Menu Foods Says it Will Survive Huge Recall of Contaminated Pet Food

Menu Foods Income Fund insisted Thursday that it will survive the fallout from a huge recall of contaminated pet food that is expected to cost at least C$45 million ($42 million), as more customers cancel orders and lawsuits mount.

Executives said they were confident that a bigger line of credit will help see the company through the recall, expanded several times and dubbed one of the largest in North American history.

Menu Foods has recalled at least 60 million packages of pet food after reports of 14 animal deaths. It said the foods contained contaminated wheat gluten imported from China.

"Menu's been in business and at various sizes and at different scales for 35 years and the intent will be that we will continue to be around," Chief Executive Paul Henderson said on a conference call to discuss first-quarter results.

He pointed to a recently-increased bank facility, to US$50 million from US$30 million. The company also has a facility for US$85 million in senior secured notes.

Menu Foods also expects to once again begin shipping many of the recalled pet food brands in the second quarter and into the third quarter.

"All of those things essentially will see us, in my opinion, through the recall," Henderson said.

Cormark Securities analyst Aleem Israel agreed, saying Menu Foods has survived hard times in the past. He cited problems in 2005 when rising costs led the company to breach its bank covenants.

"He's (Henderson) been in the situation where his back was against the wall," he said from Toronto. "They were very good at managing their way out of that."

But it won't be easy for Menu Foods to find its footing again.

The C$45 million recall cost excludes the impact of lower sales and any lawsuits exceeding the company's insurance. Menu Foods now faces nearly 90 lawsuits in North America, Henderson said.

The company also said it expects to borrow more money because of the recall at higher interest rates under an amended credit agreement.

"Both of these changes are expected to increase the fund's financial expenses going forward," the company said in a statement. Company executives were unable Thursday to estimate the impact of higher interest costs.

In its first-quarter, Menu Foods posted a net loss of C$17.51 million, or 91.8 Canadian cents a unit, compared to profit of C$1.3 million, or 73 Canadian cents a unit, in the prior-year period. Sales slumped to C$64.5 million, from C$93.9 million.

No distributions were declared during the quarter and the board will not consider resuming them "for the foreseeable future".

The company said it expects second-quarter sales and operating results will be "adversely affected" by the recall.

Israel said he is not concerned by small customers who have canceled orders because the biggest customers need Menu Foods' capacity.

Menu Food units dipped 12 Canadian cents to C$4.01 on the Toronto Stock Exchange Thursday.