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Menu Foods posts smaller year-end loss

Customers of beleaguered Canadian pet food maker Menu Foods appear to have returned to the company in 2008 after its massive product recall the previous year.

The Toronto-based income trust on Wednesday reported a net loss of $6.81 million on $260.6 million in sales for the year ending Dec. 31. That’s up from a $62.13 million loss on $244.8 million due to product recalls and lost sales in fiscal 2007.

And if the current global recession continues, the company said, history suggests cost-conscious pet food buyers are more likely to pick up private-label store-brand products rather than higher-margin major-label counterparts.

Menu, which makes private-label pet foods for U.S. and Canadian retail chains, was among several pet food makers to recall products starting in spring 2007 following a scandal in China over tainted wheat gluten supplied to western pet food processors.

The company is currently in the process of settling over 100 proposed class actions related to its recalls, through a US$24 million settlement fund.

In Menu Foods’ case, the recall began in March that year, stemming from indications that some Menu-made cuts-and-gravy dog and cat foods may have affected the renal health of some animals in the U.S.

Menu Foods said a Chinese supplier of gluten, a protein ingredient used in many pet foods, had spiked its ingredients with melamine and other compounds to “artificially inflate” protein levels. The compounds were able to slip past standard industry testing, the firm said.

Recession as motivation

“Following the recall of 2007, we began 2008 uncertain as to whether or not consumers would once again purchase Menu-produced product,” Menu CEO Paul Henderson said in a release Wednesday. “As each quarter passed throughout 2008, that uncertainty was diminished.”

In its quarter ending Dec. 31, he wrote, “Menu enjoyed sales to its continuing customers that, in many instances, surpassed the volumes sold to those customers in the fourth quarter of 2006, the last year before the recall.”

But the company also restructured its operations in 2008 to better suit the level of demand for its products, and now operates out of three processing plants, down from four.

That said, the current recession and global credit crunch may lead to a repeat of the 1982 recession, when the market share of private-label brands in the U.S. increased by three percentage points as compared to its 20-year average, the company said.

“While there can be no certainty that history will repeat itself, I believe that this current recession will again motivate consumers to increase their consumption of private-label products and that Menu’s business, which is largely private-label, will be one of the beneficiaries of this change in purchasing patterns,” Henderson said.

Increasing sales in the company’s fourth quarter of 2008, compared to the previous three, seem to point toward that possibility, the company said.

As for its own credit rating, Henderson wrote, “Menu continues to have the support of its lenders, as evidenced by the change in our lending agreements in December 2008. While Menu’s Canadian dollar debt on a year-over-year basis shows an increase, most of this is due to the appreciation of the U.S. dollar.”

The “significant escalation” in the cost of raw materials, production and delivery costs posed a challenge in 2008, the company said, but “we note that certain of those costs have begun to retreat while many others continue to rise. It is impossible to predict with any accuracy how costs will react through the remainder of 2009.”

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