Maple Leaf Expects C$20-Million in Listeria Recall-Related Losses

Aug.25.08 | About: Maple Leaf (MLFNF)

Shares of Maple Leaf Foods Inc. (OTCPK:MLFNF) could fall when the market opens today after test results from Health Canada over the weekend established a link between meat products recalled by the company and a listeria outbreak that has been linked to at least four deaths. The company now estimates direct costs associated with the recall will be C$20-million before taxes as it deals with reimbursements for returns, factory clean up and other expenses. This will likely be reflected in its fiscal third quarter ended September 2008.

There was no mention of funds being allotted for potential lawsuits and Maple Leaf CEO Michael McCain would not comment on possible compensation for affected families during a Sunday afternoon conference call.

He said:

This is not about the lawyers and the accountants. It's about public health and our consumers and people, that's where we're spending our time and attention.

He had no update on the company’s restructuring efforts or how this recall would affect those plans. He did note that the company’s CFO would be holding a conference call with analysts this morning at 9 a.m. 

The company warned that the $20-million figure is subject to change based on the actual amount of product returned by customers, costs associated with increased advertising and the possibility of reduced sales that it cannot yet estimate.

While the news may lead to more selling after Maple Leaf shares dipped 10% since it recalled two of its processed meat brands on Sunday, August 17 and expanded the recall to 23 products three days later, the company’s approach to the contaminated meat scare may be what ultimately matters most to consumers and investors.

As of Sunday afternoon, there were 21 related cases confirmed in four provinces – Ontario, British Columbia, Alberta and Quebec – and another 30 under investigation. On Saturday, Maple Leaf expanded its product recall to include all production from its plant in Toronto, where sanitization work is expected to be complete early this week. It is also doing its best to comfort customers.

In a video posted on YouTube, Mr. McCain said:

This week, our best efforts failed and we are deeply sorry. This is the toughest situation we’ve faced in a 100 years as a company. We know this has shaken your confidence in us.

The news brings up bad memories for consumers and investors alike who were affected by Ontario-based Menu Foods Income Fund’s tainted pet-food scandal. Menu Food’s shares plummeted after cat and dog deaths were revealed in March 2007. Executives were forced to take pay cuts and the company chopped its workforce after recalling roughly 60 million pet food packages and facing dozens of lawsuits.

Menu Foods was criticized for how it dealt with the problem and the speed in which it made information available. Maple Leaf has tried to avoid those problems by providing a recall list on its Web site and frequent media updates.

In an Aug. 22 research note, TD Newcrest analyst Michael Van Aelst said:

Typically, these types of issues can result in little or no permanent damage to the brand reputation if dealt with pro-actively and openly.

Bloomberg reported:

It is usually only when the company tries to cover up the problem that real and sometimes irreparable damage tends to occur.

Last week, Scotia Capital analyst Cherilyn Radbourne said insurance would likely cover losses associated with the plant closure. She told clients that the impact to Maple Leaf’s reputation is difficult to predict and will ultimately depend on whether the outbreak is traced back to the company’s products.

Maple Leaf has approximately 23,000 employees in Canada, the United States, Europe and Asia, with C$5.2-billion in sales last year.