MGP Ingredients, Inc.
Q2 2010 Earnings Call Transcript

Published: 10 Feb 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fiscal 2010 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Steve Pickman, Vice President of Corporate Relations. You may begin, sir.

[Steve Pickman:]

Thank you. Good morning, everyone, and welcome to today’s conference call. Very shortly, Tim Newkirk, President and CEO, will provide comments related to our earnings announcement. Also joining us this morning are Don Tracy, Chief Financial Officer, and Don Coffey, Executive Vice President of Sales and Marketing. Before Tim begins and before taking questions this morning, we need to note the following. Any forward-looking statements we might make today are qualified in the following respect. There are a number of factors in addition to those already mentioned that could cause our actual results and any guidance to vary materially from expectations. Additional information about these factors may be found in reports that we filed with the Securities and Exchange Commission. These include our annual report in Form 10-K and quarterly reports in Form 10-Q. I would also like to mention that this conference call is being webcast. Now, I would like to turn the call over to Tim.

[Tim Newkirk:]

Thanks Steve. Good morning everyone, and thank you for joining us. As you can imagine, we are happy to be here today after producing two back-to-back quarters of solid performance on our bottom line. In reviewing that performance, I also want to emphasize how genuinely excited I am about our opportunities and potential going forward. We have successfully completed a challenging and historical business transformation and established a very solid financial foundation to our balance sheet transformation. We now have a firm platform from which to launch even stronger long-term growth initiatives for our future. Our second quarter was very similar to our first quarter in that the sales mix consisted of a much larger percentage of higher value products compared to a year ago. As a result, our gross margin surpassed our previously announced target of 15%, exceeding 17% in the second quarter, and averaging 19% for the first six months of fiscal 2010. Our second quarter gross margin was $8.5 million compared with the negative gross margin of $23.6 million for the same period a year ago. At that time, we were losing money in both of our principal business segments, Ingredient Solutions and Distillery Products, largely due to a higher mix of commodity related products sales and an unwieldy cost structure. This year’s second quarter net income was $4.8 million or $0.28 in diluted earnings per share. That’s a significant contrast to the net loss of $42.7 million or diluted loss per share of $2.58 that we had for the same period a year ago. As reported in our earnings release, our current year’s second quarter results included charges related to the formation of the Illinois Corn Processing, LLC joint venture in Pekin, Illinois, gains in the sale of equipment, and a Federal income tax refund. Let me talk for a minute about our transformation. In the Distillery Products segment, our goal is to be among the world’s pre-eminent suppliers of high-quality food grade alcohol. In the Ingredients Solutions segment, our concentrated focus is on being a leading provider of naturally derived grain-based solutions that uniquely add value to our customers’ products. To achieve these goals, we started more than a year ago on a three-step process. Step one in our transformation was to make our current business more profitable by reducing our dependence on commodity product. We reduced our commodity sales mix in the income statement and sold or other otherwise disposed off the related assets in financial obligations. You are now seeing evidence of the positive impact from these actions. As we pointed out in our news release, high-quality food grade alcohol made up more than 80% of total Distillery segment sales in this year’s second quarter compared with 53% in the same period last year. In the Ingredient segment, value-added ingredients accounted for close to 88% of that segment’s total sales in this year’s second quarter compared with 67% a year ago. Looking at this from another angle, our combined sales of commodity gluten, starch and fuel grade alcohol approximated one-third of our total revenues one year ago. Those same commodity products are now only 17% of our total fiscal year-to-date sales. Step two is our continued balance sheet transformation in the second quarter. As previously reported during the year second quarter, we sold a 50% stake in our former Pekin alcohol facility for $15 million. Proceeds from this sale together with other cash resources went towards debt reduction. As a result, our net debt was reduced from $38 million at the end of the current fiscal year’s first quarter to $11 million by the end of the second quarter. Additionally, we had $17.8 million of availability on our revolver at the end of the second quarter further enhancing our financial flexibility. Now the task before us, step three is focused on driving growth in our value-added product areas. In the Distillery segment, our key issue has been capacity. We have more sales opportunities than output. So the joint venture at the Pekin plant was the ideal solution. We sold a 50% interest upfront and maintained the rights to market all the high-quality alcohol that the plant can produce. In the Specialty Ingredients area, our long-term vision includes a business many times the current size. Our market opportunity is to grow on two fronts, first, increase presence at each key customer, and second, the growing trend in the branded consumer package goods industry to introduce new food products that provide health benefits as well as outstanding sensory qualities namely taste and appearance. Let’s begin with how we sell our products to our customer base. Our target customers are the branded consumer packaged goods companies. As a group, they have faced a long period of weak consumer spending and price competition from private label manufacturers. This meant fewer products being introduced. However, the tide seems to be shifting back in their favor and ours. Recent market data shows that branded food manufacturers have recently gained dollar market share from private labels reversing the trend from the past three years. Industry analysts also point out that the large-scale companies and their brands tend to be less exposed to the higher slotting fees and other trading spending demands from retailers who are fighting to increase margins per square foot. Our approach is to solve customer problems by selling solutions and capitalizing on our expanded product development capabilities. Among the key people in commercialization and sales development, our experts who came to MGPI are from some of the very companies we now serve. They understand critical issues of how to effectively navigate a large corporate culture and how to sell solutions. They also understand the importance of accountability and measurement for achieving these results. The scale at which we now operate is capable of turning the right customer opportunity into an ingredient formulation and then into significant sales volume. We feel that we have the right process in place with early indications of success in the form of a growing sales pipeline and new projects in customer testing stages. This will lead to large production and sales opportunities in many cases. Sales growth for the large packaged goods companies will mainly come from new products along with enhancements to existing products. In our case, many of the new branded products our customers are targeting are in the growing segment of nutritional foods. By that, I mean foods with reduced fat, sodium or sugar, and those made with ingredients such as fiber and whole grains. MGPI continues to gain greater recognition on the nutritional value of our unique Fibersym RW resistant wheat starch. The latest study in the Journal of Nutrition & Metabolism reported that our resistant wheat starch is effective in developing food products with a lower glycemic and insulin response. This ties directly to the recommendations issued by the American Diabetes Association for managing diabetes which includes eating foods high in dietary fiber. MGPI has been focusing on health and wellness for many years, and we have continued to fund research in this area even during the tumultuous period of our business transformation. The result is growing awareness of the nutritional benefits of dietary fiber, but more importantly greater awareness of MGPI’s patent protected technology for commercial applications. There are many ingredients that qualifies dietary fiber. What makes us unique however is that our fiber ingredients can be conveniently blended into a customer’s existing product formulation to produce in-products that are nutritious and appealing. That means that the manufacturing process does not have to be significantly altered which can render a product uneconomical due to added development [ph] costs and possibly slower time-to-market. Also our dietary fiber is derived from wheat starch, which means that the in-product fits the flavor profile that consumers expect from baked goods such as bread, rolls, and a multitude of other flour-based products, as well as cereal and snack products. All this is just to say that we are running flat out to meet the growing interest in nutritional foods. We have planned to have more customers attending seminars in our technical innovation center. We are also pursuing more joint studies with the scientific community. One more way to tell that this is a totally new ballgame at MGPI is that our R&D specialists are being called into the field more often for sales support. Finally, while we are happy to produce another profitable quarter, I am more excited about what I think we can accomplish in the years ahead. In essence, we are just beginning to hit our stride. That concludes my opening remarks. Now we are ready to open the line for questions. Operator?

[Operator:]

Thank you. (Operator Instructions). Sir, I am showing no questions on the call.

[Tim Newkirk:]

Okay, thank you very much, operator. We have tried to highlight for you today the many ways that our strategy is beginning to take shape. I realize that we are still a show-me story, but we have produced tangible results in the form of a higher value sales mix, improved profit performance, and a stronger balance sheet. In closing, I look forward to the opportunity to update you on our progress in the third quarter. Thank you for your interest and this concludes our call.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day. Copyright policy