Building a Globally Competitive Food Industry

A Maple Leaf Perspective

Notes for a speech by
Michael H. McCain
President and Chief Executive Officer
Maple Leaf Foods Inc.

Canadian Club
Monday, November 22, 2004

Good afternoon,

Mr. President of the Canadian Club of Montreal, Distinguished Guests of the Head Table, Ladies and Gentlemen

First of all, I would like to thank the Canadian Club of Montreal for kindly inviting me here today.

I am very pleased to speak to you about the agri-food business and, especially, about Canada's position as a world-class player in this field.

As you might know, Maple Leaf is a leading Canadian food processor and the country's largest exporter of food products. In April, we acquired Schneider Foods, and, as a result, we expect our revenues to exceed $6 billion this year. For context, Agribusiness and its success has an enormous impact on the Canadian economy. As an industry we are the 3rd largest employer; over 8.3% GDP; exports increased more than 115% over 10 years; 1/2 of all farm sales are outside Canada.

Maple Leaf has a portfolio of businesses that span the meat, agribusiness and bakery businesses, employing some 23,000 people around the globe. We are leaders in the Canadian market in the protein value chain- from feed and hog production, to poultry, pork, processed meat and rendering. Our bakery operations span North America and the United Kingdom.

We also have a highly developed international business, which trades commodities and value-added products around the world, with international sales accounting for about a third of our revenue. We have operating plants and sales offices in the UK, Europe, the US and Asia, and our sights are set on further global expansion.

A significant percentage of our business is done here in Quebec, where we employ about 2,500 people. We have 20 plants and other facilities located across the province, from Montreal and Quebec City to Lévis, St-Hyacinthe, St-Côme and St-Ansèlme, to name just a few.

Our studies and track record show that Quebeckers appreciate the Maple Leaf brand. Our bacon products, deli meats and hotdogs are top-ranked in their respective markets. Of course, Maple Leaf has been active in Quebec for several decades, through Maple Leaf Consumer Foods, Shur-Gain and Maple Leaf International, which is involved in a joint venture operation at Yamachiche that processes pork products for export to Japan.

Recently, we have invested in this plant, which is called Lucyporc, to increase its weekly processing capacity from 3,500 to 4,500 hogs. The plant is unique in that it exports 100% of its production to Japanese customers, who require us to meet rigorous standards, not only for premium cuts of meat and food safety, but also for animal husbandry and genetics.

This joint venture is operated in partnership with Claude Robitaille, a leading hog breeder, and demonstrates the huge export potential of agriculture not only in Quebec but in Canada as a whole. I'll have more to say on this later.

Maple Leaf Foods is not only about pork and poultry. It's also about bread, and lots of it.

In fact, every week, no fewer than 4.5 millions loaves of sliced bread are baked at our seven Multi-Marques bakeries in Quebec, which produce brands such as Pom and Bon Matin.

In 2001, Canada Bread acquired 100 per cent ownership of Multi-Marques, including Maison Cousin, which specializes in frozen bread products. Multi-Marques was created in 1984 with the merger of six bakeries belonging to Quebec families. Multi-Marques has been Quebec's largest bakery ever since.

This year, we invested $4 million in a new production line at our Viau Street bakery in Montreal's east end which allows Multi-Marques to better serve the northeastern United States.

The next time you visit New York City, if you buy a hotdog from one of the outdoor vendors found all over Manhattan, there's a good chance that the bun will have come from this bakery.

We also recently expanded our Multi-Marques operations, so that they can better serve the eastern Ontario market from Quebec. Our Dempster's whole grain breads sold in Ottawa are now produced at our bakery in St-Côme, south of Quebec City.

Our investments in Multi-Marques have not only resulted in improved operational efficiencies and better serving our markets, they have also created about 85 new jobs.

Maple Leaf is also a leader in animal nutrition in Quebec. Our Shur-Gain division is a major supplier for livestock producers, through its animal health and nutrition programs. Shur-Gain has partnerships with numerous producers in all regions of the province, making it a dominant player in Quebec agriculture.

Recently, Rothsay-Laurenco, another of our independent operating companies, announced a $7 million investment to expand its biodiesel plant located on Montreal's South Shore. The plant, which recycles animal and poultry by-products into a broad range of commercial tallow and protein products, also produces Biodiesel from food wastes such as animal fat and recycled cooking oil.

This investment, which included no government subsidies, will boost the plant's annual production capacity from 4 million to 35 million litres of environmentally friendly fuel. From 2002 to 2003, Laurenco participated in a successful pilot project with the Montreal Transit Commission, which successfully ran 155 of its vehicles on petro diesel and biodiesel blends.

This is the first plant in Canada to produce biodiesel for commercial use. We are still hopeful that the Quebec government will follow the lead of Ontario and BC to grant tax incentives for the use of biodiesel, which is more expensive to produce than petroleum-based fuel, but will encourage us to sell and use this fuel right here rather than into other markets.

As you can see, Maple Leaf is well established in Quebec. But there is still great potential and opportunity for further development.

We know that global demand for food is increasing. Canada and Quebec are uniquely positioned to respond to this challenge, take a global leadership role, and reap the benefits of that leadership well into the future.

We are blessed with abundant land to grow crops and raise livestock. Our latitude offers cold winters to kill bacteria (aside from skiing, its one of its only redeeming features!). Our geography isolates us from many diseases, while providing ready access to international ports. We also share a very long border with one of the largest consumer markets in the world.

We have world-class research capabilities. And, we have a strong, centralized regulatory system for food production that is one of the best in the world. Simply put, Canada and Quebec are great places to produce safe, wholesome food for the world, and we're very good at it.

All of this adds up to a tremendous value proposition. The question is how do we pull together to leverage our strengths, develop strong partnerships and build a unified position and identity for Canadian food products worldwide. How do we turn this opportunity into reality, and what will be our key competitive advantage?

Our answer? FOOD SAFETY.

Food safety is increasingly becoming a huge differentiator around the world, and it is in this area that I believe we are extremely well positioned to respond to increasing consumer demands for confidence in the food they buy. Consumers care about food safety today more than anything and Canada is doing a "good job", but if we could figure out how to do a "great job" in this field, we can be world leaders.

This is particularly so in the case of meat, where 78 per cent of consumers consider safety as a key factor when making a purchase decision.

We want more information - What is in our food? Where does it come from? How is it grown? Is it fresh? We want to know that rules which safeguard our food supply are not only in place but are being enforced. We want hard evidence that our food is safe and nutritious.

This is a pretty tall order for the food industry! While there are many, many features we must deliver on, from convenience to nutrition to innovation to value…today's crisis of confidence doesn't just span corporate governance - it exists in our food supply as well.

Not surprisingly, consumers' biggest concern is not with their own kitchen, where the risk of contamination is the greatest, but with large animal production and processing operations. There is a high trust and emotional factor in food - food expresses love, family, and nourishment. The more we distance ourselves from the kitchen - the harder we have to work at sustaining the trust factor.

The food industry will look back at the last couple of years as replete with their fair share of food safety challenges. Never before has the industry faced so many food safety concerns, largely stemming from animal health issues, in such a short period of time.

This environment poses immense challenges for governments and industry around the world.

But I maintain our country is well positioned to turn these challenges into what could become our most significant edge. Why? Because we are already well ahead of the pack!

Canada has a highly regulated environment for food production and an international reputation as a producer of clean, safe and wholesome food. Around the world these attributes are almost synonymous with being Canadian. But we will have to work hard to continue to be viewed as a world leader.

Our real challenge is to take a good thing and make it a lot better. Canada's food industry can deliver on this promise in all respects. As a differentiator, both domestically and abroad - raising the bar on food safety will give us a calling card other countries can't match.

As Canada's largest meat processor and a company with global interests, what is Maple Leaf doing? Well, through a combination of luck and foresight we began taking steps several years ago to position Maple Leaf as a leader in food safety and innovation.

For example, four years ago we were the first domestic producer to launch premium quality branded poultry products, Maple Leaf Prime Naturally, fed from an all-vegetable grain formulation containing no animal by-products.

We followed up by offering Canada's only nationally available pork products, Maple Leaf Medallion Naturally, fed with no animal by-products. Let me be clear - we believe animal by-products can be used safely and beneficially in animal feeds. However, our first priority is to provide consumers with the choice, and to be responsive to the needs of our customers.

In 2002, we took our commitment to leadership in food safety to the next level, by launching a new brand position behind all Maple Leaf branded products - Maple Leaf… "We Take Care".

"We Take Care," says in clear terms that we will deliver on taste, nutrition, convenience and value, underpinned by our commitment to continuous improvement in food safety assurance. At Maple Leaf, this means building a culture of food safety and assuming the highest standard of care that technology and vigilance will allow.

Supporting this brand promise we have established our own proprietary 40 Steps to Food Safety program that requires our meat processing and distribution facilities to achieve operating standards that go far beyond already high government regulations. We retained industry experts to help us develop these steps and annually audit our plants against these higher standards.

They range from plant sanitation performance, pathogen reduction systems and metal detection upgrades, to improving cold chain tracking in conjunction with our suppliers and customers. Supporting our 40 Steps to Food Safety, we expect to invest over $25 million by the end of this year alone in continuous food safety improvements in our meat processing plants.

Let's move on to the newest buzz word in business - transparency. The speed, accessibility and sheer volume of information today is changing the way we all do business. High profile crises, from accounting and political scandals to the devastating consequences of animal disease, have driven public demands for transparency and accountability. The public doesn't expect us to be perfect, but they expect us to be open and honest.

The agribusiness industry has some significant steps to take to rebuild public confidence in the wake of high-profile animal health issues and product recalls. This places a huge responsibility on our industry to take transparency about the efficacy of our food safety practices to a whole new level. To regain public trust and confidence we must develop tangible improvements in our food safety practices, and back this up with a commitment to openness and transparency.

Several years ago, we aspired to be the first pork company in the world to deliver on fully commercialized traceability, one of the holy grails of a food supply chain.

This is the ability to trace a piece of meat, or any other food product, all the way back to the farm operation that produced the animal - tracking every link along the chain.

I was introduced to this goal by Japanese buyers who refer to it as "story pork" or the ability to be able to trace the entire story of meat production from farm gate to consumer's plate. They want to know about the farm the animal was raised on, what it ate, the genetic history and how it was raised. They want to be able to trace back to this history in the event of a breach, and they want to make sure we were vigilant at every link in the chain.

The Japanese value Canadian pork over every other source in the world - they pay a premium for it and one of the key drivers is again - food safety.

Breaking new ground in this quest, Maple Leaf launched our pork DNA traceability system earlier this year, which we believe is the first commercial and comprehensive DNA traceability system worldwide. By using DNA, or "Nature's Bar-Code" as we call it, this new system is uniquely positioned to trace a piece of pork from the grocery store shelf into the live animal production chain. The attraction of DNA is that it requires little capital investment, is precision accurate and relatively free of human error, and can be detected in cooked or processed as well as fresh product right through the complete cold chain to the consumer's home.

In launching DNA traceability, Maple Leaf has chosen to be fully transparent. We feel, as grand as this may sound, that the entire Canadian meat industry should adopt this technology as an industry standard platform for untold future benefits that go well beyond food safety, in much the same way as the UPC Bar Code became a platform for data bases in physical distribution.

The changing food safety landscape raises some interesting questions and ethical issues. If companies take the initiative, such as we have done with DNA traceability, we must sell to markets prepared to pay for higher safety assurance. If governments raise the standards, then who will pay - governments, customers, or consumers?

How do we meet government standards, while supporting broad-based industry participation? Can we succeed with multiple inspection standards - Provincial & Federal - when global markets will judge us as only as strong as our weakest link? We think not.

And how do we ensure our standards are aligned with those of international markets to open up new export opportunities?

How do we ensure global trade barriers don't masquarde as food safety issues much like the beef trade has demonstrated ?

Canada's model for dealing with BSE is broken - it has not worked. Canada is unique in this trade, with 40%-60% of our animal protein crossing a boarder. The only large exporter in the world where such is the case.

Every time meat crosses a border, it constitutes political risk and gross economic risk which commands attention at the highest level.

We have to manage this risk - collaboratively between government and industry - in a PROACTIVE manner. We have proposed solutions to Government but they have yet to be acted on,

That said, I believe the federal government's Agricultural Policy Framework, with its focus on food safety, innovation and the environment, is a strong step in the right direction.

It reinforces the need for sustainable development, innovation and building a consistent Canadian brand that will define our products worldwide.

To build a "Made in Canada" brand based on delivering the gold standard in food safety assurance is our vision. It will require the federal and provincial governments to take a leadership role by supporting critical research, investing in food safety innovations and enforcing high standards across the industry.

It will take all industry players joining hands and committing to the highest standards and consistency of a national brand strategy in order to deliver on our brand promise. It requires the private sector to take initiative and develop best-in-class practices and product innovations that go beyond regulatory standards.

It means not simply being content with matching the Americans or Europeans - but outmatching them! They are fierce competitors and quickly gaining ground in highly lucrative global markets.

We need to leverage our excellent reputation, make our point of difference in quality and food safety more pronounced, and position food "Made In Canada" as something akin to "German Automobiles" or "New Zealand Lamb" worthy of even more price premiums. And, we need not one, but all our industry players to join together to successfully build Canada's reputation in this area. And Quebec, with its strong stake in agricultural production, has an important role to play.

At Maple Leaf, we will do our part to take care of consumer demands for safe and nutritious food, both here and around the world. As a Canadian leader in this industry we are moving on all fronts through our own food safety initiatives; advocating for higher standards and working with government and our industry peers to raise the bar.

And we'll always do it with a passion for the food business.

We need a strong unified approach to yield the returns on reputation and price premium that are entirely within our reach.

I kind of like the notion that in working together we can make "Product of Canada" on food labels around the world something that SHOUTS out quality, reputation and the highest level of food safety assurance. That's something we can all be proud of.

Thank you for your interest.