Food ingredients fuel rebound at Penford

by Eric Schroeder
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CENTENNIAL, COLO. — Net income at Penford Corp. totaled $2,058,000 in the third quarter ended May 31, equal to 16c per share on the common stock, up sharply from a loss of $5,452,000 in the same period a year ago. Driving the rebound in earnings were record quarterly sales, gross margin and operating income within the company’s Food Ingredients division during the third quarter.

Operating income within the Food Ingredients division was $6,206,000 in the third quarter, up 16% from $5,362,000 in the same period a year ago. Sales increased 9% to $28,535,000 from $26,173,000, while gross margin advanced 10% to $9,056,000 from $8,225,000.

Tom Malkoski, president and chief executive officer, said during a July 9 conference call with analysts that two-thirds of the sales growth came from volume gains and the remaining one-third from pricing, some of which resulted from mix changes.

“On balance, the improvement in revenue was driven largely by new business gains in several of our specialty categories, including dairy, gluten-free, sauces and companion pet products,” he said.

Asked to elaborate on some of the trends in the Food Ingredients business, Mr. Malkoski said, “We’re seeing some pretty good demand for many of our new products. We’re seeing a fairly stable outlook for what I would call our base, or existing, products that go into coatings and proteins. They’ve been fairly stable the last two or three months.

“We follow the restaurant industry very carefully, and also the retail industry — grocery retail. We’re seeing that the grocery retail side of branded products are doing a little bit better than the restaurant trade. Restaurant trade trends are appearing very marginally better than they were three months ago, but they are still only up maybe 1% compared to the year-ago period.

“So we carefully monitor that, but remember that many of our products actually offer cost savings to existing products for many of our customers. Then we also have several products that create product news. But we have a pretty good split right now between customers looking for product news, and those looking for cost savings or cost reduction. So we have a full range of products to offer them.

“We’re also, interestingly, finding some customers who are interested in both at the same time. So they want product news to bring people into the store, but they are also going to be offering some lower-price menu items. They are driving for cost savings for those. So right now, the pattern of orders and the interest on a lot of our new products has been very strong.”

A long-term investor asked Mr. Malkoski whether the company has considered selling parts of its lower-margin Industrial Ingredients business to focus more heavily on Food Ingredients. Mr. Malkoski indicated such a scenario is “always in the mix.”

“Yes, from a strategic standpoint, we look at a number of scenarios on a regular basis, and assess the merits of transactions both for M.&A. on our side to being able to acquire things, as well as the possible sale of certain assets or the possible partnership using certain assets,” Mr. Malkoski said, adding that while there have been numerous discussions within the company’s internal group, “nothing interesting” has surfaced so far for Penford or its shareholders.

For the nine months ended May 31, overall net income at Penford was $4,956,000, or 39c per share, up from a loss of $5,200,000 in the same period a year ago. Sales totaled $349,823,000, up from $322,928,000.

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