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Annual Report 2018

Meat Division

RÉJEAN NADEAU
President and CEO

 

OLYMEL REPORTED EXCELLENT RESULTS FOR FISCAL 2018, BUT FELL SHORT OF THE EXCEPTIONAL PERFORMANCE OF THE PREVIOUS TWO YEARS.

 

Compared with $3,433 billion last year, sales totalled $3,439 billion, largely driven by the fresh pork sector’s sound performance, continuously high meat margins and sustained demand from China.

Production of value-added pork products was up, following increased demand, especially from Japan and South Korea. Sales to China were sustained, making this country Olymel’s largest market in terms of volume for the second consecutive year. In light of this market’s increasing size, Olymel opened its fourth international office in Beijing last fall.

In line with its growth plans, Olymel continued to make the necessary investments in production and processing sectors as well as in process improvement during fiscal 2018. The aim is to secure supplies for its facilities while increasing their capacity and efficiency.

Olymel’s business model further continues to demonstrate its relevance. Olymel has consolidated its position as leader in Canada’s agri-food processing industry with initiatives such as the partnership with Groupe Robitaille regarding Oly-Robi and the acquisition of Triomphe Foods completed in fiscal 2018.

Olymel operated under uncertain global conditions in fiscal 2018, with the looming threat of a large-scale trade war between the United-States and China. The international markets in which Olymel is present are volatile. Trade tensions and the U.S. pork industry’s very high slaughtering capacity were the main factors driving uncertainties throughout the year. But tensions were reduced by the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the new Canada-United-States-Mexico Agreement (CUSMA).
 

Hog production

For the Eastern hog production sector, Olymel incurred a loss in 2018, slightly larger than in the previous fiscal year. Fermes Boréales phase 1, which comprises five breeding facilities each with 2,360 sows, will be implemented next year in Témiscamingue.

The Western hog production sector reported a loss larger than in the previous fiscal year, owing primarily to lower hog selling prices, higher grain prices and transportation costs, significant capital expenditures to upgrade production facilities, and a stronger Canadian dollar. In 2018, Olysky continued to integrate the hog farms acquired in Alberta the previous year and started converting a number of its facilities to install open gestation stalls. All the commercial hogs produced by Olysky were supplied to the Olymel plant in Red Deer, meeting nearly 60% of its procurement needs. In the Western region, the hog production sector is currently in decline and the challenge is to ensure supplies are sufficient to meet our processing needs and customer demand.
 

Fresh pork

For the third consecutive fiscal year, the Eastern fresh pork sector generated positive results, although lower than in 2017, which was Olymel’s best ever year. While the meat margin decreased, results were bolstered by higher sales volumes, increases in the number of hogs slaughtered and in hog weight, and Oly-Robi Transformation’s positive contribution. The significant increase in refrigerated fresh pork volumes at the Vallée-Jonction plant and the launch of value-added production from fresh pork at the Saint-Esprit plant also contributed to the sector’s sound performance. Significant investments made in recent years to restructure the Eastern fresh pork sector are paying off. In 2018, the Vallée-Jonction and Saint-Esprit plants also installed the new CO2 stunning system that will greatly improve animal well- being, the work environment and meat quality. The combined investment amounted to nearly $15 million.

The partnership entered into in 2017 with Groupe Robitaille regarding Oly-Robi will come to fruition in April 2019 when the upgrade project for ATrahan, the Olymel division in Yamachiche, is completed. Lucyporc plant personnel will then join Olymel employees and 315 new recruits to create a work force of over 1,000. This completely revamped and modernized plant will focus mainly on Olymel’s value-added production.

To avoid volatility in the Eastern fresh pork sector, Olymel will implement more stringent controls to ensure greater coordination of volumes and quality across its operations. In this respect, Olymel is awaiting with great interest the decision of the Régie des marchés agricoles et alimentaires du Québec on the price paid to hog producers in response to their request of amendments to the hog agreement. Olymel and other processing companies have made representations to the Régie regarding this vital matter for the industry’s future, emphasizing the importance of not compromising its competitive capacity.

The Western fresh pork sector reported excellent results for the third consecutive year. While slaughtering volumes were slightly down, this excellent performance was driven mainly by the higher meat margin, lower supply costs and a greater volume of value-added products.

Lastly, the latest available data shows that Olymel accounted for 34.2% of total Canadian worldwide pork exports.
 

Processed pork

Processed pork sector results topped prior year perfor - mance, exceeding expectations for 2018. Lower volumes were offset by this sound performance which was driven by the higher meat margin and favourable customer mix. The widespread scarcity of labour in 2018 impacted all our operating sectors, but the biggest challenge was achieving maximum capacity at pork processing facilities.

The bacon sector recorded positive results for fiscal 2018, falling slightly short of prior year performance. These results were attributable to a favourable customer mix which drove up the meat margin.

The fresh sausage sector generated positive results, despite a slight decline stemming from the launch of production in Western Canada. Sales volumes were identical to the 2017 level. In the Eastern region, fresh sausage production is concentrated at the La Fernandière plant in Trois-Rivières, and the sector saw an increase in the meat margin resulting from a favourable customer mix and lower raw material costs. Over $9 million was invested in the La Fernandière expansion project which was carried out in 2018.

Fiscal 2018 was highlighted by the acquisition of the assets of Triomphe Foods, a business well-established in the Québec market and the mass distribution network. This company is well known for its production of a wide range of deli meats and specialty hams, including the Tour Eiffel, Nostrano, Alpina and La Mère Poule brands. With this transaction, which included three production facilities and affected over 275 employees, Olymel will enter new market segments.
 

“In line with its growth plans, Olymel continued to make the necessary investments in production and processing sectors as well as in process improvement during fiscal 2018.” 
 

Fresh and processed poultry

The primary poultry processing sector generated positive results, slightly below fiscal 2017 performance, bolstered mainly by a favourable customer mix and higher volumes. However, the sector has seen a decline in the meat margin over the past five years owing to an imbalance between supply and demand. An investment totalling over $28 million was approved in 2018 to install a CO2 stunning system at the Saint-Damase and Berthierville poultry slaughtering and cutting plants. This will make Olymel one of the first businesses in Canada and the first in Québec to operate CO2 stunning systems in all of its slaughtering facilities. For the third consecutive year, Olymel’s interests in Sunnymel, New Brunswick and in Volaille Giannone, Québec generated positive contributions to 2018 results.

The turkey sector reported a loss again, albeit lower than in fiscal 2018. The meat margin improved as a result of better turkey selling prices, but the market is still affected by an imbalance between supply and demand.

Following 44 days of hearings, in 2018, the Régie des marchés agricoles et alimentaires du Québec granted the poultry processors’ requests by deciding to maintain the guaranteed supply system in place since 1998 and harmonized with Ontario’s since 2013. Lastly, since several free trade agreements have opened up the Canadian market for products subject to supply management, the poultry sector could be exposed to some volatility in the coming years, whose extent is difficult to predict today.

Although sales volumes grew, the processed poultry sector generated a loss for fiscal 2018, compared with a profit last year, partly owing to a lower meat margin resulting from higher raw material costs. Restructuring of the Brampton plants and the launch of chicken cube production at the Saint-Jean-sur-Richelieu plant also contributed to the loss. Following these changes, activities in the coming year will be geared toward maximizing value-added production.

Also during fiscal 2018, Olymel announced its intention to acquire all the shares of Pinty’s Delicious Foods Inc., an Ontario poultry slaughtering and processing company, specializing in fully cooked products and other related products. Pinty’s employs 360 persons and operates three facilities. This acquisition, which was completed on November 26, 2018, will allow Olymel to strengthen its presence in the Canadian poultry market.
 

An era of growth

Olymel is enjoying strong growth, but is also facing plenty of challenges, such as ensuring supplies and environmentally sound production, and managing market risks and uncertainty. One issue that preoccupied us most in 2018 was the availability of manpower.

Olymel created over 1,500 new jobs during the past two years. To do so, our human resources team deployed considerable efforts and many original measures and programs to recruit candidates and train recruits, and promoted stable and permanent positions to retain them. Hats off to our human resources group. Their effectiveness no doubt helped Olymel win the Grand Prix Créateur d’emplois et de prospérité du Québec 2018 awarded by Jean Boulet, the new Québec minister of Labour, Employment and Social Solidarity. Given the planned retirements and our ambition to sustain growth, labour will remain a challenge and we will continue to give it the attention it requires.

I take the opportunity to congratulate and thank the personnel at all our facilities and service outlets who are committed to feed the world every day and make an invaluable contribution to our success.

Food is at the heart of people’s daily lives, and the world of food is constantly changing. As a Canadian leader in agri-food processing, Olymel is well positioned to track and interpret consumer and customer trends. We have the means and talent to respond to these trends. Beyond these trends, a consensus has emerged on the need for a balanced and diversified diet. Accordingly, Olymel must integrate the contribution of diversified protein sources into its growth and development, while continuing to strive for excellence in the pork and poultry sectors. As we have demonstrated in the past with our expertise, we will seize opportunities to expand our offer to feed the world, as our mission requires. It’s an exciting prospect.

Lastly, I wish to thank my colleagues on the management team for their support and contribution to Olymel’s success. I’m also grateful to our President Ghislain Gervais and all the members of the Board of Directors for their support and invaluable advice.
 

Réjean Nadeau 

President and Chief Executive Officer