(Reuters) — Shares of Maple Leaf Foods Inc. fell eight percent May 2 after it reported a surprising quarterly loss on lower meat sales.
The food processor had expected a volatile first half, but conditions have been more difficult than it expected, said chief executive officer Michael McCain.
Meat volumes were weaker after the company raised prices. Also, profits from raising and processing hogs were hurt by higher feed costs tied to last year’s U.S. drought. The yen has lost value, and pork exporters have not yet raised prices to key Japanese buyers.
Those two factors hurt earnings from the protein segment by $24 million, the company said.
“Everybody knew that you lose money on every pig you sell,” said analyst Robert Gibson of Octagon Capital.
“People like myself were surprised by the magnitude of the hit.”
The price of corn, which strongly influences wheat, shot to a record high last year after the worst U.S. drought in more than 50 years. While the drought in the Midwest is mostly over, U.S. corn planting is off to one of the slowest starts on record, keeping grain prices volatile.
Canada Bread Company Ltd., of which Maple Leaf owns 90 percent, operates a large new bakery in Hamilton, Ont., where margins are strongly influenced by wheat prices. Maple Leaf is also one of Canada’s largest producers of hogs, which are fed corn, barley and wheat.
“It’s just important for us to persevere through a period like this and stay committed to our longer-term strategies, which are demonstrably working,” McCain said.
He expects grain prices to soften in the second half.
“We see this as transitory.”
McCain said Maple Leaf was not planning additional significant price increases this year for its meat and bread products, which include Dempster’s Bread and Klik luncheon meat.
Price increases during the past year have had the predictable effect of lighter volumes, but they are now returning to normal, he said.
Sales for the company’s protein group fell six percent to $744.4 million in the first quarter.
Total sales decreased four percent to $1.11 billion.
Like other Canadian meat processors, Maple Leaf has seen sales to Russia drop off with that country’s refusal to accept pork with ractopamine, a widely used feed additive.
The only Maple Leaf plant that previously shipped to Russia, at Leth-bridge, is currently unable to export there, but McCain said he expects approval from Canadian and Russian regulators soon.
The company’s quarterly net loss widened to $14.7 million, or 11 cents per share, in the first quarter from $5.8 million, or four cents per share, a year earlier.
On an adjusted basis, the company reported a loss of six cents per share, compared with adjusted earnings of six cents per share a year earlier.
Analysts had on average expected Maple Leaf to earn 12 cents a share on sales of $1.148 billion, according to Thomson Reuters.
The company is carrying out a multi-year program of closing older processing plants and modernizing others as it seeks to boost profit and better compete with U.S. rivals.