Penford Ingredients Business Holds Up in Downturn
The North American Food Ingredients segment again reported higher profits despite the global economic contraction. Third quarter fiscal 2009 revenues fell by $0.5 million to $16.6 million from a year ago due to the second quarter 2009 sale of the segment’s dextrose business.
13/07/09 Penford Corporation, a global leader in renewable, natural-based ingredient systems for industrial and food applications, reported that consolidated sales for the quarter ended May 31, 2009 were $78.7 million compared with $102.8 million a year ago. The decline in revenues reflects product mix shifts in the Industrial Ingredients business caused by reduced demand for starches serving paper markets, lower Australian foreign currency exchange rates, the impact from passing through lower corn prices to industrial customers and the divestiture of the dextrose business in North America Foods. Net loss for the third fiscal quarter was $7.4 million, or $0.66 per diluted share, compared to net income of $2.7 million, or $0.24 per diluted share last year. These results were driven by sharp declines in revenue that outpaced cost reduction initiatives in the Industrial business and lower capacity utilization rates in Australia.
The North American Food Ingredients segment again reported higher profits despite the global economic contraction. Third quarter fiscal 2009 revenues fell by $0.5 million to $16.6 million from a year ago due to the second quarter 2009 sale of the segment’s dextrose business. Sales of all other product lines expanded 4% in the third quarter, with double-digit percentage increases in coating, dairy and pet applications. Product mix improved and average unit selling prices increased. As a result, gross margin grew $0.7 million to $5.6 million. Income from operations increased $0.5 million to $3.4 million compared with $2.8 million a year ago.
End market demand conditions remained challenging during the third quarter for the Industrial segment. Average ethanol prices are 36% below the same period last year. Paper industry customers reduced production and inventory levels as reported shipments during the quarter of uncoated freesheet papers declined by 11% and coated freesheet deliveries dropped by 30% from a year ago. Reflecting weak starch demand, the Industrial business produced more ethanol during the quarter, which carries a lower unit selling price. Total sales in the Industrial business declined to $44.7 million from $60.9 million last year.
The Industrial business has reduced its workforce by nearly 20% and renegotiated several supply contracts for materials, contractors and distribution services. These actions lowered unit manufacturing costs by $2.6 million in the quarter compared with last year. Operating and research expenses declined as a percent of sales to 5.7% from 7.1% a year ago. However, the magnitude of the cost reduction programs did not match the scale of the revenue change in the quarter. Reduced absorption of fixed manufacturing expenses, declines of 25% to 60% in co-product prices and low ethanol returns contributed to the $7.0 million operating loss during the quarter.
Sales for the Liquid Natural Additive product line expanded more than 25% over last year, continuing to support the value proposition this platform brings to customers. The Industrial business continues to suffer from the effects of denied flood insurance recovery. The Company is seeking additional payments from its insurers of more than $30 million arising from the Cedar Rapids flood in June 2008. During the quarter, the Company continued with its lawsuit against ACE American and National Union Fire Insurance Co., which is owned by American International Group.
“We expect the Industrial segment to show modest recovery. Ethanol market prices have increased and corn costs have decreased from third quarter levels,” said Tom Malkoski, Penford Corporation President and Chief Executive Officer. “Paper customer inventory adjustment programs have abated and recent monthly industrial starch volumes are 30% above the low shipment levels recorded during the first two months of the third quarter. Cost containment initiatives are having an impact, with unit manufacturing expenses significantly lower than earlier this fiscal year.
Third quarter results in the Australia/New Zealand business were similar to the second quarter. Sales were $17.6 million compared with $25.1 million a year ago, primarily on a 24% decrease in average Australian foreign currency exchange rates. Drought premiums for grain prices have begun to subside with Australian wheat and selected maize prices down from the same period a year ago. However, certain categories of maize input prices remain high and total segment grain costs increased $1.2 million from last year. Harvest conditions for the new crops are normal and forward grain prices are lower. Programs to reduce inventory balances and rationalize production as a consequence of high input costs have reduced throughput rates. Lower capacity utilization levels resulted in higher unit manufacturing costs. The business reported an operating loss of $3.1 million for the quarter.
The Company is continuing to explore operating and strategic options for this business. Several new expressions of interest for all or parts of the Australia/New Zealand business have been received and are being considered. No final decisions have been made or final contracts entered into at this date.
