Building Value Through Vertical Coordination Michael Detlefsen, Executive Vice-President, Vertical Coordination

Transcription

1 Building Value Through Vertical Coordination Michael Detlefsen, Executive Vice-President, Vertical Coordination 1

2 Michael Detlefsen Executive Vice-President, Vertical Coordination Executive VP, Vertical Coordination since 2000 Recently promoted to President, Maple Leaf Foods International effective uary 2005 Joined Maple Leaf in 1999 as Vice President, Corporate Development More than 17 years in strategy development including positions with Bell Canada, Bell Canada International, Monitor Company, PricewaterhouseCoopers and Air Canada 2

3 Overview of Discussion What is Vertical Coordination? Creating Competitive Advantage Future Direction of Vertical Coordination 3

4 What Is Vertical Coordination? Background Maple Leaf studied protein industry and competitor trends in 1999; pork and poultry processors were moving to a vertically integrated/coordinated model similar to all other agribusinesses Decision taken to move aggressively in the direction of vertical coordination Maple Leaf already well positioned with poultry partnership program in Ontario since early 1990s Maple Leaf acquired Landmark Feeds and Elite Swine shortly thereafter, significantly increasing its participation in hog production 4

5 What Is Vertical Coordination? Vertical Coordination is the process of enhancing economic value by more closely aligning the links in the protein value chain through shared strategic vision, long-term contracts, economic transfer, and well-defined partnerships Vertical Coordination is not owning it all that is Vertical Integration 5

6 What Is Vertical Coordination? Non-Coordinated Vertically Coordinated (Maple Leaf) Vertically Integrated Farm Feed Farm Feed Farm Feed Processing Rendering Processing Rendering Processing Rendering Low value chain control No farm or feed returns High value chain control and economic participation Lower capital investment High value chain control and economic participation High capital investment Full ownership by the Processor Partnership, some partial ownership Significant external sales/business focus 6

7 Overview of Discussion What is Vertical Coordination? Creating Competitive Advantage Future Direction of Vertical Coordination 7

8 Creating Competitive Advantage Strategic Objectives To maximize Maple Leaf Foods shareholder value creation through effective vertical coordination of the protein value chain Maximize economic returns relative to capital investment across all of Maple Leaf s protein value chain operations Strategic Objectives Manage system risk to reduce returns volatility Increase innovation and speed to market while providing higher quality and consistency 8

9 Maximizing Total Value Chain Earnings Maple Leaf earns returns from sales of animal feed and nutrition, farm services, genetics and partial ownership of farming operations Feed Company Farm Service Company Genetics Company Feed Services Genetics Farms Livestock Contracts Processor 9

10 Maximizing Total Earnings Pork Value Chain Landmark Swine Feed Maple Leaf Foods International Shur- Gain Swine Feed Maple Leaf Consumer Foods Elite Swine (GAP) Genetics ESI System Producers (Partial Maple Leaf Ownership) Maple Leaf Pork Schneider Foods Retail and Foodservice Customers Elite Swine Services Other Further Processors Rendering 10

11 Maximizing Total Earnings Poultry Value Chain Landmark Poultry Feed Maple Leaf Foods International Maple Leaf Consumer Foods Shur- Gain Poultry Feed Hatchery External Producer Partners Maple Leaf Poultry Schneider Foods ML Poultry Hatchery Retail and Foodservice Customers Other Further Processors Rendering 11

12 Reducing Earnings Volatility Hog farming returns are about three times as volatile as primary processing returns, leading Maple Leaf to pursue an optimal level of Effective Hog Ownership of 30% of hogs processed To pursue its target, Maple Leaf carefully manages a variety of direct and indirect investment activities: Partial investment in farms Full investment in some stages of farm production Cost of production contracts 12

13 Reducing Earnings Volatility 30% Effective Hog Ownership Industry returns vary over a 4 to 5 year hog cycle Returns are countercyclical in hog production and pork processing Hog production returns are three times more volatile than pork processing 100 EBIT in C$ per hog (Based on average industry returns) (20) Canadian Hog Producer Combined earnings at 30% EHO Canadian Pork Processor (40) Oct 2004 Canadian Hog Producer: US-based sales value (adjusted) less Canadian industry average cost of production Canadian Pork Processor: Based on industry average returns (pork price less hog price) 13

14 Reducing Earnings Volatility Vertical Coordination vs. Vertical Integration Pork Value Chain 100% Vertical Integration 30% Vertical Coordination Returns (1) RONA 10.3% 11.4% Earnings Volatility Standard Deviation as percent of RONA Earnings (1) 50.5% 22.7% (1) Average industry returns based on five year monthly averages (C$) 14

15 Protein Value Chain Returns Maximizing Total Returns Financial performance of Meat and Agribusiness should be viewed as one unit - Protein Value Chain Both business groups are affected by market dynamics which generate countercyclical returns due to hog cycle High hog prices benefit Agribusiness Pork processing benefits from stable hog prices; vulnerable to rapid rise Maple Leaf s Vertical Coordination strategy is designed to balance these varying impacts 15

16 Increased Innovation and Quality Control Provides significant competitive advantage in quality control, innovation and customer responsiveness Benefit from superior performance of farmer-owned vs. corporate farms Genetics Feed Livestock Production Primary Processing Further Processing Rendering High level of control at each stage ensures higher quality in subsequent activities 16

17 Overview of Discussion What is Vertical Coordination? Creating Competitive Advantage Future Direction of Vertical Coordination 17

18 Future Direction Vertical Coordination Strategy Currently at 20% EHO; achieving 30% target is a mid-term goal Selective balancing and organic growth at Elite Swine Opportunistic acquisitions of other hog production operations Increased penetration of COP pricing contracts The Effective Hog Ownership target is regularly reviewed Target will change as industry structure changes 18

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