Feb 09, 2006 /PRNewswire-FirstCall via COMTEX/ -- MGP Ingredients, Inc. (MGPI) today reported net income of $818,000, or $0.05 per common share, for the second quarter, which ended December 31, 2005. This compares with net income of $1,354,000, or $0.08 per share, for the second quarter of fiscal 2005. Net sales in the current year's second quarter totaled $75,671,000, an increase of 24 percent above net sales of $61,164,000 in the prior year period. The improvement in total revenue compared to a year ago resulted from increased sales in both the distillery products and ingredients segments. Distillery products sales rose by nearly $11.4 million, or 27 percent, above sales in the second quarter of fiscal 2005. Sales of ingredients in total were up approximately $3.2 million, or 17 percent, compared to last year's second quarter.
"Although we experienced a decline in second quarter earnings compared to a year ago, we see favorable conditions taking shape, particularly in our distillery products segment, that should result in improved profitability during the remainder of the year," said Ladd Seaberg, president and chief executive officer.
The decline in second quarter net income compared to a year ago was primarily due to a 68 percent increase in energy costs over the comparable quarter the prior year, which affected operating profits in the distillery segment and, to a lesser extent, contributed to a loss in the company's ingredients segment. The primary cause of the higher energy costs was a 75 percent increase in the average price of natural gas. This contributed to a $9.4 million, or 85 percent, rise in the company's cost of natural gas over the second quarter of fiscal 2005 and a $6.7 million, or 49 percent, increase over the first quarter of fiscal 2006. This reversed the trend in operating income growth from distillery revenues over the past several quarters.
"Notwithstanding the severe upsurge in second quarter energy costs, income from our distillery segment for the first six months of fiscal 2006 was more than twice our income from that segment in the first six months of fiscal 2005," Seaberg said. "Since the end of the current year's second quarter, the price of natural gas has declined while pricing for both fuel grade and food grade alcohol has improved due to increased demand in the marketplace," Seaberg said. "Additionally, prices for corn, the principal raw material used in our alcohol production process, remain relatively stable. Considering all of these factors, therefore, we expect improved profitability from distillery operations for the remainder of the fiscal year."
Although sales of the company's higher valued specialty ingredients, consisting primarily of specialty wheat proteins and wheat starches for food and non-food applications, improved in the second quarter compared to the same period a year ago, profitability in the ingredients segment continued to be adversely affected by increased sales of lower valued commodity wheat gluten. Additionally, average prices for certain of the company's specialty proteins for food applications were lower than a year ago due principally to competitive pressures. Second quarter prices for wheat to manufacture the company's ingredients were just slightly higher compared to a year ago, but up 8 percent compared to the first quarter of the current fiscal year.
The increase in commodity gluten sales revenue resulted from higher unit sales compared to the prior year's second quarter. This increase adversely affected profitability, as market prices for gluten have been below the company's cost of production. Although MGPI has deemphasized gluten sales because of such poor market conditions, gluten remains a co-product from the processing of flour. Because the company's sales of specialty proteins have not grown proportionately with increases in its specialty starch sales, more gluten was available for sale during the second quarter of fiscal 2006 than in the second quarter of fiscal 2005, as less gluten has been processed into specialty proteins.
"While benefiting from positive contributions from our distillery segment, we are striving to bring a more profitable balance to our mix of ingredients," Seaberg said. "We continue to address this situation on several fronts, including product enhancements, new product and market development, and measures to improve production efficiencies and yields. None of these things occur overnight, but are all parts of a longer term strategic process to build our ingredients segment into a more stable and significant profit center."
For the first six months of fiscal 2006, the company had net income of $4,549,000, or $0.28 per share on sales of $152,717,000, compared to net income of $1,645,000, or $0.10 per share, on sales of $130,042,000 for the first six months of fiscal 2005. This improvement was primarily due to increased sales and profitability in the distillery products segment, which resulted from higher unit sales of food grade alcohol and increased prices for both food grade and fuel grade alcohol. The company's profit performance in the ingredients segment for the first six months of fiscal 2006 declined compared to the first half of fiscal 2005, principally for the same reasons that affected profitability in this segment during the second quarter of the current fiscal year. However, sales of ingredients increased in the first six months of fiscal 2006 compared to the prior year's first six months due principally to increased unit sales of specialty ingredients for food applications together with higher unit sales of commodity gluten. These increases offset a decline in sales of specialty ingredients for non-food applications, which occurred in the first quarter of fiscal 2006, combined with decreased unit sales of commodity starches in both the first and second quarters of the year. While the premium pet chew market continues to exhibit solid category growth industry-wide, customer inventory adjustments caused company sales of this product line to be lower in the second quarter than they were in the first quarter of fiscal 2006. However, if current customer projections hold true, management anticipates an improved sales pattern flow during the final two quarters of fiscal 2006.
Total sales of distillery products in the second quarter of fiscal 2006 rose by approximately $11.4 million, or 27 percent, compared to the second quarter of fiscal 2005. This improvement was due to a $6.4 million, or 58 percent, increase in sales of food grade alcohol, a $4.1 million, or 16 percent, increase in sales of fuel grade alcohol, and an $893,000, or 15 percent, increase in sales of distillers feed. In the food grade area, sales of alcohol for industrial applications rose by $5.3 million, or nearly 76 percent, and sales of alcohol for beverage applications rose by approximately $1.1 million, or 26 percent, due to higher prices and increased unit sales compared to a year ago. The increased sales of fuel grade alcohol also resulted from higher unit sales and average selling prices. Distillers feed sales rose as the result of higher unit sales.
Total ingredient sales in the second quarter of fiscal 2006 increased by approximately $3.2 million, or 17 percent, compared to the prior year's second quarter. This principally was due to a nearly $2.4 million, or 21 percent, increase in sales of specialty ingredients for food applications and a $109,042, or 2 percent, increase in sales of specialty ingredients for non- food applications. Commodity ingredient sales increased by approximately $347,000, or 13 percent. This increase resulted from a $373,314, or 23 percent, rise in sales of commodity gluten, which more than offset a $26,428, or 3 percent, decrease in sales of commodity starches. Sales of mill feed and other mill products rose by $323,714, or 128 percent.
Seaberg offered the following outlook for the rest of the year: "Overall, we anticipate improved profitability for the rest of the year compared to the first half of fiscal 2006. We expect most of this improvement will come from the distillery segment as the result of favorable conditions in our alcohol markets. While we continue to build sales of specialty ingredients, we obviously are not satisfied with our profit performance in the ingredients segment. Therefore, our immediate goal is to improve profitability in this area of our business. We hope to do this from a combination of increased sales of higher valued ingredients and improved operating costs."
Seaberg concluded, "Demand for healthful foods is growing. Our customers are looking to provide foods that are higher in fiber and lower in fat. The challenge is in delivering foods that meets these requirements without sacrificing taste and texture. That spells opportunities for our wheat-based proteins and starches. Our business franchise was built on innovative solutions. One of the most significant ways we can develop new strategic assets for MGPI is through R&D. The investment in our new technical center, which will be completed over the next 10 to 12 months, is a key component of this program."
About MGP Ingredients
In business since 1941, MGP Ingredients, Inc. is a recognized pioneer in the development and production of natural grain-based products. The Company has facilities in Atchison, Kan., Pekin, Ill., Kansas City, Kan., and Onaga, Kan., that utilize the latest technologies to assure high quality products and to maintain efficient production and service capabilities.
Cautionary Note Regarding Forward-Looking Statements
This news release contains forward-looking statements as well as historical information. Forward-looking statements are usually identified by or are associated with such words such as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could" and or the negatives of these terms or variations of them or similar terminology. They reflect management's current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results and are not guarantees of future performance. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from our expectations include, among others: (i) the availability and cost of grain, (ii) fluctuations in gasoline prices, (iii) fluctuations in energy costs, (iv) competitive environment and related market conditions, (vi) our ability to realize operating efficiencies, (vii) the effectiveness of our hedging programs; (viii) access to capital and (ix) actions of governments. For further information on these and other risks and uncertainties that may affect the company's business, see Item 1. Business -- Risks and Uncertainties of the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005.