Menu Foods raises recall costs, to cut staff

(Adds details, company comments; in U.S. dollars unless noted)

OTTAWA, Oct 10 (Reuters) - Menu Foods Income Fund MEW_u.TO will cut between 10 and 15 percent of its staff as it raised the cost of its massive tainted pet food recall on Wednesday by C$10 million to C$55 million ($56 million).

Menu Foods said customers returned more pet food and costs were higher than previously expected. The recall, first announced in March, has been expanded several times and is now one of the largest in North American history.

The company halted shipments and said it was recalling many of its pet foods after discovering they contained Chinese-sourced wheat gluten contaminated with melamine or related compounds.

Menu Foods, which has lost customers representing nearly 37 percent of its 2006 sales volume, said it will book restructuring charges of just over C$25 million, of which approximately C$6.2 million is in cash.

The company, which had 924 employees in 2006, would not specify how much the restructuring would save from operating costs, a spokesman said.

The charges cover severance and write-offs for certain pre-recall packaging and inventory, a previously capitalized customer relationship, certain receivables and idle assets.

“Today’s announcements about right-sizing and restructuring our business are part of the impact from the largest pet food recall the industry has seen,” the company said in a statement to Reuters.

“These changes were a necessary step to help us continue to rebuild the business.”

Menu Foods recalled more than 60 million packages of pet food after reports of 14 animal deaths, and recently said it faces nearly 90 lawsuits in North America. The company recalled dozens of products under various brands, including Procter & Gamble's PG.N Iams and Eukanuba, as well as house brands sold at Wal-Mart WMT.N and Safeway SWY.N.

The company’s units slipped 2.6 percent to C$2.26 on the Toronto Stock Exchange on Wednesday, continuing a decline of nearly 65 percent so far this year.

It also said it will use the proceeds from the now-completed sale of its production plant in North Sioux City, South Dakota, to cut outstanding debt. In 2006, the plant accounted for about 16 percent of production and 14 percent of the company’s workforce.

The sale of the plant and other assets, with the settlement of certain contractual obligations has generated $26.3 million.

The company said that senior executives and directors would be “sharing the pain” and cut their compensation by between 17 percent and 22 percent.

Corporate lending agreements will soon be amended to reflect the financial revisions announced on Wednesday, Menu Foods said.

($1=$0.98 Canadian)

((Reporting by Susan Taylor; editing by Rob Wilson; e-mail susan.taylor1@reuters.com; Reuters Messaging: susan.taylor1.reuters.com@reuters.net; tel: 613 235 8385)) Keywords: MENUFOODS/