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Michael Foods, Inc.
Debtholders' Conference Call
November 11, 2008
9:00 a.m. Central time
- Welcome to our quarterly debtholders' conference call and thank you for joining us again. We appreciate your interest in Michael Foods.
- Introductions of Mark Witmer, Treasurer, Dave Johnson, President and CEO, and Mark Westphal, CFO. Dave will make some comments later in the call and we'll all do our best to answer your questions later.
- Review agenda:
A. Review third quarter results and by division
B. Divisional operating comments
C. Fourth quarter tone comments
D. Comments by the C.E.O.
E. Q & A session
Note: these prepared comments are also available in text on our website should you want to view them there.
A. Review news release - net sales and EBITDA, and by division
Third quarter 2008 net sales were $450.1 million versus $381.1 million, an increase of 18%. Third quarter 2008 EBITDA was $51.6 million versus $45.9 million, an increase of 12%.
Third quarter results by division:
Egg Products Division third quarter external net sales were $318.9 million versus $266.5 million, an increase of 20%, with EBITDA at $44.1 million versus $38.8 million, an increase of 14%.
Crystal Farms Division third quarter external net sales were $100.6 million versus $84.5 million, an increase of 19%, with EBITDA at $5.8 million versus $2.8 million, an increase of over 100%. This was both an easy comparison and a return to more historical levels for branded cheese margins. More on that in a bit.
Potato Products Division third quarter external net sales were $30.5 million versus $30.0 million, an increase of 2%, with EBITDA at $5.2 million versus $6.1 million, a decline of 14%.
Results for the first nine months of 2008 were as follows:
Consolidated net sales were up 25% at $1.32 billion versus $1.06 billion, with EBITDA ahead 17% at $145.8 million versus $124.4 million. Divisional details are:
Egg Products Division external net sales were $939.4 million versus $739.2 million, an increase of 27%, with EBITDA at $127.9 million versus $101.3 million, an increase of 26%.
Crystal Farms Division external net sales were $290.8 million versus $231.1 million, an increase of 26%, with EBITDA at $12.6 million versus $11.7 million, an increase of 8%.
Potato Products Division external net sales were $89.9 million versus $86.6 million, an increase of 4%, with EBITDA at $14.6 million versus $16.9 million, a decline of 14%.
B. Divisional third quarter operating comments
Egg Products
After protracted upswings in the commodity markets, we did experience some moderation in the third quarter. However, Foodservice margins were still hampered by the normal lag in passing along higher costs, such as grains, eggs and energy-related costs, resulting in sub-par margins still for this channel. Offsetting this performance, Food Ingredients, with strong dried products results, and Retail liquid eggs, with good volumes and pricing, had strong showings. We remain pleased that our egg products strategy, spread over three distinct trade channels, continues to work as it should, with built-in counter-balances.
On the sales side, the 20% dollar sales gain again reflects broad commodity inflation. Most commodities that affect us remained well above historical levels last quarter, even with the recent moderation. Beyond pricing, volume growth was modest at less than 1% year-over-year. Retail volume growth was strong and Foodservice rose too, though at a slower pace, reflecting the slower economy and weakness in away-from-home eating. Food Ingredient unit sales saw weakness related to competitive pressures. Overall, we are pleased that the key higher value-added lines had solid volume growth in the quarter. Specifically, ESL was ahead 7%, low/no cholesterol items by 9% and precooked by 6% - all good showings.
Overall, the strength in Food Ingredient and Retail egg products more than offset weakness seen in margins for Foodservice items, where price relief happens more slowly. However, as we have discussed with you in recent calls, we have executed pricing actions at Foodservice to offset various significant cost impacts seen during 2008. We are getting caught-up there, with September showing better results, and we expect the coming months to continue to improve.
Crystal Farms
Crystal Farms experienced a much improved quarter from what we have experienced over the past year. This improvement is directly related to cheese costs retracting from historical highs. After seeing block cheese over $2.00 per pound for much of the winter and spring, it pulled back to the $1.80 -1.90 area this summer. Simultaneously, our pricing actions with the retail trade got caught-up with the market and some movement toward more historical branded cheese margins began to be seen. Adding to the revenue improvement was a 7% volume gain year-over-year for branded cheese, reflecting our value-brand positioning, which is playing well at Retail in these uncertain economic times. Consistent with the difficult economy theme, we saw good private label cheese results as well, with unit volume up nearly 30%. Partially offsetting the cheese earnings gains was a decline in shell egg profitability. All in all, it was a very good quarter for Crystal Farms.
Potato Products
Potato Products third quarter results were a bit of a disappointment. Pricing and volumes each edged upwards, but margins were sub-par for Foodservice cuts. This reflected various raw material, packaging and manufacturing cost pressures. Retail profitability was down slightly for the same reasons, despite solid volume growth.
Other items
On the cash flow front, third quarter cash generation was good, but was slightly under our expectations. Working capital increased, both sequentially and year-over-year, due, in part, to higher inventories. However, our leverage ratio dropped nicely to 2.85x at quarter's end, which allows for a 25 bps reduction in our margin on the Term B debt to 175. We were fortunate to have had no LIBOR debt rolling during the recent turmoil in that market. Our Term B debt will reset later this month at rates that look much better than what prevailed a few weeks back.
Our overall liquidity remains strong, with invested cash today at approximately $35 million and we have $93 million of revolver availability. We only have used the revolver for letter of credit backstopping. Regarding the end of third quarter balance sheet, please note that we filed our Form 10-Q late yesterday.
C. Fourth Quarter Tone
We will now share some thoughts on the tone of business in the fourth quarter and beyond. Please note that these are clearly forward looking comments. Inherently, making forward-looking comments is fraught with risk and we list those many risk factors in our Form 10-K. Therefore, please note that these comments are clearly governed by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Egg Products
We expect our Egg Products results to remain strong, but at lower growth rates versus the year-to-date results. As discussed last quarter, we expect a mix shift, with improving results in Foodservice and lower growth results in Food Ingredients. This shift will be a function of the base year comparisons, improved pricing in Foodservice, and the changing market conditions. We expect the Retail liquid egg momentum to continue due to strong volume growth. The continued watch-out will be the overall volume performance in Foodservice as a result of economic conditions' impact on away-from-home food consumption.
Crystal Farms
We expect continued improved performance for Crystal Farms due to better margins related to our pricing actions, moderating costs, and strong volume momentum related to our value positioning. As such, we expect EBITDA to improve meaningfully on both a sequential and year-over-year basis.
Potato Products
We expect the Potato Products business to continue to experience EBITDA declines versus year ago due to raw material and processing costs. These declines may occur despite solid top line growth - particularly in Retail, where we continue to increase market share. Aiding the top line will be the launch of Yukon Gold mashed into the Foodservice channel.
D. Comments by C.E.O. Dave Johnson
E. Question and Answer Session
We will now have the operator explain the Q&A process please.
After Q & A session:
Thank you for joining us today. We appreciate your interest in Michael Foods. We'll look forward to discussing our fourth quarter and annual results with you this winter. Thank you.
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