Q3 2019 Earnings Call
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Each until good morning, everyone and thank you for joining the MGP ingredient.
Conference call and webcast [laughter], Denise financial results for the third quarter 2019, [laughter] I'd like Houston with Lamberton company and U.P., the Investor Relations firm and joining me today are members of their management team, including Gus Griffin, President and Chief Executive Officer and brands.
In call Bye bye.
Right Yeah.
He financial officer.
We will begin the call with management's prepared remarks, and then open the call to question. However, before we begin today's call. It is my responsibility to inform you that this call may involve certain forward looking statements.
Such as projections of sales operating income gross margin and effective tax rate as well statements on the plans and objectives of the company's business.
How many <unk> actual results could differ materially from any forward looking statements me.
Today due to a number of factors.
Including the risk factors described in the company's most recent annual and quarterly reports filed with us.
Securities and Exchange Commission.
Updates on key financial performance metrics, and a discussion progress against our strategy.
Then we'll take your questions.
No I work turned to the results for the third quarter.
Well the overall American whiskey market remains robust and our position within that market is still very strong timing and volatility of customers orders continued to be a challenge this year.
As in previous quarters this year.
We saw a forecasted orders delayed due to customer funding issues and their desire to do by purchasing as long as possible.
These issues have affected sales are both new destroyed and aged whiskey inventory throughout the year.
Despite this we did have a very strong quarter for sales of aged whiskey selling both more whiskey in order whiskey as customers continue to need our inventory to launch new brands.
Drill holes in their inventory and support brand acquisitions.
We believe these customer needs will be ongoing.
Well, we are behind you weren't where we'd like to be at this point in the year, we're off to a strong start to the fourth quarter and we're confident in our line of sight to sales required to deliver against our full year guidance.
Looking at each segment individually.
In our history products segment sales for the quarter were down 6.4% to $73.3 million.
While sales of age do whiskey were very strong this quarter sales of new distillate declined for the quarter.
In addition to funding issues in timing delays.
Of our existing customers reduced orders versus the prior year to worked crew temporary excess inventory situation.
We do not believe these changes in short order patterns or any indication a weakness in the health of the overall industry or our customers businesses.
Projecting out whiskey needs for a more years into the future isn't on certain science and sometimes corrections are needed.
Well the decline in new destroyed drove down sales or total brown goods for the quarter.
We continue to realized pricing intertwined with our expectations from both new discovered and aged whiskey.
Segment gross profit declined slightly to $15.9 million, while gross margin improved to 21.7% of segment sales, reflecting the impact of more high margin aged whiskey in this segment sales mix.
The strength of our age sales this quarter highlights both the demand for age whiskey and our unique ability to meet that demand.
The demand for age whiskey is driven by our customers desire to bring new brands to market sooner fill holes in their inventory for their existing brands and support their growth aspirations for brands they acquire.
Our investment in building, a large and broad why Barry waged whiskey has his wealth is positioned to meet those needs.
And while we experienced some delays.
Earlier in the year, we're now seeing the type of demand we anticipated when we initiated this investment.
Our decision in 2015 to begin investing in putting away whiskey for aging was a key part of our long term strategy.
While we are now starting to see the sales piece of this strategy ramp up it is important to understand the success of this strategy today in terms of customer recruitment and financial return.
We believe our willingness to make significant.
Sure strategic sales whitely, aged whiskey over the past few years has been instrumental and the development of our large and diverse customer base and we have achieved pricing in wine, where three X model as we have executed this strategy.
Yeah.
Our age whiskey inventory has us well positioned to meet future demand.
We now believe that other than what is reserved to support the future growth of our own brands. We will have very minimal 2015 vintage inventory remaining at the ended the year.
We're also confident the any remaining inventory from that year, we'll continue to increase in value.
As we've said all year.
Sales of aged whiskey will be the key determinant of our ability to deliver against our full year guidance.
And that continues to be the case.
We are confident in our line of sight to those sales.
As we have either trend Zach did sales or art advanced discussions with specific customers for specific inventories for those required sales.
We also continue to focus in the long term working to improve our position in the market by constantly recruiting new customers strengthening our relationships with existing customer numbers.
And expanding our geographic sales coverage.
We are doing an outstanding job recruiting new customers for our new just do it and aged whiskey offerings, adding more new customers this quarter than both the year ago period and last quarter.
Recruitment is key to our long term growth.
Ensuring we're exposed to all segments of the market.
And we believe we now support over 300, new disk to it and aged customers.
We also work hard to devolve long term relationships with our customers and we will route we recently signed a new multiyear new distributor imply agreement with one of our largest existing customers.
We're also beginning to see sales results from our earlier investment to expand our international sales coverage.
We continue to view this as a key area for long term growth and have now added a second dedicated sales manager to support that effort.
Continuing on to other areas of the segment.
Sales of premium beverage white goods increased 4.3% for the quarter with margins holding about even with the prior year period.
Sales of industrial alcohol decreased for the quarter down 5.5% with margins compressing slightly.
Both of these markets continued to be hyper competitive in the chronic oversupply dynamic in the industrial market still exist. We expect the situation to continue for the foreseeable future.
Sales of dry distillers grains, or DDG increased 12.4%, reflecting short term micro factors our outlook for DDG pricing continues to be based on the unchanged macro environment that led to lower pricing in the first quarter of 2017.
Revenue from warehouse services increased 12%, reflecting in part.
Growth in the number of customer barrels aging and our whiskey warehouses and other services we provide.
Turning to ingredient solutions.
Sales grew 4.2% to $17.4 million, while gross profit declined to $2.9 million or 16.6% of segment sales.
We're very pleased with the overall progress in this segment as we achieved double digit sales growth in both especially due to weak starches and proteins.
While continuing to cycle the loss of a large customer for our true text textured specialty we protein product at the end of last year, we continue to recruit new customers for this product and remain confident that it will be a driver of long term growth.
We also saw strong growth in our rise specialty we protein product line this quarter.
This product is used to increase protein and bakery and pasta items.
Targeting consumers, who want to add more protein to their diets, while reducing their carbon take.
This product line is also aligned with the clean label trend, allowing food manufacturers to improve texture and shelf life without adding chemical preservatives.
The FDA approval of our fiber shim in fiber right specialty we'd starches also removed a major barrier to the growth for this product line and we're now seeing its potential.
These products are ideally suited to help brands develop a healthier food offerings delivering high fiber content, while lowering carbs.
In line with increased consumer interest in the Quito diet.
Overall.
With our business segments continue to benefit from favorable consumer trends, we continue to see strong demand and pricing for our products and remain very confident encouraged about the long term outlook.
This concludes my initial remarks, let me now I'll turn things over to branding goal for review of the key metrics in numbers Brandon.
Thanks, Skus for the quarter consolidated sales decreased 4.6% to $90.7 million, reflecting a decline in our distillate product segment, partially offset by an improvement in the driven solutions segment consolidated gross profit decreased 4.1% to $18.8 billion as a result of gross.
Profit declines in both the ingredient solutions and distillery product segments.
Consolidated gross margin increased approximately 10 basis points to 20.7% of sales up from 20.6% in the prior year quarter.
Corporate selling general and administrative expenses for the quarter for $7.2 million down 5.2% versus prior year.
The decrease was due to lower personnel costs, including reduced accrual for incentive compensation based on your today performance.
And other cost saving initiatives.
This was partially offset by increased costs related the company's agreement to pay a $1 million fine and and administrative civil penalty of $251000 in connection with the chemical release incident and Thats in Kansas in October 2016.
Excluding the resolution of those legal matters, we remain focused on effectively managing these costs, while still investing to grow.
Consolidated operating income decreased 3.4% to $11.6 million compared to $12 million during the prior year quarter.
Primarily due to a decrease in gross profit and both the ingredient solutions and disability product segments, partially offset by the decrease in the previously described SDMA expenses.
Our corporate effective tax rate for the quarter was 26.9% compared with 22.9% in the year ago period, the increased rate as compared to the prior year period was primarily due to the discrete tax impact or they previously described resolution of certain legal matters.
Net income for the quarter decreased 8.8% to $8.2 million and earnings per share decreased to 48 cents.
These decreases from prior year results were primarily due the decrease in operations and the change in income tax expense as earlier described.
We discussed the strong fundamental cash generation capability of our business, which allows us to provide positive operating cash flows even as we invest in our inventory of aging whiskey.
In the third quarter cash provided by operations was $9.3 million one driver of cash provided by operations was the reduction in accounts receivable during the quarter, reducing our ratio of day sales outstanding.
While we have seen a gradual reduction year to date of days sales outstanding. We expect this will ebb and flow through the growth and evolution of our business and our customers, particularly as we develop longer sales histories with craft customers, new relationships with export customers and new long term supply agreements such as the one Gus just mentioned.
During the period, we also invested a net $9.7 million toward growing our barrel disciplined inventory for aging to meet the needs of our ever growing and diverse mix of customers.
Capital spending remains a key way we support our business growth plans, we have reduced our expected cap total expenditures in 2019 to approximately $19.5 million due to the timing of certain projects within the warehouse expansion program.
Despite this change in timing we continue to expect is 51.8 million dollar warehouse expansion to be completed during 2020.
Mgps balance sheet remains strong, allowing us to continue investing in our growth and drive long term shareholder value. We continue to have very good access to capital as of September Thirtyth 2019, $149.5 million remain available under the $150 million revolving credit line our capital allocations.
Strategy remains consistent with prior quarters and years as we continue to build our age whiskey inventory expand warehouse capabilities and contemplate possible M&A opportunities that are consistent with our long term strategy.
Recently, the board authorized a third quarter dividend in the amount of 10 cents per share. The board continues to do dividends as an important way to shed success of the company with shareholders.
MGP is confirming the following guidance for fiscal 2019.
2019 sales growth is projected in the mid single digit percentage range versus 2018 2019 gross margins are expected due to increased modestly as compared to 2018.
The company's estimate of growth in operating income in 2019 is 10% to 20% inclusive of the previously described resolution of certain legal matters.
2019 effective tax rate is forecasted to be approximately 19% and shares outstanding are expected to be approximately $17 million at year end.
Earnings per share are forecasted to be in the range up to 55 to 275.
Let me now I'll turn things back over to focus for concluding remarks.
Thanks, Brandon now I'd like to touched on some additional initiatives that support our long term strategic plan.
Our long term strategy has us well positioned in the market and aligned with strong macro consumer trends, we continued to make the necessary investments to deliver long term growth.
We continued to expand our warehouse capacity during the quarter, bringing our total spend to date on the project to approximately $46.4 million of this $51.8 million budgeted for the project.
As Brendan mentioned, we also invested an additional $9.7 million in our aging whiskey inventory.
This brings our inventory of aging whiskey to $95.2 million at cost we remain confident in the long term value of this inventory and its ability to meet the needs of our ever growing in diverse mix of customers.
While we will be selling aged whiskey from this extensive library of inventory we plan to grow the value of this inventory add cost through.
2019.
We remain confident in both the demand and pricing for our aged whiskey as well as our plan for maximizing the long term economic value.
We continued to progress our brands initiative.
And are pleased with the strong gains we have made in our current markets.
As a result, we're now beginning to expand into additional markets with the addition of Connecticut, Maryland in Washington, DC. This month.
We're seeing strong consumer acceptance of our core portfolio and great anticipation for our limited edition offerings that will be released next month.
While we are not where we'd like to be in terms of year to date operating income growth, we are confident and our ability to achieve our full year guidance.
Both of our business segments continued to be aligned with strong macro consumer trends and our strategy has us well positioned for longer term growth that will drive superior long term shareholder value.
Operator, we're now ready to begin the question answer portion of the call.
Thank you we'll now begin the question and answer session to ask a question you May Press Star then one on your touch time fine.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then say.
At this time, we'll pause momentarily to assemble a roster.
Your first question comes from Alex Fuhrman, Craig Hallum Capital Go ahead go ahead. Please.
Great. Thanks for taking my question guys. My first question I guess is is the reiterating.
The full year guidance, I mean that that would imply.
Pretty nice double digit increase in sales here in the fourth quarter, along with a really nice increase in gross margin. Just wondering what you can tell us gas about about your confidence in that I mean, it sounds like you view, but transacted. Some some sales already here in October on can you give us a sense.
How much of your anticipated Q4 sales has already been transacted in and for the sales that you anticipate for the rest of the year.
Again can you just give us a sense of what what gives you the confidence that we're not going to see this pushed out another quarter or two or these maybe larger customers are customers you've had a more long standing relationship with just anything you can tell us about that would be helpful. Sure.
As opposed to after the second quarter. When we gave you. The you had the percentages by how much had been transacted and how much we're in discussions with an how much you had been targeted with we've progressed that quite quite a bit in so now we're really down to about a dozen customers that we're dealing with we are an active.
Ongoing discussions with them.
Specific customers for specific inventory to deliver those sales the majority of them the vast majority of our existing customers.
We don't need them all to come through.
And we feel we're so we feel very good about that outlook and that's why we're so confident in our ability to reconfirm our guidance.
Okay. That's helpful. And then just kind of looking at the last three years mean, assuming you hit those numbers me Q4 revenues at the percentage of annual sales will look we'll have gone from about 25% in 2017 is about 28% last year to probably more than 30%. This year is given that that's such a big.
You have to mean is there something about just the nature of customer purchasing that that would lead us to believe that that trend will continue or at least continue to be that that Q4 is is the most important quarter.
Well I think it's as we said we were did this is a.
And knew us, adding structured and unstructured market in taking this level of inventory age aged whiskey inventory to the market, which something nobody ever done. So certainly we got off to a little slower start than some people thought we would we weren't sure. How this would fall out in terms of a quarterly basis.
And now in the third quarter, we saw.
Sales more reflective of.
Our.
How we thought it would go once when we started making this investment so we see a diverse mix of customers was very similar needs they need it because they want to launch brands they needed because I need to fill holes in their inventory and they needed because they want to support their growth aspirations for brands that have acquired so we're seeing.
Very similar needs that we have always been there. It is just the simply the timing of our customers.
Demand to fill those needs at this time seems to be skewing to the back half of this year.
Don't know that is any indication that year after year. After year, we'll continue to be the back half I think it is more it just happens to be coincidence that the customers diverse customers with similar needs or are feeling that need now and I also think as our sales of age. It picked up it is certainly a heightened our country.
Summers sensitivity to the scarcity of this very valuable inventory.
Okay. That's that's really helpful guys. Thanks for that and then just as lastly, if I could ask about the big increase in in barrel distillate inventory here in the quarter I mean, it looks like that's that's really the most you've ever put away in any single quarter since you've been with the company. It just kind of get a sense of how much of that is.
Targeted investment to be selling 345 years down the road versus maybe just some of the new distillate sales you were hoping to get in the store third quarter Didnt materialize and so they're just technically on your balance sheet in September .
No, yes, we sit at the beginning of year and think about how much we want to put away.
Strategically a lot of things impact the actual quarterly put away you've heard us talk in the past about what mashed goes we're running we put away serve our our core standard mash bills. So we're in depending on what we're running that can have impacted and then certainly you what you're seeing is a net number.
Sure so depending on sales sales versus the actual number barrels we put away reflect impacts that net number you're seeing we again, we've said we're going to grow it through 2019, we feel very good about the level of inventory, we're putting a way to support future growth. So I wouldn't read anything.
Into a quarterly number I will read into our our long term intentions.
Okay that makes sense, thanks very much.
Thank you once again, if you do have a question. Please press Star then one on your fine.
This concludes todays question and answer session I would like to turn the conference back High Bay tickets question for any closing remarks.
Thank you for your interest in our company and for joining US today for our third quarter call. We continue to make progress towards implementing our long term strategic plan and remain confident that it will provide us the resources, we need to deliver growth in 2019 and beyond we look forward to talking with you again after the fourth quarter.
Thank you see that could come France has now concluded. Thank you for attending today's presentation. You may now disconnect.
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