Grainnet

Land O'Lakes Reports Fourth Quarter and Fiscal Year 2007 Results

Arden Hills, MN—Land O'Lakes, Inc., reported Feb. 19 its fourth-quarter and full-year financial results, while also commenting on the company's balance sheet and individual business unit performance.

The company reported significant increases in both sales and net earnings, with net sales up 26 percent and net earnings up 83 percent.

Full-year sales totaled $8.9 billion with net earnings of $162.1 million, compared to net sales of $7.1 billion and net earnings of $88.7 million for 2006.

For the fourth quarter, the company is reporting $2.6 billion in net sales and net earnings of $5.5 million, compared to $1.9 billion in net sales and net earnings of $44.5 million in the fourth quarter of 2006.

Total EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was $46.0 million for the quarter and $332.1 million for the year, compared to $95.4 million and $250.1 million for the same periods one year ago.

The company also reports Normalized EBITDA (which excludes 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 $66.4 million, compared to $87.3 million for the fourth quarter of 2006.

For the year, Normalized EBITDA was $319.0 million, compared to $240.7 million for 2006.

"The past year was highlighted by improved performance nearly across the board, continued balance sheet strength and strategic progress in positioning for the future," Land O'Lakes President and Chief Executive Officer Chris Policinski said.

"Clearly, strong markets, particularly in dairy and eggs, helped boost both dollar sales and earnings.

"However, our organization-wide commitment to leveraging our brand strength, aggressive portfolio management and effective cost control put us in a position to translate market strength into improved business performance and financial results."

BALANCE SHEET

Total balance sheet debt, including capital leases, was up modestly to $749 million at year-end (versus $708 million as of December 31, 2006).

Company officials indicated the increased debt was related primarily to the September restructuring of its investment in the Agriliance LLC agronomy joint venture, which resulted in the Agriliance crop protection products business being transferred to Land O'Lakes.

The company improved its Long-Term-Debt to Capital ratio, which was at 36.8 percent as of Dec. 31, 2007, compared to 40.1 percent as of Dec. 31, 2006.

Liquidity, defined as cash on hand plus unused capacity on short-term debt facilities, was $543 million at Dec. 31, 2007, versus $452 million one year ago.

Equities were up approximately $100 million to $1.0 billion.

BUSINESS UNIT PERFORMANCE

Dairy Foods

Dairy Foods sales for the year totaled $4.2 billion, compared to $3.2 billion in 2006. Sales for the quarter totaled $1.2 billion, compared to $890 million for the fourth quarter of 2006.

Dairy Foods is reporting pretax earnings of $87.4 million for the year, compared to $47.2 million in pretax earnings for 2006.

The Dairy Foods earnings include a $28.5-million gain on the sale of its Cheese & Protein International (a West Coast cheese and whey manufacturing facility) assets.

For the fourth quarter, Dairy Foods reported $7.7 million in pretax earnings, compared to $44.8 million in pretax earnings for the fourth quarter of 2006.

The fourth-quarter earnings decline was due primarily to the impact of strong product prices on volumes and product mix, company officials said.

While strong markets boosted dollar sales and margins, higher prices did work to dampen volumes.

Overall volume in the company's Value Added segment was down 4 percent versus 2006.

The strength of the company's flagship LAND O LAKES-branded butter was reflected in a 2-percent volume increase in branded butter.

The company's Dairy Foods Industrial (manufacturing) operations continued to focus on balancing market demand and milk supply trends with processing capacity and achieved improved performance in all three of its geographic regions -- East, Upper Midwest and West.

Company officials attributed Dairy Foods solid earnings to a combination of improved commodity markets, brand strength, consumer-focused product and packaging innovation, effective cost control and continued improvement in the company's Dairy Foods manufacturing operations.

Feed

Feed sales for 2007 were $3.1 billion, up from $2.7 billion one year ago.

Feed is reporting pretax earnings of $30.9 million, compared to $36.7 million for 2006.

For the fourth quarter, Feed reported $886 million in sales and pretax earnings of $28.3 million, compared to $744 million in sales and $28.2 million in pretax earnings for the same period one year ago.

Company officials noted that high commodity (grain) prices adversely impacted both volumes and margins, with resulting higher feed prices leading to reduced feed purchases and a shift toward a lower-cost product mix.

Volumes for 2007 were down 10 percent in Livestock feed, 4 percent in Lifestyle feed and 8 percent in Milk Replacers.

Feed Ingredient and Feed Additive volumes were up 6 percent and 5 percent year over year, respectively.

Layers/Eggs

Strong markets continued to drive improved performance in the company's Layers/Eggs business (MoArk LLC).

Average shell egg prices for 2007 were $1.15 per dozen, compared to 76-cents per dozen for the previous year.

The company is reporting $514 million in 2007 sales and pretax earnings of $24.6 million, compared to sales of $398 million and a pretax loss of $40.2 million for 2006.

Notably, 2007 earnings include a $22.0-million pretax charge to establish a reserve for assets received as part of the 2006 sale of the liquid eggs business to Golden Oval Eggs.

For the fourth quarter, the company is reporting $159 million in Layers/Eggs sales, up from $112 million for the fourth quarter of 2006.

Layers/Eggs reported pretax earnings of $6.3 million for the quarter, compared to $1.6 million in pretax earnings for the same quarter one year ago.

Company officials indicated strong markets (prices), new production efficiencies and effective marketing all contributed to 2007's improved results.

The company's overall shell egg volume was up 3 percent, and volume in higher-margin branded and specialty eggs was up 36 percent.

Seed

In 2007, the company's Seed business reported record sales of $917 million and record pretax earnings of $43.9 million, compared to $756 million and $40.1 million, respectively, for 2006.

Earnings in Seed include a $7.9-million charge related to inventory write-downs and sales returns of Roundup Ready(R) Alfalfa.

For the fourth quarter, Seed recorded sales of $177 million and $0.2-million in pretax earnings, company officials reported, noting that the fourth quarter is considered part of the "off-season" for Seed.

In the fourth quarter of 2006, Seed reported $149 million in sales and $0.7-million in pretax earnings.

Volumes for the year were affected by two significant factors, a shift of acreage to corn to meet ethanol industry demands and the impact of court rulings related to challenges to the USDA's process for approving non-regulated status for Roundup Ready(R) Alfalfa.

Company seed corn volumes were up 35 percent, just over twice the corn acreage increase, while soybeans volumes were down 6 percent, as compared to a 14-percent acreage decline.

Alfalfa volume was down 11 percent year over year.

Agronomy

Land O'Lakes is reporting $13.6 million in pretax earnings in Agronomy for the year, up from $11.8 million in 2006.

Those earnings were generated primarily through the company's 50-percent ownership in the Agriliance LLC joint venture, which was substantially repositioned late in the third quarter.

For the quarter, the restructured Agronomy business (in its off-season) reported a pretax loss of $35.6 million, versus a $16.3-million pretax loss for the same quarter one year ago.

Those losses include one-time costs related to the Agriliance repositioning, which saw the assets of the Agriliance Crop Protection Products business being distributed to Land O'Lakes and the wholesale Crop Nutrients business being distributed to joint venture partner CHS Inc.

Efforts to reposition Agriliance's retail business continue.

At the time of the restructuring, company officials said these strategic repositioning efforts were intended to: align the core Crop Protection Products and wholesale Crop Nutrients businesses with each parent company's (Land O'Lakes and CHS) market strengths, core competencies and business strategies; deliver cost reductions; and enable more effective delivery of agronomic inputs to local cooperatives, dealers and producers.

The company's Crop Protection Products business is now Winfield Solutions LLC and is aligned with the closely related Seed business under a new WinField Solutions(TM) marketing identity.

While Agriliance sales have not been included in Land O'Lakes financial reporting in the past, Land O'Lakes is reporting $287 million in Crop Protection Product sales through Winfield Solutions LLC since the Sept. 1, 2007, repositioning.

Notably, volumes were improved in both crop nutrients and crop protection products in the most recent crop year.