MGP Ingredients Inc (MGPI) 2009 Q2 法說會逐字稿

Good day. Welcome to the MGP Ingredients Inc. fiscal 2009 second quarter earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Mr. Steve Pickman, Vice President of Corporate Relations. Please go ahead, sir.

Thank you. Good morning. Welcome to this morning's conference call. Very shortly Tim Newkirk, President and CEO, will provide comments related to our second quarter earnings announcement, including the news regarding our recent restructuring initiatives. Also joining us this morning are Robert Zonneveld, Vice President of Finance and CFO, and Dr. Don Coffey, Executive Vice President of our Ingredients Solutions business segment. Before Tim begins, and prior to 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 file with the securities and exchange commission, including our annual report and Form 10K and quarterly reports and Form 10Q. I would also like to mention that this conference call is being webcast and is open to analysts. Now I would like to turn the call over to Tim.

Thank you, Steve. Good morning, everyone. And thank you for joining us on this conference call. We have announced a number of significant actions since our last quarterly conference call. In our second quarter news release, we provided a high-level summary to date, as well as the related accounting treatments. Our CFO, Robert Zonneveld, will give you more detail on our financial results, and, of course, will be glad to answer your questions following our remarks. Our less than stellar operating results in the second quarter, illustrate the sense of urgency to upgrade our product mix, reduce our costs, and resize the Company's capital base.

One thing to remember though, is that the reported operating results from the second quarter, include the components of our old business model. For example internal flower production, sales of low and negative margin commodity wheat starches and vital wheat gluten, and related manufacturing and administrative overhead, certain operating leases, and inventory that had declined in value due to market influences. Every one of the items I just mentioned, has been addressed through our business transformation actions, that's because to get back to profitability, we had to attack the sales side, as well as the cost side. Regarding our sales mix, we need to lessen the relationship between grain costs and our selling prices.

Our biggest exposure to sales price volatility has come from two areas. Combined commodity wheat gluten and wheat starch and fuel grade alcohol. For all intents and purposes, we are no longer in those businesses going forward. The remaining sales mix for Specialty Ingredients is comprised of our technology platforms, which in certain areas, we have been showing very good progress, on a sequential quarterly basis, specifically we achieved a $1.2 million improvement in gross margin from the first quarter to the second quarter of this fiscal year. In general, we are seeing a higher average sales price for this segment.

This is due to our planned reduction in sales of commodity ingredients, and the commercialization of a better mix of value-added specialty ingredients. Continuing this strategy is a key factor for sustaining higher profitability. Our challenge is to scale up this business, and that will require a constant push in the areas of commercialization and customer service. Those are Don Coffey's accountabilities.

Regarding the distillery product segment, let me first comment on the food-grade side of the business. Again, we showed substantial improvement in gross margins, compared to the first quarter, to the tune of about $3 million. The major impact on our top line in this area came from customer decisions to pull back, somewhat, from their earlier commitments. This almost seemed lock-step in line with what was happening in the financial markets last fall, coupled with a decline in general economic conditions. From what we can determine, based on improved January sales patterns, the level of orders is picking up, leading us to expect that volume levels will start to build.

We did announce last week, that we have temporarily shutdown food grade alcohol at Pekin for approximately 90 days to utilize existing inventories at that location. Our plan is that, when we resume food grade production at Pekin, we expect to be running at an annualized rate between 36 million and 60 million proof gallons. Regarding our decision to exit the fuel-grade alcohol business, I don't really have anything new to add to what we've already reported.

I'll be glad to answer any questions about this subject in the Q and A session. I also don't want to take up your time by repeating details on the restructuring charges provided in the second quarter news release. I do want to touch briefly on our efforts to strengthen risk management.

We're working with outside resources to develop an integrated approach for managing our price risk. The first step was to develop internal reports for each of our new technology platforms, one benefit, will be added visibility for sales commitments by-product in our respective business segments. For each of our two key inputs, corn and wheat flour, we have specific strategies.

For corn, the intent is to lock food-grade alcohol margins, using either futures, price collars or a combination of both. We can take greater advantage of these tactics as our capital position improves. For wheat flour, we are currently fixed-price buyers, but we have a component-pricing feature in our new supply agreement. This will give us added flexibility in the future. For the time being, we are maintaining, approximately, 30 days of forward coverage, while keeping a close eye on the forward protein and starch sales levels, and our corresponding operating rates. We have a lot to cover today, so at this point I want to turn the discussion over to our CFO, Robert Zonneveld.

Thank you, Tim. One of our main goals has been to reduce the magnitude of volatility in the P&L. The three main volatile components of gross margin have been fuel ethanol, corn purchases related to our fuel ethanol production, and commodity wheat gluten and native wheat starch. Let's look at these three components.

One, fuel ethanol. Our decision to exit the fuel-grade alcohol business was a key component in reducing volatile sales prices of our P&L going forward, due to extreme and sporadic swings in fuel ethanol supply and demand.

Two, corn purchases. Our corn purchases have been reduced from, approximately, 41 million bushels per year to, approximately, 21 million bushels per year. In the past, a $0.10 increase in the price of corn added $4.1 million to our raw material cost, now that impact will be reduced to $2.1 million. With fuel-alcohol, these increases of raw material costs could not be absorbed, since historically, fuel-alcohol pricing is independent of corn costs, and has tended to track oil and gasoline pricing in demand. A significant difference with food-grade alcohol, is that we can pass these changes in corn cost, either up or down to the market. It's about the value we create for our customers and managing our gross margins on food-grade alcohol sales.

Three, commodity ingredients, specifically wheat, gluten and native wheat starch. With our decision to focus on Ingredients Solutions Business, on value-added products, we have [substansibly] exited the commodity wheat gluten and native wheat starch product lines, as we could not deliver those products on a globally competitive basis to our customers. The changes we've made in these three key areas should have a huge impact on our ability to manage our margins going forward.

Also, the closure of our wheat milling operation has also reduced volatility in the P&L. Our supply agreement with ConAgra Mills, and our HANS risk management procedures, have provided us the ability to lock in flour costs, and have given us a greater access to different varieties of wheat, ones that will give us higher yielding flour, thereby reducing our costs.

We've also reduced our cash investment in wheat and flour by $11.7 million. Since the first quarter, as we were getting our flour on an adjusted time basis. We had been underutilizing the Ingredients Solutions facilities at both our Pekin and Atchison production locations, while reducing our heritage platform business, in which we have sustained continued losses, we were able to reduce our production cost per unit by consolidating our production in one production facility versus two. And additionally, we are changing our operating procedures to continuous improvement programs in the factory to produce higher yields, and to retain better quality control. These should result in more cost-effective processes by delivering higher quality overall.

As Tim mentioned, we have made changes to the [physical] Pekin Plant, so it can efficiently produce food-grade alcohol, on a profitable basis, using current costs, using current corn-costs, and natural gas unit costs, and current food-grade alcohol pricing.

As the Company continues to focus on reducing production costs, there's also a continued effort to focus on reduced inventories and accounts receivable. Since this year's first quarter, we have produced inventories and receivables by $29.3 million, which includes $11.7 million in reduction inventories, related to wheat and flour, as part of the closure of the flour mill, and $7.9 million related to reductions in vital wheat gluten, and native wheat starch, and fuel-ethanol inventory. These reductions serve as an indicator to successful measures being taken to realign our inventories, which focus on value-added products.

We've also improved our operations in other areas as well. We've consolidated our customer care operation into one standardized unit, versus having operated by different business groups, which have allowed us to reduce our customer care operating costs.

As well as re-engineering our customer care operations, we're also streamlining various other functions. As a result, we expect to achieve a fixed cost personnel reduction of about $4.6 million on an annualized basis. We believe all these factors will help make our business more efficient, effective, and improve our future profitability and cash flow.

Our adjusted EBITDA at the end of the second quarter was negative $39.8 million. Adjustments were associated with reserve related to natural gas, impairment of assets, severance and early retirement costs, as well as other restructuring costs. In regard to our situation with the lenders, they've agreed to fund us up to our borrowing-base, and we're currently in discussions to renew our credit line facility, which expires February 27th.

The Company's negotiating with two local banks for secured financing ranging from $4 million to $4.5 million. The Company expects one of the banks may loan the Company an additional $2 million, which will be secured by a pledge of assets from a principal shareholder. However, this arrangement has several conditions, which we may not be able to achieve.

Obviously the Company has sustained substantial losses so far this year. We believe that the Company has the equity base and is made to deliver at its specific transformation actions required to turn our performance around. They are designed to make MGP Ingredients from a business based as (inaudible) in both earnings and in the capital requirements to fund such a business, to a business that is focused on value-added products, and therefore, able to create improved and more stable earnings and cash flows.

Our total assets are financed by 41% equity and 59% total liabilities, going forward we believe we've taken many of the controllable, uncontrollable drivers out of the business, as we now focus on value-added ingredients, in both our wheat flour-based ingredients solutions, as well as our food-grade alcohol business. This concludes our prepared remarks. Now we're ready to open the line for questions.

Thank you. (Operator instructions). And at this time it appears we have no questions in queue. Mr. Newkirk, I would like to turn the conference back over to you.

Thank you very much. This is Tim Newkirk again. Let me conclude by saying, that even though our ability to execute our strategy has been impacted by the global recession, we have never lost site of the main objective at MGPI, to improve our profit performance, generate cash and reduce risk. With these latest actions, major aspects of our Company's transformation are essentially complete. Major aspects of our transformation concentrated on the following. A focus on products, where we truly and uniquely create value, including our value-added wheat starches, wheat proteins and world-class food-grade alcohol.

Reduced earnings volatility, through a more streamlined supply chain with improved risk management skills, and strengthened commercialization and customer care capabilities. Through this transformation, we have developed a new high performance culture, with the right systems in place to better achieve and measure the value we create for our customers and shareholders. We thank you for joining us this morning. We look forward to talking with you again, when we report our third quarter earnings. This concludes our call.

Again, thank you, ladies and gentlemen, for your participation. This will conclude today's conference call. Thank you and have a wonderful day.