08/01/2012 09:26 EDT | Updated 10/01/2012 05:12 EDT

Maple Leaf Foods boosts Q2 profit, says food prices will rise due to drought

TORONTO - Grocery shoppers may need to dig deeper into their pockets as drought conditions inflate food prices well into next year and maybe beyond, Maple Leaf Foods president and CEO Michael McCain warned Wednesday.

Because Maple Leaf (TSX:MFI) buys ingredients in advance, consumers likely won't see higher prices for its products until the end of this year, McCain said.

"Rising grain markets, specifically corn, affect the entire food chain," McCain said in an interview.

"Broadly, we've got a good track record of responsibly passing on those cost increases in the marketplace and I think this won't be any exception."

McCain said it is too early to guess just how much of a squeeze consumers will feel on their wallets.

"We don't know exactly what the extent or the timing is of any price increases attached to this because the story of this year's crop conditions is still not fully told," said McCain.

"As this unfolds into the fall we'll have a much better picture."

The food processor reported a good quarter but said it will have to be "prudent" in its spending as it faces a challenging commodity market due to higher global prices for ingredients and drought conditions throughout North America.

The Toronto-based company's net income was $32.5 million in the three months ended June 30, up 32 per cent from $24.6 million in the second quarter of 2011.

Total sales from Maple Leaf's four business groups edged up to $1.26 billion from $1.24 billion, helped by price increases and strength in the company's fresh bakery and prepared meats businesses.

Maple Leaf says its adjusted operating earnings fell to $71.9 million or 28 cents per share from $77.5 million or 30 cents per share a year earlier.

The results were slightly ahead of analyst expectations, although there were relatively few estimates.

The consensus estimate compiled by Thomson Reuters before Maple Leaf's announcement was for $33.35 million of net income, 23 cents of adjusted earnings and $1.25 billion of revenue.

Maple Leaf shares were up 54 cents, or 5.4 per cent, to $10.54 in early afternoon trading Wednesday.

Derek Dley, an analyst at Canaccord Genuity, said more aggressive marketing during the quarter helped the company's sales.

"They're ahead of my expectations, especially on the bakery side," said Dley.

"Margins were a lot stronger than I expected. It looks like the company was able to have a positive impact on volumes with greater promotional and marketing activities which seemed to be well targeted."

The company said earnings from its prepared meat business grew, helped by price increases and the closure of two facilities last year in an effort to simplify its meat processing operations.

Some of these increases were offset by lower revenues from pork processing, which was hurt by unfavourable market conditions in North America and lower margins on exports to Japan and Korea.

Maple Leaf is Canada's biggest food processor, making and selling such well-known store brands as Maple Leaf, Burns and Schneiders hot dogs, Dempster's bread, Olivieri pasta, as well as Shopsy's deli meats and Mitchell's Gourmet foods.

Last year, Maple Leaf announced a plan to cut 1,550 jobs by closing plants in four provinces and streamlining distribution, part of a three-year, $560-million restructuring plan expected to boost competitiveness and profitability.

The company closed two bakeries in the Greater Toronto Area recently as it works to consolidate production at its new bakery in nearby Hamilton, Ont.

In February, it announced it was closing a chicken processing plant in Ayr, Ont., to the detriment of about 100 jobs, as part of a plan to consolidate the company's poultry operations at its Brantford and Mississauga, Ont., plants.

McCain said the restructuring is going as planned and is contributing to the company's margins.

"I think our shareholders, the board and management are all aligned in support of the plans that we are executing," said McCain.

Maple Leaf has 21,000 employees at its operations across Canada and in the United States, Europe and Asia.

Wallace McCain — through McCain Capital Corp. and special voting rights — had controlled the company until his death last year at age 81. As part of his estate planning, the shares were transferred to Michael McCain in July 2011.