MGP Ingredients Inc (MGPI) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the MGP Ingredients fiscal 2009 fourth quarter earnings conference call. Today's conference is being recorded. Now 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, and welcome to this morning's conference call. Very shortly Tim Newkirk, President and CEO, will provide comments related to our fourth quarter earnings announcement. Also joining us this morning are David Harbert, interim CFO and Dr. Don Coffey, Executive Vice President of Sales and Marketing.

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 in Form 10K Form 10Q. I would also like to mention that this call is being webcast. Now I would like to turn the call over to Tim.

Good morning, everyone. And thank you for joining us. We announced a number of significant actions since our last quarterly call. Therefore, I would like to begin with a recap of those actions and then move into a summary of our fourth quarter financial results, and the accomplishments they reflect in regard to our strategic business transformation.

You may recall the theme of our fiscal 2008 annual report. Laying new foundations for value creation. We chose that theme to help convey the significance of many initiatives and changes that were underway to transition MGP Ingredients into a less production-focused, more customer-driven company to create stronger foundations for greater long-term value for our customers, stockholders and employees. This has been a momentous task. And one which we took on and stuck with in the face of great challenges, including increased market volatility, exorbitant raw material costs and a sharp and rapid decline in the overall economy. We withstood these challenges but certainly not without costs. However, we believe we have emerged from this most trying of periods in our Company's 68-year history as a leaner, but stronger organization committed to creating value on a more focused and more consistent basis going forward.

We not only set a new foundation in place, but launched well into our building process, block by block, over the course of fiscal 2009 and extending into the beginning of a new fiscal year. Comprising and/or interspersed with these building blacks were many noteworthy decisions, events and activities. Just since reporting our third quarter results we announced the following, a series of organizational changes involving management, supervisory and administrative positions was implemented. We created a position of VP of Supply Chain Operations to oversee all manufacturing-related processes, from the acquisition of raw materials through the production, packaging, warehousing and delivery of MGPI's value-added protein, starch and alcohol products. By consolidating our supply chain operations we now have a more organized and synchronized process that translates to improved cost savings through improved efficiencies and management under the leadership of Scott Phillips.

Don Coffey was promoted to Executive Vice President of Sales and Marketing. This is in addition to his responsibilities for new product development and commercialization. This change brings all commercialization actions under common leadership, reflecting the transformed positioning of our Company as a supplier of value-added ingredients, including high quality call alcohol to the consumer package good industry. The consolidation of product development and commercialization activities under Don's leadership will help us simplify and improve our commercial and R&D work processes and drive growth faster for our current and future products.

We ratified a new collective bargaining agreement with local 74 D of the United Food and Commercial Workers Union, the agreement which covers approximately 100 union employees at the Company's Atchison, Kansas plant extends through August 31st, 2014, making it the first five year contract that we have had with the local. Historically such contracts have been for periods of three years.

We entered into a new banking relationship with Wells Fargo Bank National Association. This new relationship provides a $25 million line of credit subject to borrowing base limitations and will supply our operating cash needs in the coming fiscal year. In addition, we were fortunate to have engaged the financial support of two local banking institutions, Exchange National Bank and Trust Company and Union State Bank, as well as Cloud L. Bud Cray, MGPI board member and former long time officer and Chairman of the Company.

We completed the sale of our Kansas City, Kansas facility to Sergeants Pet Care products for an initial payment of of $3.6 million with provision for additional earn out payments to be paid over time. Our fourth quarter results included a pretax impairment charge of approximately approximately $1.4 million related to this transaction. The sale of the Kansas City facility includes all equipment used for the production and packaging of pet-related products. MGPI will retain ownership of equipment used for the production of the Company's Wheatex, textured wheat proteins, which are sold for use in meat extensions and vegetarian product applications.

Our most recent news was the appointment of John Speirs to succeed Ladd Seaberg as our Board Chairman. John had been a member of MGPI's Board since 2004 and becomes the first person outside of the founding Cray family to hold this position. Earlier this year John was appointed lead Director by the Board to actively assist me in the execution of MGPI's business transformation to a truly customer driven, value added ingredients business. John has been very instrumental in providing solid guidance in the development and implementation of all of our strategic initiatives. His leadership will be valuable as we move forward.

Likewise our newest board member, Karen Seaberg will perform a valuable role as Director of our Company. She has proven her leadership abilities time after time spearheading and/or helping accomplish highly successful projects and events at the national, regional, state, and local levels. She also brings extensive business skills to her position on the Board, along with a tremendous amount of drive and enthusiasm.

I also want to take this opportunity to publicly acknowledge the significant contributions of Ladd seaBerg during his outstanding career at MGP Ingredients. Ladd joined the Company in 1969 starting as distillery Production Manager and subsequently moving into executive management. He held the office of President from 1980 to 2006 as well as Chief Executive Officer during his last 20 years of management service. He was named Chairman of the Board in 2006. In stepping down from that position, he will continue with us in a consulting capacity. Everyone at MGPI wishes Ladd and his family the best.

As you know, David Harbert from Tatum LLC has been our interim COO as we actively seek a permanent replacement. I have nothing definitive to report on our search at this time other than to state that we are aggressively working to fill this position and complete our leadership team. I will say that David has been instrumental in helping us complete the restructuring transactions and in working with our lending group to secure our current financial agreements. David will not be making any formal remarks on today's call but has agreed to be available during the question-and-answer session.

Now let's talk about our fourth quarter performance. Since you have the numbers in front of you, I won't repeat each line item. On an operating basis we saw significant improvement, not only compared to the prior-year's fourth quarter but also over the third quarter of fiscal 2009. If you compare our fourth quarter with where we started at the begin of the fiscal year, ours looks like two completely different companies. That is because it is. MGPI is a classic before and after case study.

Let's start with the before picture dating back the past few years. We were heavily, and I might add unpredictably, influenced by sizable commodity swings in wheat, corn and ethanol, market demand for our commodity ingredients and distillery products particularly wheat gluten and fuel-grade alcohol was volatile. A case in point was the sudden surge in demand for US-produced wheat gluten prompted by the melamine-tainted Chinese flour that was disguised as gluten and shipped into this country. The surge was relatively brief and once again cheaper foreign made gluten regained its favor and domination in the marketplace. More recently as oil and gasoline prices set record highs,the ethanol industry experienced a boom. That boom quickly turned to a bust while ethanol capacity was still expanding and gas prices began to subside.

From a volume standpoint, much of our business was focused on the wheat gluten and ethanol markets. As a result our physical plant network was not configured in such a way as to consistently maximize profits when confronted with severe swings in market demand. Our fixed costs were high and working capital was consuming more cash than necessary. MGPI has an excellent manufacturing history, particularly on the distillery side, despite the frequent ups and downs with which we had to contend in regard to fuel alcohol. In fact, our beverage and food grade industrial alcohols continued to maintain long-standing popularity in the marketplace, serving a stable set of key customer partners. However, as we increased our sales of fuel grade alcohol along with our commodity ingredients while simultaneously attempting to place greater focus on our specialty ingredients and high quality alcohol business, the manufacturing processes became more complex and less sufficient. While the volumes were growing, the profitability was declining from a combination of pricing pressure and higher input costs.

Meanwhile our highly technical R&D assets, a source of significant competitive advantage, historically were more internally focused on incremental product improvements, our new product development process was not externally focused and configured around the customer as we are today. While we have been working to transform MGPI over the past three years I would have to say that the defining moment for us was when the ethanol market collapsed. We reached a point where every gallon of fuel-grade alcohol that we produced was sold at very low or negative margins. This represented a significant portion of our total revenues, not to mention the investments in plant and equipment and the added costs for hedging programs and the related accounting. The downturn in the economy at the end of 2008 only made matters worse. The $18 million loss before extra items we reported in the first quarter of fiscal 2009 was a reflection of the old MGPI, the before picture.

Now let's look at MGPI going forward, the after picture. This Company is truly a niche player. Today, however, there is more value invested in every key customer. Growing sales of higher value products to the branded packaged goods industry should result in improved, more consistent profitability. There is more science and less steel on the balance sheet, and there is greater accountability for producing results.

Let's review our most recent results. While we reported a total net loss of $2.9 million or $0.18 in diluted loss per share, our pre-tax results were significantly better in both the Ingredient Solutions and Distillery Products segments. For example, for the fourth quarter just ended we recorded pre-tax income of $1.4 million in the Ingredients Solutions segment, compare that to the year ago fourth quarter pre-tax loss of $7.9 million. Our fourth quarter pre-tax income of $3.9million in the Distillery segment was also a significant turnaround from the pre-tax loss of approximately $510,000 that we experienced in this segment a year ago. The other important point to make here is that sales in both of these segments were down significantly on a 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 a positive pretax earnings turnaround in both segments.

While the other business segment other showed a decline in sales compared to a year ago, the $34,000 pretax loss in this segment represented a huge improvement over the pretax loss of $845,000 that we had in the fourth quarter of fiscal 2008. Following recent sale of our Kansas City facility and the related pet products business the other segment is now mainly comprised of our emerging biopolymer technologies. In addition to our segment results for the quarter, along with a significant improvement in our total performance compared to the prior year's fourth quarter additional noteworthy financial measurements which are indicative of the progress we have made include the following, the achievement of $1.3 million in positive adjusted EBITDA for the fourth quarter, the realization of positive cash flows from operations of of $1.7 million in the quarter, improved liquidity and a focus on more effective management of working capital. All of these are strong signs of how far we have come since the start of a very difficult and challenging fiscal 2009. More importantly, they are reflective of our potential to make even greater progress going ahead.

Before we take your questions, I want to add that given the continued uncertainty in the economy, along with what has been our practice for some time now, we are not providing financial guidance for the coming fiscal year. We can, however, point to the improving trend in our pre-tax operating profits as an indication of our transformed potential. That concludes my opening remarks. Now we are ready to open the line for questions.

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator instructions) There is currently no one in the cue but as a reminder if you do have a question, please press star-one on your touch-tone telephone. And we'll go first to Bill Gordon with Gordon Capital.

Good morning.

Good morning.

Good morning. I was wondering if you could give us a little better understanding of where this Company is going. It is a little confusing in terms of all the changes that have occurred here, what you're dropping, what you're not dropping, comparing apples to oranges here and no -- the lack of pro forma in terms if we can eliminate the commodity part of the business. Can you give us -- if you can't do that, if you haven't done that, if it is too difficult to do that because it is all too muddy, can you give us some direction about your comment regarding less steel, more science of more technology, where are we going? What are our goals? What are we trying to do? What industries are we catering too? Products we're selling? What is left and where are we going? What alcohol? What else is happening ?

Great question, Bill. This is Tim. I'll take that. And I appreciate that question. Believe me, as we've gone through the transformation process ourselves here in this last year there we've been awed at the amount of changes. But I think the thing to think through, Bill, and that we want everybody to understand is that we're focusing on products that we've always had. What we've really done is stripped away a lot of the more commodity-type products where we were -- where we were not a low-cost producer and where we were always struggling to maintain positive margins and, for sure, struggling to return our cost of capital and earn our cost of capital. What we've done is we've trans formed the business, we've shrunk the steel on the balance sheet so that it's not just about top line growth but about profitable top line growth and refocused our efforts on all of the value-added products that the Company has in its product portfolio that are going into the consumer packaged goods industry. That is about as plain as it can be.

Again, you are giving me -- I'm getting a blunt answer. Value-added, I understand. I understand technology. And I understand what you are saying to me where the margins will be higher on less volume, it is all good stuff. But can you dimension it a little? Can you add clarity as to the specific products? What the current business is in the past 12 months? What is left here? What are we doing in this area, what are we doing in that area that you expect to go forward with as opposed to what has been discontinued? And finally the areas that we're growing with, any sort of indications of margins that we have historically had in these value-added areas, what our goals are? Can you add some dimension to this?

I'll do my best to do that, Bill. I guess the first thing to start with is on the alcohol side it is the various premium beverage alcohols that we do, the gin-type products, industrial alcohol products that we do, we've been producing those products for 50, 60 years, those are the types of products that we're going to focus on on the alcohol side of the business.

On the wheat side of the business, the fiber-type products that we have, the value added starches, the specialty starches that go into a variety of health and wellness variety type products, the value added proteins that also are in the health and wellness type products, certainly our textured wheat protein products which are seeing tremendous interest from the customers right now, and certainly the emerging area of biopolymers that we talked about a little bit earlier in our other segment. Those are products that we've had in our stable and we've been producing for the last four, five, six years. Their profitability and gross margins were disguised because we could -- because of all of other commodity-type products where we did not have positive margin and that is where we're focusing our business.

If you look at top line, you'll see that we've basically shrunk the Company by 50%. That's a pretty good proxy for the amount of commodity-type business we were doing, whether it was fuel ethanol side, the commodity vital wheat gluten side and some of the -- what I would call the vanilla wheat starch type products. Those are all carved out, what we have today is approximately a Company with half the run rate on top line that we had before, but certainly a much more profitable margin mix. And our future is about growing the sales of those kinds of products into those health and wellness areas and into the and into the branded packaged goods industry.

Okay. Let's try to put it this way. We're running half the business on a run rate basis, okay, that means that we're doing X volume dollars and pass the profitability on that is why? Can you add numbers there? In other words what do we look like if we stripped out all the junk, all the commodities, what would the run rate and what would be the margins on that run rate?

We're not -- we're not prepared to share margin run rates, Bill, at this time. We're still -- we're still -- you have not seen -- let me just put it this way: The full leverage of the business model is still not captured in that fourth quarter. We should by the end of the first quarter see the full leverage of the new business model and that is about all the further I'm willing to go on margins.

It is very difficult to get our arms around this as you can imagine from the outside looking in.

Understood.

Okay. That's a -- if that's as far as we're going, I thank you for your help.

You bet.

We'll go next to Pete Enderlin with Titan capital Management.

Good morning. Thank you. Maybe one way to try to get a little better feel for this is if you would discuss what the normal gross margins should be, not giving a timetable or any prediction but just a -- what would be the normal gross margin that you can achieve in your two main business segments? Or that the industry can achieve in those businesses?

That's a -- Pete, this is Tim. That's a good question. That's a tough one for us to answer and not because we're unwilling to answer it but this is a very new business model for us, stripping out all of those commodity products and getting the operating leverage on these value added products. It is difficult for us to talk specifically yet about what our margins are going to look like although as you can see from the gross margin that we reported in fourth quarter obviously it is much better than what we had -- than what we had been able to generate with the combined commodity and value added from before. The other big issue that we have is where the -- the big change that we've had in the volatility and commodity input prices and where we are, that's also going to have some impact.

When you look at this from an industry perspective and, again, I think I -- the value added ingredient business it is tough to get some industry comps because there's no real clear picture of anybody running a model exactly like this one right now. But if you think about commodity type businesses running and somewhere -- always just barely above break even from a margin perspective, we certainly expect to see significantly better margins in the value added ingredients business because you have to pay for the -- the -- for the value added that we bring with the technology and the service above a typical commodity type product.

And is it easier to talk about the kind of normal industry gross margins on the beverage alcohol side of business?

Again, no, it's really not. You can't. It's tough to find comps and, quite frankly, again, there -- you still have to deal with some of those impacts on -- of the commodities and the volatility that we've had in commodities over the last several years. But it is certainly a more stable business from a margin perspective than anything we've seen in the fuel ethanol side and that's the biggest reason we've walked away from that.

And have you thought your strategies on hedging your commodity costs, your input costs?

From? I guess the answer to that would be, yes, from the perspective of historically we've looked at-- historically in the commodity type markets, the way that you had to get a margin is work your way into one with your risk management practices. You couldn't always earn one just based on looking at the spread between what your raw material cost was and what you were selling for.

The new model that we have, Pete, is really more geared towards protecting the margin that we have out there. And so when we have contracts and we put contracts in place it -- it is locking that -- it is using risk management to lock that margin, not work your way into one which is -- that's one of the -- that's one of the difficult things about the commodity world is if you don't guess right on the commodities you may or may not be able to earn a margin versus in the value added world, you've got a margin and your job is basically just to protect it. We've got -- we've got very long term customers that we've been doing business with a long time and we are -- we are very comfortable with the margins that we're getting in those businesses.

So does that mean that you can write these long-term contracts with some protection features built into them?

The other issue with this, or the other opportunity, I guess, maybe a better way to say it, Pete, with this customer set compared to the more commodity type customer set is you don't actually have longer term contracts. You've actually been able to shorten up, and we've been able to shorten up our contracting periods, which allows us to be much more effective at risk management without having to deploy a whole lot of capital on the risk management side, which has helped us on our working capital side, because you do have an inherit value you're creating for that customer and -- and that margin that we have is -- is more manageable as you have changes in those commodity input costs. And so we're much more comfortable with shorter term contracts because we -- we've got more pricing power, if you want to think about it that way, in the value-added world than we ever had in the commodity world.

Yes. And so the stability is basically on the demand side of those contracts, from those stable, you might say historical customers?

Exactly. Great way to say it.

Okay. Thank you.

You bet.

And with no further questions I'd like it turn the call back over to Mr. Newkirk for any additional or closing comments.

Thank you. I have just a few more comments before we conclude our call. Our corporate transformation has been no small feat. Over the past two years we pledged to take action in order to create a more focused company, one with a sustainable competitive advantage. We have purposely narrowed our focus and streamlined our business operations to build market share and scale. From a financial point of view we set out to generate more cash while reducing risk.

Our mid-term report card includes a number of key milestones, we reduced the impact of grain prices on our revenues. The price of what we sell is much less dependent on our costs. We eliminated a considerable amount of commodity risk on the sales side, greatly reducing the production of fuel-grade alcohol and distancing ourselves from the impact of huge swings in fuel alcohol demand and pricing. We improved the profit profile of our sales mix overall, focusing on our specialty proteins and starches and high quality food grade alcohol, we lowered the total cost of production. Our raw material costs have gone down and initiatives to improve productivity are proving successful. We disposed of non-core assets and related liabilities with total assets removed by more than 1/3rd and created a customer driven value added focused sales organization. We currently have more projects in the development pipeline at the customer level that ever before.

I refer to this as a mid-term report card because we are not yet finished. Investors are right to call MGPI a show-me story it is up to us to produce tangible results in the form of rising profits and topline growth. We look forward to talking with you again when we report our first quarter results. Thank you for your continued interest and this concludes our call.

Once again, that does conclude today's conference call. Thank you for your participation.