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Debtholders’ Conference Call May 9, 2008 10:30 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. 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 First quarter 2008 net sales were $427.7 million versus $327.9 million, an increase of 30%. First quarter 2008 EBITDA was $48.9 million versus $39.0 million, an increase of 25%. It’s a nice way to start the year, though we would warn the audience against doing any extrapolations when contemplating the full year. First quarter results by division: Egg Products Division first quarter external net sales were $301 million versus $229.2 million, an increase of 31%, with EBITDA at $42.2 million versus $29.5 million, an increase of 43%. We would remind the audience that the 2007 period was a down EBITDA period for Egg Products, in part because the significant Food Ingredient side was experiencing margin pressure and market conditions were such that shell eggs were a modest profit contributor in 2007. Crystal Farms Division first quarter external net sales were $96.5 million versus $70.2 million, an increase of 37%, with EBITDA at $3.6 million versus $5.5 million, a decrease of 34%. Potato Products Division first quarter external net sales were $30.2 million versus $28.5 million, an increase of 6%, with EBITDA flat at $5.6 million. In summary, we had a very good quarter for Egg Products, tough Crystal Farms results due to the high cheese market and Potato Products held fairly stable. In all, we are pleased we are making overall progress. B. Divisional first quarter operating comments Egg Products On the sales side, the 31% dollar sales gain reflects notable inflation from the egg market. That market saw records highs, as reported by Urner Barry, in the first quarter and has since backed-off quite a bit, but remains well above historical levels. Beyond pricing, volume growth was a contributor, with first quarter units sold up 3%, with Food Ingredients volumes mixed by product line, good Retail results, and Foodservice volumes up nicely. In particular, the two key Foodservice lines, extended shelf-life (ESL) liquid and precooked, demonstrated very solid unit sales growth, up 10% and 7%, respectively. As a reminder to our investors, the ESL line, which we pioneered in the marketplace for convenience and safety, is now 19 years old. Between a robust egg market rising breaking stock prices and high grain costs, with corn near $6, we had both expensive external and internal eggs in the quarter. However, the Food Ingredient side of Egg Products saw pricing, as quoted mainly in the Urner Barry daily markets, rise and this pushed our pricing for dried, frozen and short shelf-life liquid items up significantly. The market environment reflected strong demand coupled with tighter supplies, resulting in elevated markets. The overall impact of pricing in the Food Ingredients sector rising more rapidly than costs was helpful to the division’s margins and EBITDA contribution for the quarter. Margin expansion in Food Ingredient egg products was able to more than offset weakness seen in margins for Foodservice items, where price relief happens more slowly. However, as we discussed only six weeks ago with you, we are taking significant pricing and cost reduction actions at Foodservice to offset significant cost impacts. We also should mention that we saw notable profitability gains from our modest shell egg business in the first three months of 2008 versus the prior year period related to the robust egg market.
Crystal Farms Crystal Farms experienced another difficult quarter. The cheese market was strong and pricing to the retail trade continues to lag the cost increases. As a result, Crystal Farms had a tough EBITDA period, much as was the case in the prior two quarters, despite there being a 37% increase in net sales. Volume growth was strong at 8% for the quarter, with the key branded cheese line up almost 3%. Again, due to the addition of a major account last spring, the private label side of our cheese business had strong volumes, with a near tripling seen year-over-year. Potato Products Potato Products first quarter results were about as expected. Volumes were good, with units ahead 5%. Foodservice margins suffered due to various raw material and manufacturing cost pressures, but Retail profitability was good due to a combination of price increases and strong volume growth. Other items On the cash flow front, first quarter cash generation was hampered by increased working capital needs in accounts receivable and inventories as a result of the higher market and cost environment. Working capital metrics are in line with our expectations and remain a focus of management. We also funded our $8.7 million acquisition of Abbotsford Farms out of operating cash flows in January. First quarter capital spending was fairly modest; it should not be annualized to get to a figure for all of 2008. Cash is on the rise as the second quarter progresses. Regarding the balance sheet, we plan to file the Form 10-Q on Monday. C. Second Quarter Tone We will now share some thoughts on the tone of business in the second 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 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 For the second quarter, we expect to see an EBITDA increase over last year, but likely not at the levels experienced in the first quarter. Food Ingredient and shell egg businesses may see margins contract, along with the egg market declines we have seen in recent weeks, and as year-over-year comparisons become more difficult. We expect weaker Food Ingredient results to mitigate continued Retail momentum and Foodservice margin gains, which should come from pricing and easier year-over-year comparisons. As always, changing commodity markets and how our volumes hold-up after taking pricing actions remain concerns. We are also mindful of the challenging cost environment, with energy costs, in particular, being substantially higher year-over-year, as well as how a weak economy may affect away-from-home food buys. Crystal Farms We have executed price increases on cheese to cover the market increases. As such, cheese margins should improve in the months ahead, but how much depends on future cheese market movement and our overall volumes post the pricing actions. We also note the EBITDA comparisons for Crystal Farms will get easier as we progress through the year. Beyond pricing, our new business activity for Crystal Farms remains robust as we expand distribution and several new chain accounts have been added recently. Potato Products Potato Products is showing better momentum on the Retail side, which is where we have stronger margins. Part of this is due to a good response to our increased promotional activity, including a new Simply Potatoes advertising campaign. Also, as mentioned in our last call, we combined all of our retail selling under the Crystal Farms organization in late 2007 and we are pleased with the results to date. Despite the Retail momentum, Foodservice margins are under some pressure due to increased costs and it is not clear if we’ll see higher EBITDA from Potato Products in the current quarter compared to the 2007 period. 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. Thank you for joining us today. We appreciate your interest in Michael Foods. We’ll look forward to discussing our second quarter results with you this summer. Thank you. |
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