Q1 2021 MGP Ingredients Inc Earnings Call
Good day and welcome to the MVP ingredients first quarter 2021 financial results Conference call. All participants will be in most of the only mode.
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Please note. This event is being recorded I would now like to turn the conference over to Mike Houston.
Go ahead.
Thank you and Mike Houston, with Lambert of <unk> Company, and GPS of Investor Relations firm and joining me today are members of their management team, including Dave Colo, President and Chief Executive Officer, and Brandon Gall, Vice President of Finance and Chief Financial Officer.
We will begin the call with management's prepared remarks, and then open the call up the 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 the projections of sales operating income gross margin and effective tax rate as well of statements on the plans and objectives of the company's business.
The company's actual results could differ materially from any forward looking statements made today due to a number of factors, including the risk factors described in the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission.
The company assumes no obligation to update any forward looking statements made during the call.
Anyone does not already have a copy of the press release issued by M. G. P. Today, you can access it at the Companys website Www Dot M. G P ingredients dot com.
At this time I would like to turn the call over the M. G. P S President and Chief Executive Officer, David Colo Dave.
Thank you Mike and thank you all for joining us.
On this call we will provide an overview of our results for the quarter updates on key financial performance metrics and.
And the discussion of progress against our strategy then.
And then we will take your questions.
We are very pleased with our continued momentum this quarter, which has again yielded record consolidated results.
Sales of premium beverage alcohol increased 31, 1%, primarily due to higher aged whiskey and new distillate sales.
As expected during the quarter, we experienced temporary softness in our ingredients solutions segment, primarily due to of natural gas curtailment that impacted approximately two weeks of production in February however.
However, we anticipate improved results in the second quarter as we have cycled past the weather related events in the first quarter.
Consolidated sales for the quarter of increased nine 3%, while gross profit increased 39, 2% to a record $32 $3 million, representing 29, 8% of consolidated sales.
Reported operating income increased 49, 6%, while adjusted operating income increased 56, 7%.
Looking at each segment individually.
In our distillery products segment sales increased 11, 5%, primarily driven by sales and brown goods, which increased 49, 3% from the prior year period.
Strong aged whiskey in new distillate sales led to these results.
Aged whiskey sales also served as the primary driver to the increase in gross margins for the period.
Our objective to optimize the brown goods profit by increasing volume share at market based pricing continued to benefit both the segment and consolidated results for the quarter.
The macro consumer trends supporting the ongoing growth of the American Whiskey category remains solid which is confirmed by the demand we're experiencing from new and existing brown goods customers.
We also experienced strong aged whiskey demand from craft distillers at the percent of our overall H sales mix during the quarter, which was more comparable to pre COVID-19 levels in relation to our national and multinational customers.
While the consumer demand for American whiskey remains robust and our diverse customer mix has positioned us well, we anticipate our growth rates will begin to normalize and come more in line with overall category growth.
Continuing on to other areas of the segment sales of premium beverage white goods declined <unk>, 3% per the quarter, while sales of industrial alcohol decreased 19, 8% with improved pricing and margins.
As mentioned in our last call the decline in industrial alcohol sales was primarily attributed to reduced third party sales of industrial alcohol produced by ICP, our former joint venture partner.
Going forward <unk> will market and sell these products and we anticipate these services will be substantially complete by the end of the second quarter of 2021 with sales for the year totaling approximately $4 million per.
For reference in 2020, we sold approximately $24 million of product for ICP reflected at the industrial alcohol revenue within our distillery products segment at low single digit gross margins.
Excluding the impact of this third party agreement industrial alcohol sales would have increased 6% from the prior year period.
We are pleased with the improved pricing and margins following contract negotiations that occurred during the fourth quarter of last year, but anticipate spot market margins will normalize and return to historical levels as demand moderates and additional supply interest the market over the next several quarters.
Sales of our distillers grains of byproduct decreased 28, 9% for the quarter, primarily due to the need to convert from selling dry distiller screens byproducts to wet distillers grains byproduct due to the drier incident in Q4 of last year.
We expect continued comparative declines in revenue per our distillers grains. This year until the dryer system installation is complete which we anticipate occurring in the fourth quarter of this year.
Revenue from warehouse services increased five 1% for the quarter, reflecting in part growth in the number of customer barrels aging in our whiskey warehouses and other services we provide.
Turning to ingredients solutions sales for the quarter grew 3%, while gross profit decreased to $4 million.
Representing 27% of segment sales.
As expected this quarter's results do not properly reflect the solid demand we continue to experience in the ingredient solutions segment.
In addition to the temporary natural gas curtailments, which resulted in loss production in February of this year and reduced margins by more than 400 basis points in the quarter. We also experienced issues with backlogs at various ports as well as shortages for shipping containers needed to deliver our products abroad.
Despite the impact of these issues had on product mix. We finished the quarter with strong sales and margins in March and anticipate improved results in the second quarter as we have cycled past the weather related events that occurred in the first quarter.
We believe our diverse customer base and optimal product mix continue to be aligned with strong consumer trends.
We are very pleased with the revenue and profit results this quarter.
Overall, both of our business segments continue to benefit from favorable consumer trends and our strategic plan has us well positioned to fully capture the potential of these trends offer.
This concludes my initial remarks, let me now turn things over to Brandon Gall for a review of the key metrics and numbers Brandon.
Thanks, Steve for the quarter consolidated sales increased nine 3% to $108 $3 million as a result of double digit growth in premium beverage alcohol within the distillery products segment.
Gross profit increased 39, 2% to $32 $3 million due to improved gross profit from the distillery products segment gross margin increased by 640 basis points to 29, 8%.
As noted in our last earnings call, we experienced the fire at the <unk> facility during the fourth quarter, which damaged feed drawing equipment and constant temporary loss of production time.
During the first quarter, we recorded a $3 $6 million partial settlement from our insurance carrier and we are working to construct the replacement drawing system that is anticipated to be operational in the fourth quarter of this year.
Until the replacement system is operational however, we anticipate this will continue to affect gross profit results. However, we expect a portion if not all of these losses will be offset by our business interruption insurance coverage similar to the past two quarters.
Please note however, the timing of any insurance recovery. Despite best efforts is outside of our control and may not occur in the same period as the recognized loss.
Selling general and administrative expenses for the quarter increased $2 $3 million to $11 8 million as compared to the first quarter 2020, primarily due to the business acquisition costs related to the the Mexico transaction.
We will incur additional transaction related costs, the majority of which will occur in the second quarter of 2021.
We anticipate fully transitioning our legacy <unk> brands into the luxe growth sales and marketing organization during the second quarter, which will be reflected in our quarterly results and reported under the newly established branded spirits segment going forward.
Operating income for the first quarter increased 49, 6% to $25 million, primarily due to strong brown goods sales within the distillery products segment.
Non-GAAP operating income increased 56, 7% to $22 $4 million exclusive of business acquisition costs related to the <unk> transaction.
Our corporate effective tax rate for the quarter was 23% compared with 24, 7% of year ago, primarily due to additional tax credits recognized as a result of the new drawing system investment.
Net income for the first quarter increased 56, 7% to $15 4 million and earnings per share increased to 90.
From 57 per share primarily due to higher operating income.
Non-GAAP EPS for the quarter increased to 101 per share from 61 per share exclusive of business acquisition costs related to the <unk> transaction.
Cash flow from operations was $17 million in the first quarter, which is up from approximately $500000 in the first quarter of 2020, reflecting the strong cash generating capability of our business.
In addition to improve the operating results. Our operating cash flows were also driven by the combination of record eight sales and reduced put away for aging whiskey inventory.
<unk> balance sheet and access to capital remains strong, allowing us to continue to invest to grow and drive long term shareholder value, we remain well capitalized with debt totaling $39 $9 million and the strong cash position of $22 6 million our capital allocation strategy continues to provide sustainable.
Growth opportunities that are consistent with our long term strategy and strengthen our position in growing markets.
Our investment in inventory of aging whiskey decreased by $6 7 million to $98 7 million at cost at the end of the first quarter.
This net decrease was driven by strong sales of aged whiskey and reduce put away of whiskey for aging during the quarter.
And we are pleased with the continued execution of this critical component of our long term strategy.
And GP is offering the following guidance for fiscal 2021, excluding <unk> financial results and acquisition related costs.
2021, adjusted sales growth is projected in the zero to 2% range versus 2020, reflecting reduced sales of third party industrial alcohol and reduced average sales prices, resulting from the selling of wet versus dry distillers grains byproduct.
The company's estimate of growth in adjusted operating income in 2021, 7% of 12%.
Which is exclusive of <unk> acquisition costs.
Adjusted earnings per share are forecasted to be in the two of five to $2 15 range with shares outstanding are expected to be approximately $22 million at year end full.
Full year adjusted EPS guidance includes the impact of 5 million shares issued in connection with the <unk> acquisition, while first quarter EPS results were calculated based on 17 million shares outstanding prior to the transactions close.
We anticipate providing 2021 consolidated guidance inclusive of Lux co. During the second quarter earnings call at which point, we will have completed the finance and accounting requirements associated with the transaction.
In light of our strategy to pursue growth through investing in our business and the recent closing of the <unk> acquisition.
Board authorized a quarterly dividend in the amount of <unk> 12 per share.
Which is payable on June 4th to stockholders of record as of May 21.
The board continues to be dividends as an important way to share the success of the company with shareholders. Let me now turn things back over to Dave for concluding remarks.
Thanks, Brandon we remain committed to the execution of our long term growth strategy.
Further building on the momentum from last year.
We recently achieved a significant milestone in our strategic plan with the completion of the <unk> acquisition in April and have begun the integration and synergy work streams necessary to optimize our combined business, while setting ourselves on the path for anticipated future growth.
The newly combined company will greatly expand our portfolio of higher value added branded spirits from coast to coast.
We now have three business segments that are uniquely aligned with strong consumer trends, which we believe will create long term and sustainable shareholder value.
I wanted to provide additional context around the guidance Brandon shared as it relates to the legacy parts of our business from the full year.
While we are off to a strong start to the year, we remain mindful of the market factors associated with our overall business in particular of the market factors associated with our ageing brown goods products.
We have learned the past several years that there can be significant variability in our customer demand patterns for these products based on a number of factors, including the lack of forward visibility to customer demand as most of this product continues to be sold on a spot versus contract basis as.
As we stated earlier, although we experienced significant growth in each brown goods revenue and gross profit in the quarter well ahead of the historical growth for the broader American whiskey category, we anticipate our growth rates will moderate over time and be more in line with the overall category growth.
This is factored into our guidance for the full year as we continue to execute our long term strategic plan.
Inventory of aging whiskey at quarter end declined $6 $7 million from the fourth quarter to $98 $7 million at cost.
Selecting strong sales of aged whiskey and reduced put away of whiskey for aging.
We are very pleased with the continued execution of this critical component of our long term strategy and we believe we have reached a point of equilibrium recognizing that this is a dynamic versus static state.
We will continue to evaluate our aged whiskey inventory and put away levels on an ongoing basis with the objective of carrying adequate inventory levels of various ages and mash bills to meet projected customer demand and the demand of our branded spirits segment.
Our library of various mash bills and vintages has truly enable the MGE to provide additional value to customers, while contributing significant levels of profit and cash flow for the company.
Although we delivered strong results for the quarter, we continue to experienced two primary headwinds for 2021.
The first headwind relates to increased commodity costs.
As you may be aware during the past several months there have been significant increases in corn commodity exports from the U S as well as downward revisions to 2020, corn crop yields and stocks, resulting in higher corn and wheat costs.
As a reminder, we employ an extensive risk management program that includes purchasing the corresponding grain at the same time, we contract volume and pricing for our products. However.
However for various reasons, we do not contract 100% of ourselves and as a result, we cannot provide assurance that we will always be able to price through increases in commodity costs are.
Of our customers in the open market.
Second like many other businesses, we are experiencing disruptions in our supply chain.
We continue to experience transportation availability issues, both domestic domestically and with backlogs at various ports as well as shortages for shipping containers needed to deliver our products abroad.
While these logistical issues are likely the result of the global supply chain disruption caused by the COVID-19 pandemic. It is unclear how long these delays and issues will persist.
However demand for our products remains robust and we believe our business continues to be well positioned to mitigate these challenges through the balance of the year.
Our focus on continually refining the effectiveness of our tactical execution.
The accelerating the pace of our strategic implementation and leveraging the strong foundation. We have built has positioned <unk> for sustainable long term growth.
That concludes our prepared remarks, operator, we are ready to begin the question and answer portion of the call.
As you may have.
We will now begin the question answer session task of question in the press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys so low.
All of your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yes.
Our first question today will come from Alex from <unk> with Craig Hallum. Please go ahead.
Great. Thanks, very much for taking my question.
Wanted to ask about the implications of.
The <unk> acquisition to the numbers I know it's tough.
From where you're sitting right now to really give a firm projection for 2021, including lack of co. But can you kind of help us out of it given that it is.
We're going to have a really significant impact on the numbers.
What would it have added in the last three quarters of the.
2020, just any sort of kind of base case or historical training off of.
What what <unk> has done in terms of topline and EBITDA contribution.
It would be really helpful. As we think about our models.
Yes, Alex this is Brian interest of all thanks for the question.
I'm happy to provide some clarity where I can.
So.
The fee the point back toward us.
As the Investor presentation, we released in January when we announced the luck stretch transaction.
Yes, there are some of them.
The financials shared at the time.
On a adjusted unaudited basis.
For 2019, but also on an LTM basis as of October 2020.
That should be free directional I think from what youre trying to accomplish.
We'll share also debt.
Yes.
Now moving on wanted the integration of Watsco.
Still run the traps on the numbers as.
We mentioned already the threat.
No surprises.
And things are.
Progressing along very nicely on that front.
Great that's really helpful.
And then just as we think about the sales of aged whiskey and and.
This is really now.
<unk>.
Three quarters in a row that debt you've had good success in selling the aged whiskey and you mentioned that it's hard to really forecast what that demand is going to look like in the future of immediate there of sense that given that the demand is strong right now that we could continue to see strong sales of it this year as long as the demand is.
There.
Anything you can kind of tell us about your current yes, I know theres not so much visibility multiyear, but at least looking out over the next couple of months is that is that kind of what you've been seeing any any direction there would be helpful.
Yes, Alex this is Dave.
Yes, we have experienced.
Really strong demand for our aged whiskey as you mentioned the last three to four quarters Q1, as well, obviously, a very strong quarter.
We.
The best indication that we have that we keep trying to guide to is the fact that we think over time our growth rates should be pretty much in line with the overall American whiskey category growth rates.
We recognized the quarter to quarter, our growth could be above or below that as evidenced by what we've seen here in Q1.
But as we look forward, that's kind of the guidepost we references.
<unk>, we think that is the American whiskey category grows that's where we would expect our growth rates to be in line with.
Also if you look at our inventory position and we spoke to this in the prepared remarks.
We feel like we've we've pulled down our inventory levels of our aged put away. The last year, we filled the level that we're at now is a pretty good level and I would say, it's kind of at the level of equilibrium meeting on a go forward basis.
We would look to put away.
The amount of whiskey based on what we think our forecasted demand is going to be within that given year.
So we feel good about that we think our inventory positions are much more balanced today.
Then they were a year ago, and we will continue to put away whiskey again based on what we think our projected demand going forward will be.
Sure that makes that makes sense.
Thank you and then my last question.
Of the ingredient solution side of the business, that's been a really top performing segue.
Segment for for a while now and it sounds like from your prepared remarks that the demand from your customers for your offerings remain very strong and there were some reasons why we didn't kind of see that in the numbers. This quarter can you talk a little bit more about that and when we should start to see.
Reported results start to start the match, what youre seeing in terms of customer demand.
Sure, Yes, I think in Q1.
We kind of gave a.
The.
The forecast of this in our Q4 call. We had the in the month of February we lost about two weeks of production in our ingredients business due to the cold weather that came through the Midwest. Our natural gas supply was curtailed which resulted in us needing to shut down operations through that period as we restarted operations.
Got into March we had a very strong March both from a top line and the gross margin performance more in line with what historically, we've printed all of that business last year and as we go into Q2 of the balance of the year, we still are having very strong demand.
Would expect.
The business too.
Similar gross margins to what we've been reporting in the prior year. So we're still very confident in that business, we have cycled past the weather related events in Q1.
And feel like we're back on track for the balance of the year.
That's great thanks very much.
You bet.
Our next question will come from.
Bill Hull.
Sure of Securities.
Please go ahead.
Thanks, Good morning, good morning.
Bill.
Just I guess first kind of question on the the.
The guidance and especially on the distillery business and your kind of commentary of it growing in line with the report in line with the category I guess, one can you kind of quantify how much.
The the and you might have already done this.
The.
The white goods issue I mean, the switchover.
How much of that impact is on this year.
And then two I'm, just trying to kind of more.
More importantly.
Couple of the statements because you would think of your selling aged inventory.
On a regular basis, which has a significantly higher price point and transaction value then.
The new distillate that you should you still should grow faster than the category until you are kind of out of it.
Of the product or cycled through that so help me understand why you would only grow in line with that if you are still selling age for the foreseeable future.
Yes, Phil this is Brad and thanks for the questions first.
First of all on the switchover.
The the total sales of ICP, which of the third party contract facility that we started the partnership with last year.
Around $24 million in total and that of hits, our industrial alcohol product line. This.
This year, we expect to the finished selling by the second quarter of this year and we expect the total to be somewhere around $4 million in total sales for 2021.
As it relates to your broader question, which is a really good one.
The.
Sure.
As Dave mentioned there is variability.
And gravity that within the next day is pricing as you correctly pointed out for age is much greater the new distillate.
And then as we sell 123 and four year old theres different pricing.
Yes.
For each of those as well so as we cycle over quarters, we may sell a lot of H, one quarter, but even more than we did the prior comparative quarter, but if it's a different.
We signed more than one year old vs. Four year old it may not have.
You would think would be the desired result.
From inside of that much more volume so it's not that straightforward.
What we do know is that we've seen four of five straight quarters now of extreme demand for brown goods specifically for age.
Sure.
In.
There are underlying trends that would indicate that that can continue but as we know there could also be as we've experienced some variability to that business just due to customer volume patterns that we've discussed.
So just to follow up debt. So your guidance for the remainder of the year of just assuming.
There is no further aged sales and net debt would just be upside in the or that or are you thinking that the.
The the aged sales are front end loaded this year and you'll see it kind of a lesser amount as we move through the year yes.
Yes, it's probably more of the latter bill.
So R R.
As we put together of the guidance. This early on in the year, especially after coming off a strong quarter of strong few quarters range. The few actually.
Go back and look at the last three quarters. It is a little bit more frontloaded, but for the full year.
We do have our total ground sales growing closer in line with the category.
Got it.
And then second question can you give us any update on on at least top line trends for Lux go for the first quarter.
Continue to to grow of there've been the issues anything we should be thinking about.
Yes can't share a lot on the first quarter at this point.
And believe me the stock because I don't want to we've been working on this for a long time, we're really excited about the deal.
We can't wait to share more with you in Q2.
What I will share is what I already mentioned a little bit the Alex is that we have not seen any surprises.
Since January.
That would make us feel differently about the numbers, we share it at that point in time, which again ourselves.
<unk> still on our website and available.
But we do have to the finish line the traps.
And put together.
The required.
Accounting, that's necessary to really provide more important guidance, we hate the.
One of the a little bit ahead of ourselves now only to have the slightly or revise out at all of the quarter from now we just want to be prudent in our approach and that will be as clear as possible with you and the investors from the times right.
Got it and then.
Last two questions sorry.
One going back to the Brown spirits, Inc.
It seems that.
The kind of conversion over the past year of how youre viewing the age has been from.
Creating an asset that you can sell for top dollar to creating a library.
For your customers to shop whenever they want and I didn't know if that is having a negative impact on kind of.
New distillate because now of your customers can see like look we can buy on consignment and just buy it in three or four years, we don't need to buy it upfront if that's having an adverse affect near term or expected to on your kind of new distillate business.
Yes, I think.
We still sell a lot of new distillate and a lot of those customers are on a contract basis.
Thank you know through the the last I'd say three to four quarters in the as the result of COVID-19 I think what we've seen is that the brown goods at particular on aged in the last two to three quarters, we've seen the craft distillers.
And of come back into the AG market in a pretty significant way and now they are back in line with kind of their historical.
Buying patterns, if you will bill so I think long term, we still view the kind of the balance between the age to new.
<unk> to be in line with what we've seen over the last three years to four years.
That's something that we evaluate literally quarter to quarter and obviously it also influences how much MBT and GP of inventory we put away.
But at this point, we still sell a lot of new distillate, we expect that to continue.
And we also expect to see some pretty good growth patterns in the H side of the business as well.
Got it last question from me just the insurance settlement in the quarter didn't know whether that I think thats included in the in the in the numbers.
And then your full year guidance I could be wrong, and just didn't know where the.
Gross margin or if the fill in SG&A just any clarity there would be helpful. Yes. Thanks for doing the object clarify that bill yes. So we did recognize the partial insurance settlement of around three.
Three of five $3 $7 million in the quarter that is treated as a reduction of the cost of goods sold so it will hit the gross margin.
The actual receipt was closer to $8 5 million.
The difference we have on our balance sheet until we because of <unk>.
A portion of that.
We're going to go towards different areas.
It's more of a business interruption or whether it's sort of the driver replacement itself. So all of it until we get more clarity and get closer to the edge, if not or even complete the replacement driver system.
We are going to keep that on our balance sheet just to be conservative in that recognize the one when we have more visibility and clarity.
But the $3 seven.
As in the non-GAAP EPS for the quarter and then in your full year guidance of 2% to 215 nine years that correct. It's actually yes from the GAAP reported.
For the quarter, because we did receive and recover it in the quarter.
Yes.
We are factoring of that for the year, we are going to offset.
The majority of if not all of our business interruption index.
The insurance, okay, great. Thanks perfect.
Thank you.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to Colin for any closing remarks.
Thank you for your interest in our company and for joining US today for our first quarter call. We look forward to talking with you again after the second quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.