MGP Expects Gross Profit Rebound in Q4 From Lower Corn Costs
13 Nov 2013 --- MGP Ingredients, Inc. has reported results for the third quarter ended September 30, 2013. Net loss for the third quarter was $6.4 million, or $0.37 per diluted share, compared with net income of $418,000, or $0.02 per diluted share, in the prior year. Operating profit in the third quarter was negatively impacted by, among other things, reduced industrial alcohol sales and increased fees related to the current proxy dispute.
Year-ago net income included a $1.8 million unrealized hedging gain on open commodity derivatives. In the current quarter the Company did not have any open commodity derivatives.
Lower sales of industrial alcohol continue to be offset by increasing sales of beverage alcohol. Sales of the company’s premium bourbons and whiskeys remain at higher capacity levels made possible by manufacturing efficiencies and other process changes at the Indiana distillery. Production of new bourbon and whiskey distillate has more than doubled since the acquisition of the Indiana distillery in late 2011, with plans for further expansion by the end of 2014. Sales of MGP’s bourbons and whiskeys continue to have a positive impact on profitability.
Net sales for the third quarter improved by approximately 5 percent from the year ago period. Beverage alcohol sales benefited from higher unit volume and pricing, while sales of industrial alcohol saw lower unit sales but increased pricing compared with the same time period a year ago. Ingredient Solutions sales in the third quarter were flat with a year ago.
Third quarter loss from operations was $6.0 million compared to income from operations of $0.9 million in the third quarter of 2012. The Company’s net sales increased by $4.0 million, while cost of sales increased $9.3 million, or 13 percent, over the prior year period. The reduction in third quarter gross profit from the prior year was attributable to the distillery segment related to: 1) the sales price decline of by-products; 2) significantly lower industrial sales; and 3) a year-ago quarter hedging gain, compared to no hedging impact in the current quarter. Selling, General and Administrative expenses reflected increased professional fees related to the corporate proxy dispute.
For the first nine months of 2013, net sales declined by approximately 1 percent to $245.9 million. This was mainly due to a decrease in net sales of distillery products partially offset by increased net sales of ingredient solutions. For the year-to-date period the Company generated a gross profit margin of 5.4 percent compared to 7.1 percent in the prior year period. Also during the first nine months of the year the Company experienced incoming power supply interruptions in Atchison, KS, which negatively impacted manufacturing output compared to the same period a year ago. Loss from operations for the first nine months of 2013 was $4.2 million compared to a loss of $2.0 million in the prior year.
Beginning with the fourth quarter the Company expects to experience its lowest corn costs in approximately three years, reflecting the strong U.S. corn harvest. With the majority of its fourth quarter distillery volume committed and priced, the Company estimates that fourth quarter gross profit could approach or exceed a level last achieved in first quarter of 2013.
“With the market fundamentals in certain grades of industrial alcohol now showing signs of improvement, we believe that we’ve reached a major turning point for achieving higher profits in our bulk white goods, which still comprise the vast majority of our distillery volume,” said Tim Newkirk, President and Chief Executive Officer. “MGP’s profitability has been pressured from the combination of tight U.S. corn supplies coupled with very competitive pricing. Today, however, we’re on the receiving end of one of the largest corn harvests in recent history. With greater liquidity returning to the corn markets, we expect a two-fold benefit: lower corn costs going forward and the ability to fully hedge our customer contract pricing. Sustained lower corn costs are the key to achieving the Company’s long-term targets of double-digit gross margins in industrial alcohol. Regardless of improving fundamentals, we will not stop looking for ways to lower our per-gallon manufacturing costs."
Newkirk added, "Our premium spirits strategy continues to gain momentum. The main challenge at this point is to meet the growing backlog of orders. The tight supply situation for both new and aged distillate in the U.S. has been compounded, at least temporarily, by a weather-related shortage of whiskey barrels, which we hope is resolved in 2014. MGP has come a long way since we acquired MGPI - Indiana less than two years ago, becoming one of the leading independent suppliers to both large and small branded spirits companies."
Premium Spirits and Industrial Alcohol
•Distillery products net sales for the third quarter were $66 million, an increase of 7.4 percent compared to the prior year quarter. Increases in sales of premium spirits, whiskeys, bourbons and distillers feed were offset by declines in lower-grade industrial alcohol products. The decline in the lower grades was primarily driven by a 90 percent reduction in the supply sourcing of industrial alcohol from the Company's joint venture partner, ICP, to be sold by the Company.
•The distillery products segment reported a third quarter loss from continuing operations before income taxes of $1.7 million compared to income from continuing operations before income taxes of $3.5 million during the same quarter a year ago. Along with higher cost of goods as previously mentioned, the Company experienced a quarter-versus-quarter reduction in gross profit from lower grade bulk white goods, as corn costs rose while net sales prices remained flat.
•For the nine months of 2013, distillery segment sales were $200.7 million, a decrease of 2.2 percent compared to the prior year period. The decrease was mainly due to a 99 percent reduction in the supply sourcing of industrial alcohol from the Company’s joint venture partner, ICP. Income from continuing operations before income taxes for the year-to-date was $5.8 million compared to $9.9 million in the prior year period. Overall distillery segment pricing was out-paced by increased costs for corn and natural gas, which averaged 8.5 percent and 2.8 percent higher, respectively, from the prior year period.
Food Ingredients
•Ingredient segment net sales for the third quarter were $14.1 million, a decrease of less than 1 percent from the prior year’s quarter. For the segment as a whole, the 6.5 percent decrease in volume was partially offset by a 6.4 percent increase in unit pricing.
•The ingredients segment reported third quarter income from continuing operations before income taxes of $1.2 million, or 9.1 percent of net sales, equal to the same quarter a year ago. Flour costs averaged 13.9 percent higher than the prior year period. This was offset by improved sales mix.
•For the first nine months of 2013, ingredient segment net sales were $44.9 million, an increase of 7.5 percent. Sales benefited from both higher average unit pricing and unit volumes. Income from continuing operations before income taxes for the year-to-date period was $3.9 million, equal to the prior year period.
Newkirk said, “The groundwork has been laid for profitable sales growth at MGP, starting with a more positive outlook for our industrial alcohol grades. Added to that is the growing contribution from our bourbon and whiskey distillates. As premium spirits with higher margins comprise a greater percentage of our sales mix, we expect to see the direct impact to MGP’s operating profits. The recent five-year supply agreement not only validates the quality of our bourbons and whiskeys, it brings stability to a portion of our future output. We look to close additional agreements with both branded spirits companies and distributors. The third driver of future profit growth is our specialty food ingredients, where we continue to add technical and sales resources. MGP’s ingredient product innovations were recently featured at the American Association of Cereal Chemists International (AACCI) Annual Meeting.”
