* Targets 75 pct increase in EBITDA margin over 5 years
* Capital spending of C$1.29 bln planned through 2013
* Maple Leaf to close some meat plants, expand others
* Shares fall 2 pct on Toronto Stock Exchange (Adds interview with Maple Leaf CEO)
By Rod Nickel
WINNIPEG, Manitoba, Oct 6 (Reuters) - Maple Leaf Foods (MFI.TO) plans to boost earnings and capital spending by closing some meat processing plants while expanding others, as it tries to narrow the gap on more technologically advanced and lower-cost U.S. rivals.
Shares of Maple Leaf, whose brands include Schneider’s meats and Dempster’s bread, initially rose 1 percent on the Toronto Stock Exchange, before falling 2 percent to C$12.13, compared with a drop of 0.3 percent on the S&P/TSX composite index. .GSPTSE
“I’m scratching my head as to, ‘How are you going to get there?’” said analyst Robert Gibson of Octagon Capital, about the plan’s targets. “It’s definitely going to have to be a show-me thing.”
The Canadian food-processing company is rolling out a big-spending strategy that it has talked up over the past year, two months after an activist investor bought a big stake of Maple Leaf under expectations of shaking up its direction.
The plan, announced late Tuesday, aims to increase the margin on earnings before interest, taxes, depreciation and amortization by 75 percent over four to five years, through measures such as price increases and the company’s biggest-ever cost-cutting effort.
The result will be double-digit earnings growth in each of the next five years, Chief Executive Michael McCain said in an interview on Wednesday.
The timing is right to execute a plan that has been long in the making, he said, with the company moving past the effects of a deadly tainted-meat recall in 2008.
“It’s clear, it’s measurable, it is affordable and will deliver maximum shareholder value,” McCain said. “I don’t think that can necessarily be weighed based on the stock price at any one particular day.
“Over time, it will result in a very significant appreciation of the stock value, and that’s what we’re investing in.”
The company expects earnings growth will help pay for C$1.29 billion ($1.27 billion) in capital spending over the next three years, including a big new bakery in Hamilton, Ontario, to open in 2011, and construction starting in 2012 on a prepared-meats plant in an undisclosed location.
Maple Leaf is taking appropriate actions to improve margins and boost value, analyst Kenneth Zaslow of BMO Capital Markets, said in a note to clients.
“The key question is, what is the likelihood of success of the long overdue restructuring plan, in light of the current operating environment?” he wrote, citing hurdles of high meat and wheat prices and weak consumer demand.
Big spending has long been a concern of some investors about Maple Leaf. The plan includes C$775 million in “strategic” capital spending through 2013 and another C$515 million in maintenance capital, although that is not all new.
McCain said that spending is key to halting a six-year trend of U.S. competitors like Hormel Foods (HRL.N) and Smithfield Foods SFD.N building market share in Canada, which recent strength in the Canadian dollar has only helped.
Some initiatives are already under way, including work on the bakery.
Still, the plan looks like a gamble to some.
“The concern would be if, before they get the new facilities in place, they don’t achieve the margins they’re talking about, they’re not going to have the cash flow to pay for these,” Gibson said.
Ontario Teachers’ Pension Plan said in August it was selling shares making up about 11 percent of the food producer to hedge fund West Face Capital Inc.
Since then, Maple Leaf shares jumped 38 percent through Tuesday to a 2-1/2-year high as investors anticipated changes that would boost the stock’s value, although shares of food companies were generally strong during that period.
West Face spokesman John Lute said the company is reviewing Maple Leaf’s plan and had no immediate comment.
Teachers’ has said it intends to sell its remaining 25 percent stake in Maple Leaf and the new plan likely does little to change that, Gibson said.
Maple Leaf has been coping with higher raw costs of wheat and meat for much of the past year, and McCain said that trend looks to continue indefinitely. Maple Leaf will continue to respond by raising prices, without affecting operating results, he said.
$1=$1.01 Canadian Reporting by Rod Nickel; editing by Rob Wilson and Janet Guttsman