MGP Ingredients has pinned its hopes on specialty ingredients to help turn the company’s fortunes around after reporting a loss of more than $11m for the year.
Tim Newkirk, MGPI president and chief executive officer said the number one priority now was to return the company to profitability after it saw its net income drop from $17.56m in 2007 to a loss of $11.74m for fiscal 2008.
This was largely blamed on the high price of corn, wheat and natural gas, particularly in the fourth quarter when Newkirk said there was “no price relief in MGPI’s key input costs”.
However, the loss led the company, which manufactures natural grain-based products, to breach “several financial covenants” during the fourth quarter. It is now in the process of reaching an agreement with its lenders which could see it restricted from paying dividends and its commodity positions and hedging strategy reviewed.
In July corn futures reached all-time highs of over $7.50 per bushel in late June, and in May wheat futures reached nearly $9.00 per bushel.
Newkirk said the company could expect improvements if market prices for the commodities remain near or below current levels but this was not enough to “get back on a path of consistent profitable growth and predictable cash flows”.
Instead he identified three main focus areas - continued growth in specialty ingredients; realizing more of MGPI’s installed manufacturing capacity and expanding its share in high-quality food grade alcohol.
Newkirk said: "If I had to pick one thing to point to this past year as tangible progress around our long-term strategy, it would be strengthened sales of the right mix of specialty ingredients.
“Specialty protein sales, for instance, were up double digits in volume, as well as in sales revenue. Fiber-enhancing specialty starch sales were up 30 percent in volume and 40 percent in revenue, while textured protein sales experienced a 15 percent increase in volume and a 19 percent increase in revenues compared to fiscal 2007.
“Demand for healthy foods drives our long-term opportunity. The major food companies are working at breakneck speed to develop new and differentiated products.
"We are only beginning to realize the potential of being able to build our role as a value-added supplier to our current customers.
“For example, we are the leading domestic supplier of vital wheat gluten. This has opened the door with certain customers, allowing us to demonstrate the benefits of our specialty starches and proteins in some of their existing products.”
For the fiscal year, net sales 2008 were $392.89m in 2008 compared to $367,99m the previous fiscal year.
In the fourth quarter, which ended June 30 2008, there was a net loss of $9.98m, which included a fixed assets write-off of $1m net of tax. This compares with net income of $1,66m for the same period in 2007.
Meanwhile total sales in the fourth quarter of 2008 were $104,22m, an increase of three percent above 2007 fourth quarter sales, which were $101,54m.
MGPI said corn and wheat prices for the year averaged 37.6 percent and 63.3 percent higher, respectively, above its 2007 levels, while the price of natural gas averaged 14.8 percent higher than the average price of natural gas during the prior year.
The company’s segment results showed total ingredient solutions sales in the fourth quarter increase by about $6.5m, or 31 percent, compared to the same quarter in 2007.
Combined sales of specialty proteins and starches increased by 25 percent and there was also a 21 percent increase in sales of vital wheat gluten resulting from higher volumes and pricing compared with a year ago.
However, MPGI said that the growing contribution from specialty ingredients was offset by higher wheat prices, which averaged more than 90 percent higher than a year ago.
The higher wheat costs combined with added product innovation and commercialization staffing to produce a pre-tax segment loss of $10.9m. This compares with a pre-tax profit of $463,000 in the prior year's fourth quarter.