Dairy alternative producer and marketer Galaxy Nutritional Foods has reported a rise in losses for the second quarter and first half ended 30 September 2005, blaming costs incurred because of a change to outsourcing.

For the three months the loss was $1.180m, compared with a loss of $575,754m in the same period a year ago. Sales in the quarter were $10.4m, compared with $11.9m a year ago.

The loss for the half was $10.6m, compared with $298,520m last year, on sales of $20.3m for the half as against $23.0m a year ago.

The company continued to incur significant expenses that were directly or indirectly related to the pending sale of substantially all of its manufacturing equipment and the transition to a production and distribution outsourcing relationship, it said. Although the company recorded approximately $500,000 in disposal activity costs in the most recent quarter, management expects to achieve significant and recurring expense reduction benefits from the production and distribution outsourcing relationship, beginning in the fourth quarter of FY2006.

The 12% decline in net sales primarily reflects a reduction in sales due to the transition from indirect sales to Wal-Mart through a private label customer to direct sales to Wal-Mart in April 2005, it said.

“Our second fiscal quarter net loss continued to reflect non-recurring costs related to the pending sale of our manufacturing assets and the transition costs related to the outsourcing of our production and distribution activities,” said CEO Michael E. Broll. “We are pleased with the progress to date, and have already outsourced the majority of our slice, block, and shred products. We expect to outsource the production of our remaining products during the third quarter of FY2006. As we move into the fourth quarter of FY2006, we should begin to realize significant benefits from this production outsourcing and distribution relationship.”

“On a longer term basis, we believe that the benefits in transforming Galaxy from a manufacturing company into a branded marketing company will far outweigh the short-term challenges associated with the transition currently underway,” he said. “Without the cash-flow burden of carrying inventory and managing manufacturing overhead and production issues, management can focus a substantially greater amount of time and resources on the marketing and sale of our products. Of particular importance is the fact that we will be able to take advantage of our outsourcing partner’s lower production costs relative to the high production costs of our underutilized plant facilities, as well as their purchasing power with raw materials suppliers.”