MGP Ingredients Inc (MGPI) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the MGP Ingredients, Inc. Fiscal 2010 First Quarter Earnings Call.

Please note that today's call is being recorded.

It is now my pleasure to turn the call over to Steve Pickman, Vice President of Corporate Relations. Please go ahead, sir.

Thank you.

Good morning, and welcome to today's conference call. Very shortly, Tim Newkirk, our president and CEO, will provide comments related to our first quarter earnings announcement. Also joining us this morning are David Harbert, Interim CFO, and 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 a report that we file with the Securities and Exchange Commission. These include our annual report and Form 10-K and quarterly reports in Form 10-Q.

I would also like to mention at this time that this conference call is being webcast.

Now I would like to turn the call over to Tim.

Good morning, everyone, and thank you for joining us.

At our annual meeting last month, we offered a preview of our first quarter by noting that we had expected to see a significant turnaround from the large losses recorded one year ago. As you can see from today's earnings release, our net income for the quarter was $3.7 million compared with a net loss of $17.2 million for the same period a year ago. That's equivalent to a positive swing amounting to approximately $21 million.

I want to remind everyone that last year's first quarter results did not include any measurable effects related to restructuring charges or write-downs. The large net loss a year ago was truly a function of our old business model and cost structure.

The best way for me to illustrate this point is for you to compare the income statement and balance sheet between our most recent quarter and that of one year ago. In many respects, you are looking at two different companies, and not just in terms of sales mix, profit margins, working capital and plant and equipment. What you can't see from the numbers are the dramatic changes we made in several key areas, including product innovation, manufacturing, sales development, financial systems, and management. These changes, along with better execution, are mainly responsible for the improved results over the past two sequential quarters.

Speaking of management, earlier this week we announced the hiring of a new Chief Financial Officer effective tomorrow. After an extensive search, we are very pleased to welcome Don Tracy to MGPI. His professional career spans more than 30 years, nearly half of which have been spent in senior level financial and executive management positions. In addition to Don's business skills, he is a solid fit with our new strategic direction. Following his orientation of our business segments and customers, he will join us in full force for our second quarter earnings call.

I also want to thank David Harbert from Tatum, LLC who performed as our interim CFO during a very challenging period for MGPI. We greatly appreciate and are very impressed with David and the outstanding professional services he has provided us.

Now let's talk about the first quarter. Since you have the numbers already available to you, I won't repeat each line item. On an operating basis, we saw significant improvement over the year-ago quarter as well as compared to the fourth quarter of fiscal 2009. The $3.7 million of net income generated $0.22 in diluted earnings per share and was a strong validation of the new MGPI.

Taking a closer look at our new business model, operating income improved by $27 million to $4.6 million on a reduced sales base that was approximately and intentionally 50% lower than a year ago. Again, this is a real comparison of MGPI's old and new business model without any restructuring charges in either period.

The drivers for the improvement in operating income included a positive swing in gross profit of $26.5 million and a reduction in SG&A expenses of $1.5 million during the quarter compared to a year ago.

Next, I want to point out the sequential progress in both our Ingredients and Distillery segments. For the first quarter just ended, our Ingredients segment reported pretax income of $2.3 million. This compares to our fiscal 2009 fourth quarter pretax income of $1.4 million and a pretax loss of $5.4 million in this segment in last year's first quarter.

The same goes for our Distillery segment. For the first quarter just ended, we reported pretax income of $6.6 million. This compares to fiscal 2009 fourth quarter pretax income of $2.3 million and a pretax loss of $12.9 million for the year-ago first quarter.

For those of you who may be new to MGPI, sales in both of these statements were down significantly on a year over year basis. The lower sales resulted from our planned reduction of low and negative margin products, principally vital wheat gluten, commodity starch and fuel grade alcohol. The resulting improved sales mix of value added products was the primary reason we were able to achieve a positive turnaround in both segments.

The other segment is now mainly comprised of our emerging eco-friendly biopolymer technologies. Although we showed a decline in sales compared to a year ago, mainly due to our exiting the Pet Products business, our pretax income as a percent of sales in this segment showed a substantial improvement over the prior year's first quarter.

MGPI is no longer a restructuring story. What you see from our first quarter results is a profitable company. The obvious questions we get from investors are, "How much can you grow" and, "What is your potential earnings power."

First, a few words on growth. The reason that we narrowed the focus of what we do at MGPI is to be able to devote greater resources for capturing a bigger share of our targeted markets.

Let's start with Ingredients. We think that embedded in our core customer base is a market potential that could translate into revenues that could grow at an annual compounded rate of 5% to 8%. I am referring to large marquee brand food processing companies where we clearly have the opportunity to expand our internal footprint with each one. We have longstanding relationships with these major customers and, as we become more successful in getting MGPI formulations into their products, the scale of their existing markets creates enormous upside potential for our revenues.

A significant part of our restructuring plan involved a realignment of our new product development and commercialization process to better match the forces driving the food industry. I'm referring to the growing interest in food products that promote health and wellness. Our restructuring couldn't have happened at a better time. Our consumer packaged goods customers are focused on developing healthier foods that deliver higher fiber, along with lower fat, fewer calories, and lower cholesterol. And as I have said before, our dietary fibers and specialty protein ingredients fit this need perfectly.

One thing that has changed from the past is that we have greatly increase our visibility in the industry following recent clinical studies pointing to the health and wellness benefits of our Fibersym resistant wheat starch. Researchers at the University of Nebraska and Kansas State University, among others, have recently reported fundamental health benefits due to the consumption of resistant wheat starch, which are the dietary fibers we market as Fibersym and FiberRite.

As you may know, dietary fiber is the only nutritional deficiency in the US diet. The difference between the US recommended daily intake and current daily consumption shows a shortfall of more than three billion pounds per year in the USA alone. Now, I am not implying that we will grow our fiber business to a multibillion dollar level. I simply want to illustrate the enormous market opportunity for the dietary fiber category where we have a strong product offering.

We believe that MGPI has the best dietary fiber for flour-based foods. Our fiber products fit perfectly into our bakery customers' formulas and manufacturing processes while also delivering great nutritional and taste benefits. For example, in bread applications, our ingredients can increase the dietary fiber by a factor of five times, with a lower calorie count and excellent taste compared to the standard bread formulation, sort of a "Tastes great and more filling" concept. That is a winning combination for our customers and their customers, the consuming public.

While we see a much bigger and more valuable ingredient solutions segment over time, we do not see the need over the near-term to build up a lot of new infrastructure to support growth. This is one of the reasons that we have aligned with a key distributor to the bakery industry. This will allow us to focus on commercialization and still achieve a much broader market reach with significantly higher service levels. That's indicative of our approach at the new MGPI.

Regarding growth in our Distillery segment, suffice it to say that we see opportunities to extend our market share on both the food-grade industrial side and in the premium beverage area. There is unprecedented demand in the food-grade industrial arena, where we have been a key participant since the Company's founding in 1941. We have a strong and loyal customer base into this category and the beverage alcohol market.

Especially exciting to note is the fact that we have opportunities to continue to improve our overall alcohol product mix and further strengthen our Distillery segment gross margins. Even though the food-grade alcohol industry is comprised of mature markets that have traditionally grown in the low single digits, we look for better traction from our more focused sales organizations.

Let me now provide you with some key points on our margins for the quarter. For the first quarter, our gross profit margin exceeded 20% and our operating profit margin was just under 10%. This improvement was a direct result of the strategy to transform the Company's business model, stronger manufacturing performance, and lower commodity and natural gas costs. While the new business model and continuous improvement in manufacturing creates stability and predictability, changes in the cost of commodities and natural gas can generate short-term positive and negative impacts on our financial results.

Together with the growth opportunities I covered earlier, these are the fundamental keys regarding our new business model as it relates to profitability, at least over the foreseeable future.

To begin with, we are targeting a gross margin in the range of 15%. Over the near-term, our main margin opportunity is through higher starch recoveries. Our ability to produce and sell more starch per pound of flour processed should flow directly to our bottom line. Our current starch recovery yields trail world-class levels. As we improve these yields, we will generate sales revenue at a greater gross margin.

Going forward, we are pricing more of our products relative to the value they create as opposed to pricing based on commodity costs. The proof is in our improved gross margins over the past two quarters. This kind of stability represents a welcome change from the quarterly margin swings that our company has historically experienced. Much of this was due to a greater commodity influence than you see today. As manufacturing yields and margins expand, it's important to remember that we have the ability to increase wheat protein and starch unit volumes by a significant factor without the need for much in the way of incremental capital.

Finally, a few comments on our cash flow and liquidity. Free cash flow for the quarter was $3.3 million. This enabled us to reduce the balance of our new revolving line of credit with Wells Fargo to $12.6 million at the end of the quarter. As a result, we had liquidity, or availability under the new line, of $8.7 million.

Before we take your questions, I want to add that, given the continued uncertainty in the economy, we are not providing financial guidance for the coming fiscal year. We can, however, point to the improving trend in our operating results and cash flow as an indication of our potential.

That concludes my opening remarks. Now we are ready to open the line for questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS.)

Errol Rudman with Rudman Capital.

You announced a new relationship with an external party. Could you outline the nature of that relationship and help us understand what additional revenues could be generated and how that would affect your underlying level of profitability? And I have some more questions after that.

I believe that new relationship that you're referring to is on the distribution side. And what it really does is offer us a new opportunity to go to market in some of the smaller accounts while we stay focused more on the development of our commercialization efforts and the development of the new products. Is that the basis of your question?

I'm referring to your press release this morning.

Yes, that's right, the distribution agreement. Yes.

Then that's the answer. It's really on the distribution side, opening up a new channel for us to go to market than we've had previously.

And could you outline what the sales potential could be from this channel and who you have the relationship with?

Yes. Hey, this is Don Coffey.

Listen, the agreement is really an extension of our working relationship with BC Williams, the leading bakery ingredient distributor in the US. And this is an extension of a long -- a historic relationship we've had, but it's a pretty significant extension, enabling us to do two things - one, drive sales growth across the industry, so improving our reach to customers, and also working more closely with them where we can improve our entire supply chain operation, too, because of their experience and expertise in small and medium account distribution. Their insights and enable us to improve our own performance and simply drive better performance across the board.

I'm not sure exactly how to answer your question about total sales potential, but their improved reach, or their ability to improve our reach, certainly helps us to achieve our goals in hitting our long-term targets for significant growth in specialties.

Can you help us understand, based on your current revenues, like what percentage it of your revenue comes from your large commercial, loyal, historical customers versus what comes from the smaller customers and what that is for the industry, meaning you're under-penetrated in the smaller customers, so that we can understand the gap that BC Williams is going to help you fill.

It's really a function of the -- I guess to try to answer that, you have to think about where we've come from before. And we have a great core group of customers, which are the major consumer packaged goods companies, and I would say the bulk of our sales today go to those types of customers. It's very difficult for us to be able to make any kind of projection as to what additional penetration or sales opportunities we have (inaudible) because, quite frankly, we've never had this reach before. This is brand-new.

So, I would say, again, the core of our sales are to the major consumer packaged goods companies, and we'll have to learn over time, because this is a brand-new agreement, a brand-new relationship. We'll have to see the impact it has over the coming quarters. But, everything should fall in line with our stated goal here of 5% to 8% range.

I wanted to understand better, if I could go back, to your statement that free cash flow was $3.3 million in the quarter. Was that gross cash flow or free cash flow? Because if I added in the changes in working capital year to year, you had a negative free cash flow for the quarter. So, maybe you could help me understand how you're defining it.

Yes, this is Dave Harbert. Free cash flow we define as cash flow from operations less CapEx. And as you will note from looking -- if you refer to the 10-Q, which was filed this morning, you will find those numbers. You will find $3.3 million of cash flow from operations, and essentially there was no CapEx for the quarter.

Right, I saw that, but why don't you -- why -- other people use changes in working capital to get at free cash flow, and I was wondering why you don't do that. What is the nature of your business that--?

Well, sir, let me just mention to you that cash flow from operations includes net income, plus depreciation, plus or minus changes in all working capital, plus or minus changes in any other long-term assets or liabilities, and that will take you down to cash flow from operations. And if you look at our cash flow statement this morning that was filed with the 10-Q, that's exactly what you will see. So, when I talk about free cash flow in cash flow from operations, it absolutely includes working capital changes.

Well, I'll go over that at another time with you. I'm a little bit -- I understand, of course, your definition. I was fully aware of that before you said it, but I don't quite understand the significant increase in working capital versus last year, why that's not included in your definition.

Feel free to call me, sir, directly.

Okay. So, we have some other questions, but you want to let others get in, come back to us, however you want to do this?

Yes. Let's take another call, and we can always come back.

(OPERATOR INSTRUCTIONS.)

Bill Gordon with Gordon Capital.

Good morning. Good morning.

Good morning.

Couple of questions here. I find the changeover here to be quite difficult to follow. I was wondering if you can be so kind as to give us some sort of segment numbers on an apples-to-apples basis, i.e. the wheat ingredient area as opposed to the food alcohol area -- we've got two basic segments here -- what those two segments did in the quarter. If you can possibly try to clean out everything else and compare that to the comparable numbers in the preceding four quarters earlier. I recognize there's a lot of mud out there and it's very difficult, but I was wondering, you must have some internal pro forma numbers on this.

Yes, good morning. Dave Harbert again.

We have not really prepared any pro forma numbers here. This is a straight comparison of fiscal '10 first quarter compared to first quarter of last year. And you're right, there is a lot of noise in the numbers.

But, I think, if you think about the comments Tim made, the fundamental changes -- the largest changes are really in the transformation of the company. And if you'll recall, when you look at our year-end results and our 10-K for June 30, there was $26.5 million of restructuring charges throughout fiscal year '09.

What you couldn't see was that, on top of that, there was an additional $27 million of lower or cost of market charges. And rather than try to get too sophisticated with that, just think of that as you're selling product below your cost. And these are the issues. When Tim talks about unprofitable commodity products, protein, wheats and starches, and fuel grade alcohol, these are specifically the impacts from those products in fiscal year '09.

And the majority of that noise occurred in the first half of fiscal year '09. By the end of the third quarter, the transformation had pretty much been complete. And that's why, when you look at our fourth quarter, that's when we were emerging and beginning to show some positive profitability, and we have sustained that into the first quarter of fiscal year '10.

We just do not have a pro forma layout here, and that's just not available.

Okay. The quarter we just printed, the first quarter, can you define to me some sort of -- or dimension to me seasonality in this company? What are we looking at? Is this quarter different from all others? Is it better? Is it worse? How do you see that, going forward, from your type of business now as it's constructed today?

With the value-added businesses that we have left, we just, quite frankly, don't see a lot of cyclicality like we would have had historically in some of the more commoditized businesses. It is a pretty consistent based business right now, business base.

Okay, good. Good answer.

Early on, you in your introductory remarks spoke about questions from Q&A, I guess, from investors and responding by saying that you are looking for 5% to 8% growth, basically. Now, it's hard for me to square the circle when you subsequently say "unprecedented demand," "especially exciting," and "productivity margins," and then "enormous growth." I mean, these subsequent comments just don't fit with 5% to 8% growth. Can you help me out with that?

The 5% to 8% compounded growth was top line, and that was out of the core customers in those value-added ingredient markets. There are some very acute opportunities that we have in the industrial alcohol that we talked about, the unprecedented demand specific to the industrial alcohol, which, quite frankly, are in hand sanitizers that are being consumed at an incredible rate across our country as people tried to put up defenses against the H1N1 virus, but that's very acute.

Now, how much of this acute demand will be a permanent demand shift? We don't know. We'll have to wait and see and what that means in terms of pricing and volumes after this flu season passes. We also talk about -- in there about being excited about the opportunities with our fiber lines, the Fibersym and the FiberRite products. Those are very specific product lines that have a tremendous future that we're finding out from the -- and have great health and wellness benefits from the clinical trials.

So, we're trying to -- this is still new. This is the end of our second quarter with the transformed company. And we're trying to be conservative little bit and understand where things are going, but there are some exciting potential upsides. We have some key trials going on with some very large, exciting consumer packaged goods companies, especially in the fiber area.

So -- and you never know how those are going to fall out. That's the thing when you're doing new product development and putting products out there for the consuming public. Some of them are wins and some of them are not. So, we're trying to kind of hit what we -- using the last two quarters as a guideline, kind of where we see as the middle of the road, and hopefully we can do better.

One other question. In the release, you speak about corn costs as well as natural gas costs, which sounds like they're quite variable. Is there any way, [A], to hedge against that variability, or two -- or build in some escalators in the contracts in terms of selling product the way the airlines do, with surcharges, or [UPS] does?

We are looking at all of those opportunities, and there's three basic ways we're looking at going about this. Number one is selling value and making sure that we have value-added products that have plenty of value, and realizing that these more value-added products that we've built the business model on today are really a very small percent of the cost of goods sold of the final product for our customer when they go to the consuming public.

And so, there's a lot less impetus for that customer, with changes in input costs, to come back and demand radical changes in pricing. So, that's one thing. It's based on the product mix that we sell and selling value, not just a cost-plus arrangement. We're also working on making sure that we synchronize our sales horizons, whether we do quarterly or monthly, along with our risk management program and locking in margins that way, too.

So, we are working at and looking at all the different opportunities that we have to tried to take out some of that volatility. But, frankly, the best opportunity is to continue to sell the more value added products.

Let me -- [please for one other question, then go home, then]. Assets held for sale on the balance sheet showed $29 million. When do we see that?

Yes, I'm sure it that's a question everybody would like to know. We really -- other than what we've said -- and I apologize for this in advance, but obviously you can appreciate where we sit today and where we mentioned in the releases is about all that we can say today, and that is that we are -- continue -- the bulk of those are the Pekin, Illinois facility, and we continue to explore all of our strategic options there.

Okay, thank you.

You bet.

Greg Bennett, Smith Barney.

Good morning.

Good morning.

There's a lot of excess plants on the market right now, from what I understand, that were ethanol plants common fuel grade plants out there. Is there the potential for any of these plants to be converted over to industrial or food-grade alcohol that would -- what's the competition in that area, the food-grade and -- is there more capacity? You mentioned about the demand now for alcohol because of the swine flu virus. What's the potential for other people switching over?

Good question, Greg. There's several things to think through in that supply and demand balance. First of all, I would argue the bulk of the reason of the fuel ethanol plants are idle is because they were under-capitalized. In order to be able to produce a different grade of alcohol, food-grade type alcohols, you have to have additional capital because you have to have additional equipment. And so, if one of the reasons that they are idle is because they were short capital to start with, that is certainly a barrier. And we all know the capital markets are -- while they're starting to free up a little bit, are still extremely, extremely tight.

The second thing is, there is some know-how. There is a -- it's a different type of sale. You have to have a little bit more infrastructure on the quality side and on the service side to be able to handle those kinds of customers. So, it is possible that those plants could be converted.

The other thing, though, to remember is, right now, the fuel ethanol market is extremely strong, and a lot of Brazilian-based alcohol that was on the world market has been turned into sugar because of high sugar prices. And as such, there's just strong demand globally for alcohols in all different types. So, in the short run, I don't see a lot of -- I'm not too concerned about a lot of idle capacity being converted into food-grade.

So, your [Perkins] Plant is, though, a plant that was -- if this plant were to be sold, this is a plant that was probably be sold to somebody that was going to utilize it for fuel grade? Is that a correct assumption, or not necessarily?

Yes, Greg. The Pekin, Illinois facility is a dual -- what we would call a dual use facility. It can produce 100% of its capacity as fuel grade, and then it can produce approximately about a third of its capacity as food-grade.

So, if you sell this plant, potentially you could sell it to somebody who is in the food-grade that would compete against you?

Potentially.

What is -- is there more capacity coming online in the food-grade area? I mean, do you see upstarts or people adding capacity to that? Who's your competition in that area, in the food-grade area?

The three principal players are ourselves, GPC, Grain Processing Corporation, and ADL. And we have not seen a lot of new entrants in years, quite frankly.

How about ADM or GPC adding capacity?

I mean, I suppose it's always possible. There's nothing that's been announced.

Okay. And then, switching over to your fiber area, your value-added proposition, are you the only ones that have this type of product? Is this proprietary, or are there other sources of adding fiber to flour that are competition to you?

Yes. Greg, this is Don Coffey again.

Listen, the situation we have with our resistant starch [basin] in wheat is we've got a very favorable position there because we are the exclusive license holder for that technology, so that works out very well for us. The fiber market in general, we talk about big numbers, and frankly, everybody intuitively knows that the fiber demand is enormous in the US, but there are a lot of different ingredients that qualify as dietary fiber. So, this is not simply our product line being the only candidate to fill that. There are many, many different technologies, many different sources of dietary fiber.

Now, I'm not -- so, I'm not sure I'm answering your question. However, we've got a very favorable position with this from the technology specifically. And as Tim said, we believe we have the best dietary fiber for flour-based foods. So, the people who make breads, rolls, biscuits, things made out of flour, our products fit in perfectly within the process that our customers use and -- for end results.

When you say you have the best, though, does that mean it's the best because it's the best, from a cost point of view, if you're a large bakery?

No, no. I wouldn't say that, although we're pretty competitive when you get right down to dietary fiber delivered. The issue for our large consumer products companies and large bakeries is this - they have to make products that fit their processing plants, because they have their own install capital to worry about, and our products -- our dietary fiber products fit in perfectly with the existing formulations, right? So, it's a very easy transition for them to make high fiber products. It doesn't mean it's easy to introduce high fiber products to the consuming public, but we give them a bit of a faster entry.

Also, because our dietary fiber is made from wheat starch, it fits in perfectly with the flavor profile that people expect from breads and rolls. So, there's no off flavor or degraded flavor profile, because that's a basic consumer complaint about high fiber food products out there. They tend not to taste great. And ours helps customers avoid that problem.

I'm a little bit confused. You all said that there's a tremendous demand for this, but, on the other hand, you just said that it's difficult to introduce to the consumer high fiber. Is that because the consumer -- a lot of the consumers don't like the texture or the taste?

Yes. High fiber products do have a built-in consumer -- I'll say ambivalence, right, because consumers have been burned in the past with new product concepts that simply don't taste good. And that's -- when we talk about the Kellogg's of the world or the Krafts of the world, when they introduce new products, those products obviously have to fit a price point, and they have to taste great to get that second, third and continuing buys from the consuming public.

Have you thought about branding your fiber?

We have debated that for years. Branded ingredients is an interesting concept. It has worked for some people and it has not worked for others. But, trust me when I tell you that, from a marketing perspective, we have debated that. We have tested that concept. And that's not something that we're -- that's not a pony we're riding at the moment.

So, the competition in that area is other people have fibers that they probably sell at a lesser price, but then they may not have the value added that's a taste or a texture?

Yes. Greg, there's a -- like I said, there are many different ingredients that can deliver dietary fiber in processed foods. We're one of them. And there are price points all over the map, some very cheap, some much more expensive than our product lines, and performance and formulation challenges all over the map, too.

So, it's a messy development process. It's a fairly long-term development process with our big customers, also. These are multi-year developments, typically. But, we're well into that, and we're focused like a laser on that.

Well, to get the 6%, or 5% to 8% annual growth in sales, that means that you must have confidence that the Sara Lees or the Kellogg's -- I don't know if you're -- is this also utilized in cereals, or is it only really in bread products?

Well, no. This sort of technology can find its way into many, many different products. Our historic base is in bakery products, but we can develop high fiber foods in a variety of formats.

Can it also be done on liquids?

Not so much, not with our technology.

Not with yours.

Would you say that over the -- if you were to go back and look at your fiber business in your food-grade alcohol or industrial alcohol business, and you were to look at the volatility of your inputs, of the raw material, the commodity, and natural gas prices, would you say that those businesses in the past, at least, have consistently been profitable for you with wild swings, or would you say that there's quarters that those businesses would you have had a loss because the commodity price of an input went against you?

This is Tim. Greg, those types -- especially those two examples that you listed there, going back through recent history, which had some pretty volatile periods in it, would have been profitable.

So, you're telling the shareholders today that what you have -- the businesses that you're in today, Tim, that with -- if there's wild swings in the price of your raw material, wheat or wheat gluten and-or natural gas for producing food-grade alcohol, that you still would maintain a profit margin?

I think the way I answer that question, Greg, was those two particular products in product lines, the answer was yes. We are still working on continuing to optimize our product mix and develop more products with those types of characteristics. Not everything we have today is there.

What are the ones that aren't there?

I mean, all sorts of different -- I mean, we still manufacture other types of wheat starches, not just fiber, but we have a whole portfolio of products, and there's other types of alcohols, also. But, I mean, that's where our focus is, and that's where we're continuing to focus our growth efforts, is on those types of products that give us a very wide range of input costs and volatilities and are still profitable. That's our job. That's where we're driving.

What percent would you say of your business is commodities-sensitive to those input prices, and what part is this value-added that is consistently profitable, of your product mix today?

I mean, Greg, to answer that question, we'd have to talk about specific ranges, because there are some products that are going to be profitable at certain values of -- in combinations of values of corn and natural gas and flour, and others that aren't, and so that's still a very complex answer to that. But, the types of products, like Fibersym and like the beverage alcohol that we're talking about focusing on, are the ones that are going to be growing and the ones that we are focusing our efforts behind. That's about all that I can say on that right now.

You can't say what your percent of your overall sales in this quarter were those particular value-added products?

I don't have those numbers in front of me. If you'd like to -- I mean, we can work on--.

I guess what we're trying to get at here, Tim, is just that investors in your company over the years, you've -- the previous structure of the company has had enormous swings in volatility in earnings, and it's always been blamed on the wrong way that a commodity moved, whether it was natural gas or wheat gluten or whatever the inputs were. And you're representing that the company now today is -- it's a new day, and you had a good quarter here, but you're also cautioning that maybe that might not be the case. So, you're still kind of a show-me story, whether we really realize that each quarter you should obtain -- that you'll be profitable.

Well, I mean, I would agree. And we look at that, and we said that. I mean, we believe the transformation and understanding where we want to go and the products we want to focus on, Greg, we believe that is complete. Are all of our products and all of our sales revenue in the right categories, in the categories that are going to be much more resistant, or completely resistant, to input swings? No. Is that where we're headed? Absolutely. It's certainly very different than where we were a year ago, and I think the results show that.

(OPERATOR INSTRUCTIONS.)

Errol Rudman.

Hi. Just going back to the ingredients business, could you tell us who your competition is there? That's question one. And question two, when you talk about opportunity in your large commercial customers, is this opportunity to expand your market share, or is this a new market where they are trying out new products with high fiber, and your Fibersym and FiberRite products are under trial?

And thirdly, going back to the new distributorship, distribution agreement, I don't know the food market, so if you want to say is 90% of the baking goods market held by the large companies and 10% by the mom-and-pops, or is it 70%-30%? I'm not asking for your projection. I'm just asking you what the industry split is.

Yes. Errol, listen, your first question, who's our competition, if we go back to some of our basic product mix in our ingredient business, which is basically a total portfolio of (inaudible) and a fairly broad portfolio of proteins, the kind of (inaudible) that business are companies like National Starch and every other starch company. And in the protein world, we compete with a variety of soy protein ingredient suppliers, people like Solae, and ADM and Cargill are in that list. But, there's a broad list of competitors that supply starch-based carbohydrates and plant-based proteins to food manufacturers, so it ends up being a very long list.

In our textured protein business, it's a different set of competitors, but again with slightly different product offerings. But especially companies like Solae, which offer soy products (inaudible). That's sort of a high level--.

I understand that. Are you partnered with any of the big players? Because your R&D can go only so far, given your size of the company.

Well, when you say partnered, we talked about linking up in a much more aggressive way with a key distributor for the bakery world, because that is where a large portion of our sales are today, right? And so, we're working more closely with BC Williams, which is an excellent, technically sophisticated distributor of specialty ingredients for the bakery world. And they help -- as a sales partner, they help extend our reach into new customer bases and help us serve a variety of customers, okay?

Errol, I'm assuming that's where you were going with that question.

Yes. And can you just give us some industry profile as well, because this is all new customers for you. It's a market that you haven't tapped in the past. I just want what the industry split is.

Errol, probably a lot more productive way to do this would be for you to call me directly.

Okay. We appreciate that.

Is it possible for you to outline the [stage, for me], your negotiations about your loans and what rates you're likely -- or what the [band] of discussion is in terms of rates and your ability to obtain capital for future growth?

All of that information on all of our loans was out in the 10-K that came out, and nothing has really changed there. I can tell you, anecdotally, there's significant interest from multiple sources of capital in the banking world for us as we look at growth opportunities, and we're on the phone with them weekly, and they're following our continued progress and improvement. So, I don't -- at this point, anyway, I don't see capital as a major constraint for growth for us.

Yes. Just to add on to that, as you probably noted in our K, and also in the Q today, we finalized a new revolving line of credit with Wells Fargo in July in our first quarter. And we also noted that we have paid down on that revolver already in the first quarter. And at September 30th, the end of the quarter, we actually had $8.5 million of liquidity, or availability, so -- as Tim mentioned in his comments.

So, in terms of looking for a new loan, we were able to complete the relationship with Wells Fargo. We have the new revolving line of credit, and everything is going fine. And there are other opportunities for us to access capital for growth.

And ladies and gentlemen, that is all the time we have for questions today. I'd like to turn the call back to Tim Newkirk for closing remarks.

Thank you.

I have just a few more comments before we conclude the call. Our business transformation has been challenging and achieved in record time. Restating my closing comments in today's news release, the true picture of what we can accomplish is just beginning to take shape, as evidenced by our recent return to profitability. While our corporate history spans nearly seven decades, we have completed the transformation to a more focused competitor with unique assets and a strong customer base. Today, we go to market with a more aggressive sales culture, led by a strengthened management team. Our goals are higher than ever, but so is the level of accountability.

I believe that we are only beginning to realize our long-term earnings potential. We have a firm idea of what needs to be done, and now we have a clear path for executing our plans. In closing, we want to thank our stockholders, customers, suppliers, and our team of employees who have stuck with us and demonstrated their confidence in our ability to succeed. We look forward to talking with you again when we report our second quarter results.

Thank you for your continued interest, and this concludes our call.

And once again, that does conclude today's teleconference. Thank you all for your participation.