MGP Ingredients Inc (MGPI) 2009 Q3 法說會逐字稿

Good day, and welcome to the MGP Ingredients fiscal 2009 third quarter earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Steve Pickman, Vice President of Corporate Relations. Please go ahead.

Thank you. Good morning, and welcome to this morning's conference call. Very shortly, our President and CEO, Tim Newkirk, will provide comments related to our third quarter earnings announcement. Also joining us this morning are David Harbert, interim CFO, and 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 in 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 in form 10-K, and quarterly report in 10-Q.

I would also like to mention that this conference call is being webcast. Now it is my pleasure to turn the call over to Tim.

Thanks, 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 call. In our third quarter news release, we have provided a high level summary as well as the related financials.

As you know, we recently announced that our former CFO, Robert Zonneveld, stepped down to pursue other opportunities. We want to thank Robert for his many contributions. In his place, David Harbert from Tatum LLC will be working as our interim CFO for a minimum term of three months as we actively seek a permanent replacement. We feel very fortunate to have someone of David's caliber as we move forward to execute our business plan. He is a seasoned veteran of corporate turn arounds, including broad experience as a former CFO. David will not be making any formal remarks on today's call, but has agreed to be available if the need arises during the question and answer session.

Let me start out by saying the difference between our second quarter and third quarter is like night and day. As you remember, our poor operating results in the second quarter reflected the old business model at MGP. This included the adverse impact of sales of low value fuel-grade alcohol, a business which we have since exited, inefficient internal flour production, and sales of low and negative margin commodity ingredients and the related manufacturing and administrative overhead. Our second quarter also included $22.9 million in impairment and restructuring charges.

Now jump ahead to our recent third quarter. While we reported a net loss on the bottom line, our pre-tax operating results were significantly better in both the Ingredients Solutions and distillery products segments. For example, for the third quarter just ended, we reported pre-tax income of $1.4 million in the Ingredients Solutions segment. Compare that to the year ago third quarter pre-tax loss of $2.6 million and the pre-tax loss of $4.1 million in this segment in the current year second quarter.

While on a year over year basis our third quarter pre-tax income of $41,000 in the distillery segment was substantially below the $5.5 million in pre-tax profits that we experienced in last year's third quarter, it represented a huge improvement over the pre-tax loss of $15.4 million that we incurred in the second quarter of this year.

The other important point to make here is that sales in both these segments were down significantly on both a sequential and year over year basis. The lower sales resulted from our planned reduction of low and negative margin products and was the principal reason we were able to achieve the positive turn arounds in the ingredients and distillery segments.

The other segment consisting primarily of our emerging biopolymer technologies as well as pet treat products, also showed a decline in sales in this year's third quarter versus a year ago. Here again, however, part of this reduction was planned as we continue to shed or, at a minimum, place less focus on those products which adversely impact margins.

As a result, our third quarter pre-tax loss of $162,000 in this segment showed considerable improvement over the pre-tax loss of $508,000 in last year's third quarter. This provides a summary of the results from our three individual operating segments.

Now I would like to spend a few moments focusing more on the total picture, so to speak, by highlighting key components of decisions and accomplishments related to our aggressive business transformation process. A critical part of our restructuring plan has been to reduce the volatility in our P&L. The most volatile components of our gross margin have been fuel ethanol and related corn purchases, the higher costs of which greatly weakened our ability to manage margins. We exited the fuel ethanol market since the more we produced over the past year, the more money we lost. Based on the inherent structure of the fuel ethanol market, there is limited ability to pass on increases in raw material costs.

However, with high quality food grade alcohol, we are better able to deal with changes in raw material costs to better manage our gross margins on a more consistent basis. We have taken a similar path in our Ingredients Solutions segment, concentrating on growth driven by our specialty proteins and starches. These ingredients add greater value to our customers' products and, therefore, are less influenced by fluctuations in raw material costs.

For these reasons, we are no longer a major participant in the low value commodity wheat gluten and commodity wheat starch markets. The closure of our wheat milling operation has also reduced volatility in the P&L. Our supply agreement with ConAgra Mills is working well. This agreement has allowed us to achieve just in time sourcing and eliminates the significant cash investment in raw material inventories that we experienced under the old system.

As the Company continues to reduce per unit production costs, there is also a drive to reduce inventories and accounts receivable. As we stated in our press release, we have reduced our inventories by approximately $45 million from the peak in August of last year. In addition, we are continuing to drive improvements in productivity, manufacturing yields and efficiencies, and ever increasing levels of quality. In summary, I want to note that our transformation to a value added ingredients business is nearly complete.

The most recent quarter, particularly in Ingredient Solutions, provides a first look at a more profitable company. We view our current revenue rates in this segment as a base level from which we plan to build going forward. Related to that, we are having better success than ever before in growing our business with existing customers, while also adding new customers. Our available manufacturing capacity in our ingredient solutions segment can absorb significantly higher revenues with very low incremental capital. We have long-term goals to double the utilization of this productivity capacity by continually strengthening the right mix of higher margin products.

This concludes our prepared remarks. Now we are ready to open a line for questions.

(Operator instructions) We currently have no questions in the queue. I'll turn the call back over to Mr. Newkirk.

Thank you. I have just a few more comments before we conclude this call. MGPI is a powerful competitor in value-added ingredients in food grade alcohol. We exist to help our customers succeed in the branded packaged goods industry. We serve a long list of major branded packaged goods customers. To drive efficiency and profitability, we are creating a single supply chain focussed only on those activities and products in which we uniquely create value.

To drive growth, we are running a record number of customer and market driven new product development projects. Along with this, we have created a new score card for measuring our success in solving customer problems while building value and managing risk for stockholders. While the full benefit of our transformation has yet to be completely realized, we are very encouraged by the improved results in this past quarter.

We look forward to continuing progress with the newly transformed MGPI business model. This concludes our call. Thank you very much.