spending that capital if we don't need to."
A Canadian dollar that has jumped from the mid-60-cent (U.S.) range in 2002 to near parity today has exposed the inefficiencies in the company's network of plants, which was cobbled together from 30 acquisitions in 10 years. Maple Leaf wants to close some, revamp others and build brand new superplants - such as a new $100-million bakery that's under construction in Hamilton. That bakery will replace three smaller Toronto-area plants.
With customers such as Wal-Mart Stores Inc., Loblaw Cos. Ltd. and Sysco Corp., expenses are key. "They don't pay premiums. They demand competitive costs and they can access the world's supply."
Maple Leaf's margins trail those of U.S. rivals, which Mr. McCain said is a result of too many small plants. In what Maple Leaf calls its "value-added protein business," where it makes meat products, there are 24 plants across the country making everything from pregrilled meat strips to bacon to smoked ham.
"In America they would look at that as nonsensical," Mr. McCain said.
With fewer, bigger plants, there would be economies of scale, and buying new cost-saving technology would be more economical, he argued.
Along with too many plants, the company has a jumble of 40 systems resulting from its history of acquisitions, and that is being simplified to one software system as part of the revamp. That's costing $170-million.
Mr. McCain dismissed another option some shareholders have raised as a way to boost Maple Leaf's long-sagging stock - spinning out the company's baking operations to shareholders. Maple Leaf controls the baking business through its 90-per-cent stake in publicly-traded Canada Bread Co.
Mr. McCain said he has studied the option extensively for the past 15 years, but Maple Leaf would lose too much. The companies share functions such as purchasing in order to lower costs and Maple Leaf likes to be able to approach customers with package deals, such as providing the meat and the bread for a product.
"Look at the trends in food. [Food companies]are getting bigger not smaller," he said.
Mr. McCain said he is looking for three to five years of patience from shareholders to get the full benefits he expects from the planned investment, and he wants credit for keeping the company profitable through an economic recession, the dollar's recession and a tainted-meat crisis in 2008 that claimed more than 20 lives.
"We may not, to date, have proven our value creation story but I think we have proven resilience."
Mr. McCain said he's not frustrated about the fact that his long-term plan may be challenged by West Face, and his statements reflect a belief that he will be able to sell his strategy to shareholders and the board and to hold on to the CEO post. He declined to answer questions about the moves by Teachers, saying his focus is on operations.
"My role is to report to that board. It was and has been for the last 15 years, and I expect it to be for the next 15 years."