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Menu Foods pulls profit in Q2

Beleaguered Toronto pet food maker Menu Foods has earned a quarterly profit for the first time since late 2006, the company reported Wednesday.

The income trust posted a profit of $735,000 on $60.3 million in sales for its second quarter ending June 30, up from a $3.6 million loss on $47.2 million in sales in the year-earlier period.

The company was one of the firms at the centre of one of the largest-ever North American pet food recalls in March last year, when an overseas supplier’s wheat gluten, a common pet food filler, was found to have been spiked with melamine and other compounds.

Menu today bills itself as the first of several pet food companies to recall product adulterated with melamine and related compounds in connection with the major recall. “Menu, its competitors, its customers and consumers were all victims of a terrible fraud perpetuated on the pet food industry as a whole,” the company wrote.

“While the 2007 recall is now largely behind us, its impact on our profitability and on our leverage ratios will be felt for some time to come,” Paul Henderson, the income fund’s administrator, wrote Wednesday in a message to the fund’s unitholders.

It’s still not known how much it will cost the company to defend the legal actions launched against it following the product recall, nor is it known how much of that would be covered by the company’s insurers.

A U.S. district court in New Jersey in May approved a tentative settlement agreement that would resolve over 100 planned class actions filed in U.S. and Canadian courts. Motions for final approval of that agreement are to be heard in October in the U.S. and in “various Canadian courts” in November, the company said Wednesday.

Overall, the company said it still expects the direct costs of the recall alone to be around $55 million, and subsequent restructuring costs to be around $5.4 million.

“Given the covenants contained in our credit facilities and our goal of rebuilding the business, the fund’s management and employees’ near-term focus will continue to be on cash flow generation and the day-to-day effective operation of the business,” Henderson wrote. “In the second quarter, we realized benefits of this approach, although to a reduced extent due to the influence of market-wide material cost increases.”

Looking ahead, Henderson said the company expects its costs to continue to escalate within the cost of sales, more than offsetting the price increases the company made in its Q2.

However, early in Q3, Henderson said, national branded manufacturers of wet pet food have raised their prices in Canada, after which the company increased the prices it charges to its private-label retail customers.

“Given this movement in Canada, we expect leading national branded manufacturers to initiate price increases in the United States in order for them to recover the cost increases experienced in that marketplace,” Henderson wrote. “When this happens the fund expects to follow with a price increase of its own.”

But until the company can pass its increased costs along to its own customers, it expects its gross margin and earnings before interest, taxes, depreciation and amortization (EBITDA) will “continue to be adversely impacted.”

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