| Progress always comes with new challenges. For the year 2012 we experienced our share of both. The purpose of our report is to offer a brief look back, but more importantly, a view of where MGP is headed. We were challenged to show progress on the bottom line. Our net income for 2012 was $1.6 million, or $0.09 per common diluted share. This compares to net income of $1.1 million, or $0.06 per common diluted share, in the prior twelve months. The results for 2011 included one-time asset acquisition gains net of tax provisions of more than $21 million related to the purchase of our Indiana distillery. Our net income for 2012 included gains from the partial sale of our interest in a joint venture in Illinois, as well as a gain from the sale of the remaining textured protein production assets. On an operating basis, your Company was in the red in both 2011 and 2012. We did achieve significantly higher net sales in fiscal 2012, realizing an increase of approximately 20 percent to $334 million. Most of the gains came from increased sales of premium spirits, bourbons and whiskeys from the Indiana distillery. The growth in sales from these high-value products enabled us to make significant progress in our gross profits, with margins approaching 8 percent of sales compared to less than 3 percent in the prior year. What’s our vision and strategy? MGP is a much different company today than it was only a few short years ago. We may be smaller when you look at our total assets and revenues, but we’re much more focused in terms of our customers and our products. The biggest difference between yesterday and today, however, is in our future opportunity. Our vision for MGP is to be the preferred supplier of premium spirits and specialty food ingredients. We want customers who come exclusively to us for exactly what they need and when they need it. This includes | | our best innovative ideas at the formulation stage, as well as delivery of high quality finished products. In general terms, our strategy can be described as one of differentiation (high-value) versus mass market (low-cost). We strive for product and service leadership within a narrow segment of customers in the consumer packaged goods industry. In specific terms, our strategy is to concentrate our alcohol and food ingredient resources on premium market segments of custom distillery spirits and nutritional health innovations. What’s driving our new plan? Until a few short years ago, MGP’s strategy was to do what we had always done—to process corn and wheat into alcohol products and food ingredients. As such, our fortunes were greatly affected by the commodity markets. While we enjoyed several prosperous periods, we found that our successes were accompanied by periods of high volatility, and often, significantly lower earnings. The Great Recession, in our view, was the great equalizer, causing all businesses to re-evaluate their products, their customers, their costs, their capital structure and their risk profile. We were no different. The most recent profit squeeze on our historic alcohol business came from record corn prices. As a key raw material, our costs were rising faster than prices could keep up. Also, during this past year, we experienced lower volumes and margin compression in bulk alcohol sales due to higher input costs and increased market supply. However, not all of our alcohol products were producing low profits. In fact, the category of premium distilled bourbons and whiskeys remains a top performer among consumer beverages. These premium products take MGP back to its roots in the 1940s and, more importantly, they will play a critical role in our future. |
