Land O'Lakes Earnings Down in Q2

Company officials indicated business unit results were mixed, with Dairy Foods and Layers/Eggs particularly affected by declining commodity markets and the impact of economic conditions on consumer purchasing decisions.

17 Aug 2009 Land O'Lakes, Inc. has reported net sales of $5.8 billion and net earnings of $164.1 million for the first six months of 2009. While net sales were down from $6.6 billion for the first-half of last year, the $164.1 million in net earnings matched the same period one year ago, despite 2009's difficult economy. The company reported net sales of $2.8 billion and net earnings of $81.5 million for the second quarter, versus $3.3 billion in net sales and $102.8 million in net earnings for the same period one year ago.

Land O'Lakes President and Chief Executive Officer Chris Policinski said the company's first-half financial results indicated that: "While Land O'Lakes is not immune to the stresses and challenges of a difficult economy, we are solidly positioned to deal with the challenges ahead."

Among the factors Policinski cited in Land O'Lakes positioning were a sound and stable balance sheet, strong market positions and leading brands, an organization-wide commitment to best cost discipline and well-developed strategic plans.

Company officials indicated business unit results were mixed, with Dairy Foods and Layers/Eggs particularly affected by declining commodity markets and the impact of economic conditions on consumer purchasing decisions; strong performance in Seed and Crop Protection Products; and Feed realizing a volume decline in the livestock segment (due to financial stress among beef cattle and dairy producers), but seeing increased volume in the lifestyle feed and ingredients segments.

The company's Total EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was $141.3 million for the quarter and $254.1 million year to date, versus $163.8 million and $273.1 million for the same periods in 2008.

The company also reports EBITDA on a normalized basis, excluding the effects of unrealized hedging, significant asset sales or impairments, legal settlements, debt extinguishment costs and other special items. Normalized EBITDA for the quarter was $100.5 million, compared to $136.7 million for the second quarter of 2008. Year-to-date normalized EBITDA was $216.2 million, versus $272.1 million for the first half of 2008. The company decreased its guidance for full-year (2009) normalized EBITDA from $350 million to $340 million.

Commenting on the balance sheet, the company reported an improved Long-Term-Debt to Capital ratio (32.7 percent versus 34.4 percent as of June 30, 2008) and sound liquidity ($456.1 million in cash-on-hand and unused borrowing authority). Total debt at the end of the second quarter was $968 million, versus $722 million at the end of the second quarter in 2008. The difference was due to increased working capital usage.

In Dairy Foods, Land O'Lakes reported second-quarter sales of $713 million and $18.0 million in pretax earnings for the quarter, as compared to second-quarter sales of $1.0 billion and $44.8 million in pretax earnings for the same period one year ago. Year to date, Dairy Foods sales stand at $1.5 billion, versus $2.1 billion for the first two quarters of 2008. The company reported $0.1 million in pretax earnings in Dairy Foods through June, versus $39.7 million in pretax earnings for the first half of 2008.

Company officials noted that 2009 performance in Dairy Foods has been negatively affected by lower commodity markets and a consumer shift toward lower-priced (private label) products. Volumes were mixed, and reflected the product-mix shift. Value Added total butter and spreads volume was up 1 percent versus the first half of 2008, with retail butter volume flat, private label butter up 3 percent and spreads down 9 percent. Retail cheese volumes were down 6 percent, while Dairy Solutions volumes (Foodservice and Ingredients Solutions) were up 5 percent, driven primarily by gains in the government and school segments. On the Industrial (commodity) side of the business, cheese and whey volumes were up 4 percent and 22 percent, respectively. Again, dollar sales and earnings in Dairy Foods were shaped by a lower-price environment in both the value-added and commodity segments.

The Feed division reported $851 million in sales and $19.8 million in pretax earnings for the second quarter, versus $926 million in sales and $21.0 million in pretax earnings for the second quarter of 2008. Feed reported $1.74 billion in sales year to date, and $25.1 million in pretax earnings, down from $1.87 billion in sales and $30.4 million in pretax earnings through the first two quarters of 2008.

Factors affecting Feed performance, particularly in the livestock sector, were reduced volumes and a shift away from fully formulated feeds, attributable largely to market declines and financial stress in the beef cattle and dairy industries. Year to date, livestock feed volumes were down 13 percent versus the first half of 2008, while lifestyle feed volumes were up 2 percent and feed ingredients volumes were up 1 percent. Feed's 2009 earnings were also partly supported by unrealized hedging gains.

The company participates in the layers/shell eggs industry through Moark LLC, a wholly owned subsidiary. While volume was up, performance in this business was affected by a significant slump in the commodity egg market, with the average shell egg price for the first half of the year at $1.08 per dozen, down nearly 25 percent from the $1.43 per dozen of the first half of 2008.

For the second quarter, the company recorded $120 million in sales and a $6.2 million pretax loss in eggs, compared to $138 million in sales and $11.0 million in pretax earnings for the same quarter last year. First-half sales in eggs totaled $258 million, compared to $320 million for the first-half of 2008. Pretax earnings through June were $4.3 million, down from $43.3 million for the first half of 2008.

Overall shell egg volume through June was up 7 percent over one year ago. That gain, however, was in lower-priced commodity eggs (up 8%), while volume in branded and specialty eggs was flat with one year ago.

For the second quarter, the Seed division reported sales of $364 million and a pretax loss of $4.7 million, as compared to sales of $248 million and pretax earnings of $11.8 million for the second quarter of 2008. For the first half of the current year, the company's Seed business reported significantly increased sales and earnings: $1.14 billion in sales and $81.8 million in pretax earnings, versus $875 million in sales and $54.8 million in pretax earnings one year ago. Company officials attributed Seed's continued strong first-half earnings to an ongoing focus on the delivery of the best genetics and traits, the success and expansion of the company's "Expert Seller" and Answer Plot programs, and the strength of the company's seed/crop protection products business alignment (under the WinField Solutions marketing identity).

From a volume perspective, year to date, corn volume was down 4 percent, soybeans were up 5 percent and alfalfa was down 11 percent.

The company's Agronomy business consists of its core, wholly owned, wholesale crop protection products business (aligned with Seed under the WinField Solutions banner) and a 50-percent interest in Agriliance LLC, a retail agronomy joint venture. Second-quarter Agronomy sales totaled $790 million, with pretax earnings of $77.1 million, as compared to sales of $994 million and pretax earnings of $46.9 million for the same quarter one year ago. Year to date, Agronomy operations reported $1.20 billion in sales and $69.3 million in pretax earnings, versus $1.48 billion in sales and $37.6 million in pretax earnings one year ago. This improvement was partially due to the acceleration of vendor rebate income this year due to an improved documentation process.

Crop protection product sales and volumes were down from one year ago primarily due to declines in the value of some key products (such as glyphosates), inventory carry-over and just-in-time purchasing by customers, and a later growing season. Company officials indicated they expect to recapture some of the sales decline in the third quarter.

Company officials also indicated efforts to reposition the Agronomy retail business (consistent with a strategic focus on wholesale crop protection products) continue. In April, the company announced the sale of nine Agriliance retail centers to Agri-AFC LLC. More recently, the company announced that an agreement had been reached to sell 11 Agriliance retail facilities to Tennessee Farmers Cooperative.