Milling & Baking News - May 18, 2010 - 17

Financial Results 

AIPC quarterly net declines;
pre-tax earnings up sharply
KANSAS CITY - Net income of
American Italian Pasta Co. in the
second quarter ended April 2 was
$23,235,000, equal to $1.09 per share
on the common stock, down 11% from
$26,196,000, or $1.27 per share, in the
previous year's second quarter. Net
sales were $145,904,000, down 10%
from $162,325,000.
Accounting for the decline in earnings was the company's resumption
of income tax payments, having used
up credits from losses sustained in
earlier years. The company expensed
$12,668,000 in taxes in the quarter, versus a tax benefit of $1,714,000 during
the second quarter last year.
Income before taxes in the second
quarter was $35,903,000, up 47% from
$24,482,000 during the same period
last year.
Accounting for the 10% sales decline, AIPC said 5.4 percentage points
were due to lower average selling
prices with the balance of the decline
from a slide of volume.
"The volume decreases were in the
institutional and non-strategic brand
channels, which offset volume gains
in the strategic retail channel of 2.7%
for the quarter," AIPC said.
Margins improved markedly during the second quarter with gross
profits of 36.5% of revenues, up from
27.2% a year earlier, and operating
profit margin of 25.3%, up from 17.6%.
"Our retail focus on private label
or store brand business, along with
our strategic brands, contributed to
strong results in the second quarter of
fiscal 2010," said Jack P. Kelly, AIPC
president and chief executive officer.
"AIPC continued to outperform the
pasta category in both revenue and
volume, and we are operating the
business more profitably, as secondquarter operating profit increased
30% from the year prior. Strong performance in 2010 has allowed us to
continue our aggressive debt reduction, bringing total debt outstanding
to $45 million from $110 million at
the end of fiscal 2009. Since the second quarter ended, we have further
reduced our debt outstanding by an
additional $15 million."
Mr. Kelly offered considerable additional color on the quarter and the
company's outlook in a May 6 conference call. During the call he said that
while the company does not break out
results for store brands separate from
18 / May 18, 2010 Milling & Baking News

its strategic retail channel, private label represented a "great success" for
AIPC during the quarter.
"Our store brand volume and revenue continue to grow," he said.
Mr. Kelly devoted considerable time
to discussing the better-for-you segment for pasta.
"We're making significant headway
into the important fast-growing betterfor-you pasta category, which as we've

said in prior earnings calls, presents
significant growth opportunities for
AIPC," he said. "Our better-for-you
pasta products totaled nearly 7.8% of
our second-quarter volume, compared
to 5.6% in fiscal 2009.
"Providing benefits such as higher
levels of fiber, calcium, omega-3, et cetera, better-for-you pasta products tend
to sell at higher per pound prices and
deliver higher margins. This industry
innovation is driving volume growth,
increased household penetration and
continued relevance for pasta."
He said a new gluten-free pasta
product has been "very well received"
in Europe and the United States.
"While store brands account for
33.7% of the overall category in the
latest 52-week data, store brands are
only 13.3% of better-for-you pasta
products," he said.
Overall, the pasta category has
maintained its upward trajectory, Mr.
Kelly said. He cited data indicating
a 0.6% volume gain overall and 4.8%
for store brands in the 13 weeks ended
April 10.
Overall dollar sales were down 2%
during the 13 weeks, but store brands
were up 1%.
"AIPC is well positioned to take
advantage of this trend toward store

brands, which according to recent consumer polls, is likely to continue," he
said. "Research indicates that once consumers switch to store brands they are
likely to stay. According to a customer
poll conducted by GFK Customer Research North America for the P.L.M.A.
(Private Label Manufacturers Association), frequent buyers for store brands
are at an all-time high of 57%, and virtually all shoppers who switched, 97%,
are pleased with their decision."
Noting that retail pasta consumption has hit a record 1,420 million
lbs, Mr. Kelly described the figure as
"growable."
"We also believe the economy will
continue to provide tailwinds to the
dry pasta category, given the slow
economic recovery during which consumers will work to rebuild their balance sheets," he said. "The U.S. Labor
Department recently reported that
food prices jumped by 2.4% in March,
the most since January of 1984. While
this may not be indicative of longerterm food inflation, prices for proteins and vegetables are higher, while
regular retail prices hold for pasta. We
believe consumers will continue to
stretch their food dollar with pasta."
Looking forward, Mr. Kelly said
the company largely has completed
its shift from "non-strategic markets"
and will no longer report on this metric each quarter.
Answering a question about capacity utilization, Mr. Kelly said that
a hard and fast answer was difficult,
though he characterized utilization
rates overall as "very high."
"One of the things we will be looking
at as we give up some volume in the
ingredient channel, is converting some
of the pasta producing assets to being
able to also produce retail packages,"
he said. "So we are going to need to
add some packaging assets to some of
the industrial lines to help us continue
to support the growth that we expect in
our strategic retail business."
Commenting on the company's balance sheet, Paul Geist, executive vicepresident and chief financial officer,
said AIPC is working to optimize its
capital structure.
"We anticipate that our current
credit facility will be refinanced during the third fiscal quarter," he said.
In the six months ended April 2,
AIPC net income was $43,934,000,
or $2.07 per share, down 16% from
$52,224,000, or $2.56 per share. Sales
were $294,850,000, down 12%. Income before taxes year to date was
$68,067,000, up 33%. MBN
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Milling & Baking News - May 18, 2010

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