Casein costs force Galaxy to tighten its belt

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Rising raw material costs lead to decline of $0.58m in Galaxy's
gross margin for 3Q 2005, leading to price hikes and expense cuts
throughout the remainder of the fiscal year.

However stringent and swiftly applied measures have meant that the producer of plant-based dairy alternatives still managed to trim its loss from operations to $0.45 million, from $1.12 in last year's comparable quarter.

Net sales increased 10 percent over the quarter ended 31 December 2004, reaching $10.6 million compared with 9.6 million in 3Q 2004.

The good news on the sales front was mainly attributed to contract manufacturing sales but, as they are not as lucrative as sales of branded products, the increase was not enough to stave off the impact of the escalating costs.

CEO Michael Broll said: "Higher casein costs alone accounted for approximately 1 million dollars of our margin decline in the third quarter, when compared with the prior-year period."

Casein prices have been picking up speed since the start of the company's 2Q. They have been responsible for a margin decline of around 2 million dollars over the nine months since the start of the fiscal year, said Broll.

The company has said that a proportion of the additional costs, to which packaging, film and transportation also contribute, will have to be borne by the consumer though price increases.

But executives are also doing their bit on an internal basis by "aggressively reducing"​ non-essential spending, including corporate overheads.

The raw materials blow comes on top of a disappointing full fiscal 2004, for which Galaxy reported a net loss of nearly $3 million, or 30 cents per share, compared to a net income of just over $1 million, or 5 cents per share, for the previous year.

When these results were announced last June, Scott Van Winkle, managing director of Adam, Harkness & Hill, commented to​: "There has been a decline in the consumption of bread in the US and I would suspect this has had an impact on the sector. But the real issue for Galaxy is that it has a large factory - built with higher sales figures in mind - and therefore large overheads. If this were scaled down, the sales figures would look good."

The company's management has also been going through a transitional period, with two CEO changes in 18 months. Michael Broll took up the helm in July 2004 from Christopher New, who himself had only replaced founder and president Angelo Morini in December 2002.

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