Q2 2021 MGP Ingredients Inc Earnings Call
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Good morning, and welcome to the M. G. P ingredients second quarter 2021 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions to ask a question you may do so by pressing Star then 1 on your telephone keypad.
Please note this event is being recorded.
I would now like to turn the conference over to Mike Houston. Please go ahead.
Thank you and Mike Houston, with Lambert and company and <unk> 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 to questions. However.
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 as 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 and the company's most recent annual and quarterly reports filed with Securities and Exchange Commission.
The company assumes no obligation to update any forward looking statements made during the call. If anyone does not already have a copy of the press release issued by and 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 to <unk>, President and Chief Executive Officer, Dave 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 a discussion of progress against our strategy then we will take your questions.
Turning to the results for the second quarter the record consolidated quarterly results reflect the progress our team has made towards executing our long term strategic plan.
Sales of premium beverage alcohol increased 54, 2%, primarily driven by brown goods sales growth of 72, 8% from last year.
Was it due to both higher aged whiskey and new distillate sales.
The American Whiskey category remains robust and we continue to optimize our significant share and scale advantage to grow the business.
Integration of our recently completed <unk> acquisition remains on track, including achievement of the synergy expectations, we shared earlier in the year.
This additional platform is already improving our gross profit and cash flow generation profile and provide long term growth opportunities for the company.
We also recently announced 3 key leadership changes and David Bradshaw was elevated to Chief operating officer.
<unk> was appointed Chief Information Officer, and Erica Lappish joined as Vice President Human resources.
David a male and Erica are proven leaders and further strengthen our capability of executing our long term strategies.
We experienced record results across each of our business segments this quarter, including the solid sales growth of aged whiskey.
Better than anticipated growth for our branded spirits segment.
<unk> sales for our white beverage products as well as record results in both revenue and gross profit or ingredient solutions segment.
Each of our business segments showed top line growth over the prior year and as a result, our consolidated sales and profitability for the quarter achieved record levels.
Looking at each segment individually.
We posted another record quarter and our distillery products segment with sales, finishing the quarter up 28% to $90.3 million, while gross profit improved to $32 million or 35, 4% of segment sales.
We are very pleased with our record performance of our aged whiskey sales this quarter, representing solid revenue growth as compared to the prior year period from a diverse group of customers.
This growth and aged whiskey reflect strong pricing margins and demand as the macro consumer trends and supporting the ongoing growth of the American whiskey category remains solid.
While we are very pleased with the unprecedented aged whiskey sales year to date, our full year guidance reflects aged whiskey demand to moderate in the back half of the year and over the long term to grow in line with the overall American whiskey category.
Our diverse aging whiskey library, along with a solid sales team and our ability to support our brands' growth regardless of its size and offers a sustained position of strength over time.
White goods also posted solid growth of 22, 4% from the prior year period, primarily due to improved prices.
As for industrial alcohol products. This quarter sales decreased 35, 7%, despite improved pricing and margins.
Mentioned and our last call the decline and industrial alcohol sales was primarily attributed to reduced third party sales of industrial alcohol produced by ICP, our former joint venture partner.
We have seen additional supply enter the market during the year and we anticipate spot market margins will return to historical levels as demand also moderates over the next several quarters.
Also of note sales of dried distillers grains, or DDG decreased 31, 1%, primarily due to the need to convert from selling dry distillers grains byproducts to wet distillers grains byproduct due to the drier and today in Q4 of last year.
We expect continued comparative declines in revenue for 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 13, 1%, reflecting in part growth and the number of customer barrels aging and our whiskey warehouses and other services we provide.
Turning to branded spirits and the results for this newly created segment exceeded our expectations this quarter.
Sales totaled $60.4 million.
Primarily due to the <unk> acquisition.
Gross profit increased to $18.4 million or 35% of segment sales compared to $1 million or 38, 5% of segment sales and the second quarter 2020.
Excluding the effects of purchase accounting related to the <unk> acquisition.
Gross profit increased to $21.6 million and gross margin totaled 35, 7% for the quarter.
Of the $3.1 million impacted gross profit this quarter as outlined in the purchase accounting table in our press release $2.5 million is not expected to recur in future periods.
We are very pleased with the ongoing consumer demand for our brands as we continue to focus on improving our portfolio of profitability by optimizing gross profits and margins as well as implementing the most effective marketing mix across all of our brands.
Turning to ingredient solutions sales grew 39, 1% to a record $24.2 million, while gross profit increased to $6.4 million also a record representing 26, 5% of segment sales.
This reflects a significant increase in gross profit as compared to the prior year period.
Specialty wheat starch sales grew 38, 1% this quarter, while our specialty wheat protein sales grew 38, 9%, both primarily driven by increased volume.
We feel very good about the robust project pipeline for these products as well as our recently rebranded pro Terra line of textured proteins and remain confident that they will drive long term growth for this segment.
We believe our diverse customer base and product offering continue to be aligned with strong consumer trends and remain encouraged by the robust gross margins as a result of our strategy to focus production and sales mix on our highest margin products.
Overall, each of our business segments continue to benefit from favorable consumer trends and providing additional confidence and our long term strategy.
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, Dave for the quarter consolidated sales increased 89% to $174.9 million as a result of strong growth and each of the business segments consolidated gross profit increased 175% to $56.8 million.
Representing 32, 5% of consolidated sales due to record gross profit and each other reporting segments.
Non-GAAP gross profit increased 187% to $59.4 million representing.
Representing 33, 9% of consolidated sales.
And as noted in our last earnings call, we experienced a fire at the Atchison facility during the fourth quarter of last year, which damage free driving equipment and caused a temporary loss of production time during the second quarter.
Recorded a $6.2 million partial settlement from our insurance carrier. We are working to construct replacement driving system that is anticipated to be operational and the fourth quarter of this year.
Until the replacement system is operational however, we anticipate this will continue to affect gross profit results. We expect a portion if not all of these losses will be offset by our business interruption insurance coverage similar to the past 3 quarters, the timing of any insurance recovery. Despite best efforts is outside.
Our control and may not occur and the same period as the recognized loss.
Corporate selling general and administrative expenses for the quarter were $29.2 million as compared to $9.4 million and the second quarter of 2020, primarily driven by the assumption of Watsco SG&A expenses as well as 1 time acquisition related costs.
Consolidated operating income increased 144% and $27.7 million compared.
Compared to $11.3 million during the prior year quarter, non-GAAP operating income increased 205% to $36.9 million.
Our corporate effective tax rate was 24, 2% and the current quarter compared to an effective tax range of 23, 1% and the prior year quarter due to higher pre tax income, which less and the proportion of effects of tax credits received.
Net income for the second quarter increased 136% $20.1 billion and earnings per share increased to 91 cents as compared to <unk> 50 per share and the prior year period.
Non-GAAP EPS increased to $1.27 per share from 54 per share and the second quarter of 2020 easy.
These increases from prior year were primarily due to improved results and all 3 reporting segments.
Adjusted EBITDA increased to $42.3 million from $15.7 million, representing a 170% increase from the prior year period.
Before I move on to providing updates on our strong cash position and balance sheet I wanted to share an update on the financials related to the <unk> acquisition.
And as Dave mentioned, the branded spirits segment results exceeded our expectations with strong top line growth, especially within the on premise channel, which does not have as robust of a gross margin profile as compared to the off premise channel.
And that's more on premise establishment and fully open and reload their inventory, we expect that to slightly impact the business segment gross margins throughout the year.
Surely we remain on track to achieve the previously mentioned cost and revenue synergies of $6.4 million.
By the third fiscal year.
As well as the leverage ratio of approximately 2.5 times adjusted EBITDA and the second quarter of next year due to the strong free cash flow generation capabilities of the business.
This strong fundamental cash generating capability allows us to provide positive operating cash flows even as we invest and other parts of the business cash flow from operations totaled $35 million from the second quarter, which was up from $5.4 million last year.
During the second quarter, we also amended our existing credit facility agreement, which increased the maximum principal amount available by $100 million.
This amendment to the credit facility brings the total principal amount of $400 million.
Plus an accordion feature of up to an additional $100 million. We've also increased the shelf on a private placement facility with Prudential Global investment management, which now totals 120 million and unused capacity.
Our anticipated capital expenditures per year has increased from $43.3 million to $51.5 million, primarily due to capex related to watsco as a reminder of the approximately $31 million and total costs related to the dry replacement, we anticipate between 15 million and $20 million of that total.
And will be funded through insurance proceeds.
Our balance sheet and access to capital continues to be strong, allowing us to continue to invest to grow and drive long term shareholder value as we integrate the Lux co transaction and as such we ended the quarter with a debt balance of $274 million and a cash balance of $37.2 million.
We are offering the following consolidated guidance for fiscal 2021, including <unk> financial results.
Sales are projected to BD and the range of $570 million to $580 million.
Adjusted EBITDA is expected to be and the range of $105 million to $110 million.
Adjusted earnings per share are forecasted to be in the $2.90 to $3 range with weighted average shares outstanding and expected to be approximately 27 billion at year end.
Last year, we share some adjustments and our go to market approach and an effort to maximize profit on our brown goods sales and the time since we sold record volumes of each progress, which has in turn and helped drive record profitability for the company.
While we continue to have sufficient aged inventory to service our customers our ability to transact large volume sales of similar vintage is reduced as we've sold through menu those older barrels.
This in addition to the headwinds day, we'll share with you and enrollment is contemplated in our consolidated guidance.
Recently, the board authorized a second quarter dividend and the amount of <unk> 12 per share, which is payable on September 30 to stockholders of record as of August plan. This marks the 11th consecutive year and GP has paid a dividend before continues to be dividends as an important way to share the success of the company with share.
Holders.
So things like early day for concluding remarks. Thanks.
Thanks, Brandon now I would like to touch on some additional initiatives that support our long term strategic plan.
Although we delivered strong results for the quarter and year to date, we continue to monitor and manage 3 primary headwinds for 2021.
The first headwind related to uncertainty surrounding the potential Covid resurgence Inc.
<unk> the impact it may have on our business.
The second headwind and relates to increased commodity cost, namely higher corn and wheat costs.
As a reminder, we employ and extensive risk management program that includes purchasing the corresponding grain at the same time, we contract volume and pricing for our products.
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 to our customers and the open market.
And lastly, similar to many other businesses, we continue to experience disruptions and our supply chain, including various packaging supplies ingredients and transportation availability issues.
While these supply chain issues are likely the result of the global 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.
And of the year.
We have factored each of these headwinds into our full year guidance and continue to closely monitor each of these potential headwinds we will provide additional updates on future calls.
Turning now to our aged whiskey sales strategy with the addition of Lux goes aging whiskey and our total aging whiskey inventory amount now sits at $151.4 million at cost.
Excluding the addition of Lux goes aging inventory MVP owned inventory levels at costs are similar to last quarter as a result of putting away additional barrels to offset those sold to customers at aged sales.
This confirms our commentary during last quarter's call that we've come close to achieving equilibrium.
We will continue to make put away decisions based on forecasted sales and broader market trends negating the need to provide and M. GP owned quarterly inventory update at cost going forward.
We will continue to provide the combined aging inventory figure each quarter, but please keep in mind that this figure can vary quarter to quarter based on whisky put away levels and sales demand.
Our long term objective remains unchanged, we will continue to target adequate inventory levels to support our own brands and our customers' needs.
Branded spirits made solid progress this quarter, we expect our legacy <unk> brands will be available and all 50 states over the next 12 months.
Currently they can be found and 35 states up from just 16 states before the <unk> acquisition.
During the quarter, we also experienced an uptick and our on premise channel sales.
We expect this to continue through the end of the calendar year as more establishment opened to full capacity and reload inventory.
Going forward on premise sales may be impacted dependant on the potential of a COVID-19 resurgence.
In addition to the 3 leadership changes, we recently announced.
I am pleased with the additions to our board of directors.
<unk> and.
Hi, Clark, Tom Gerke, and Kevin Rockman, each have unique backgrounds and skill sets that enhance mvp's capabilities to further its long term growth strategy.
This new group significant M&A experience and legal and financial acumen, as well as consumer products and branded spirits backgrounds and position the company well for sustained long term growth.
Before we open the call for questions I would like to reiterate per confidence that each of our business segments remain well positioned against strong macro consumer trends and we continue to believe that our strategy will drive long term sustainable growth.
Operator, we are now ready to begin the question and answer portion of the call.
Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Mitch Pinheiro with Sturtevant. Please go ahead with your question.
Good morning.
Or is that we've mentioned.
So.
Just first 1.
Aged whiskey sales.
And very strong and the quarter and what's interesting is.
And so you said that the barrel distillate.
Similar to the last quarter.
Sure.
And to put that.
Together.
So you had really strong sales and use.
Is that right.
CMG T barrels didn't grow much in the quarter.
And getting that right.
Yes, Mitch this is Dave I mean.
What we're trying to do is.
As you know and maintain our legacy if you will M. G P owned inventory.
Levels that we feel are adequate to support future growth and the business of both.
And this particular case our customers needs.
And our brands needs.
And what we were able to do is.
Make sure that with the increased sales we had this quarter, we were able to put away enough whiskey to maintain our inventory levels at the same level. They were at the end of last quarter.
Does that makes sense, yes. It does.
Yeah, and then just staying on the ground.
The first and second.
<unk> is the Lux co.
Sure.
And balance.
And these are we going to see any any any near term fluctuation and isn't.
Net.
Yeah, the the watsco portion is.
And exclusively to support our Whiskey American whiskey brands within the portfolio and at this point, we believe that the amount of inventory. We have is adequate to support the growth of those brands.
Over time, as we anticipate those brands to grow grow well make the appropriate decisions to put away the proper amount of whiskey to support that growth as well into the future.
Okay could you.
And I'm staying on box so could you just talk about.
Okay.
There are categories, ultra premium premium value et cetera, and and the growth rates and any any.
And these dynamics that are worth calling out.
And this quarter.
Yeah I think.
We continue to see I think we've spoken before about are more focusing on.
Some key brands within the portfolio from a primarily American whiskey.
Brands as well as tequila brands and.
And we're very pleased with the growth that we're seeing and both of those categories, which would be and the premium and ultra premium part of the portfolio.
So the marketing efforts and the focus we're putting.
With the distributors and at the retail level and the consumers is paying off and those brands. So we're very pleased with that.
And as you would expect our expectations on the <unk>.
And kind of mid and value tiers of our portfolio are that those would grow in line with the overall.
Category.
<unk> for those particular price.
Price position brands.
Was there any.
Is this quarter from a seasonal and.
And I suspect there is there anything unusual about second quarter for watsco.
Relative to what we should look for and.
Third and fourth quarters.
Yeah, I think part of what we called out in the script Mitch was that we're starting to see we saw some pretty strong sales into on premise.
And as on premise accounts start to you know more fully open if you will.
And that's driven some a little bit more growth maybe than we anticipated we do expect that to continue.
Throughout the balance of the year is that the on premise channel.
Inventory loading continues and the only risk we see to that is what we called out as a potential headwind is it COVID-19.
The resurgence of Covid heats up and on premise location and start to you know.
Closed down or limit.
The amount of consumers they can allow and we do think that that could potentially impact it.
But if that if that doesn't occur we think that we should continue to see some on premise strength throughout the balance of the year.
And.
And.
Just 1 more question moving on to the ingredients solutions side.
It was it was really tremendous growth from the quarter.
And just trying to figure out you know.
30%, 40% type and price sales.
Sales growth.
And it's gotta be beyond that.
The category gross.
Is there some.
No.
How should we think about.
You know the gross rate and the next 612 months for this business as it.
Is it.
Stay at this time and you know.
High level or is there more of a category or segment gross that we should be thinking about.
Yeah, I think the growth and ingredients this quarter, 1 thing to take into consideration matches last year and Q2.
We had a cyber security event hit the company.
And it impacted our ability to produce our ingredients for about 10 days and in Q2, so that impacted our sales last year and Q2. So we're we're cycling up against that which and place the numbers of bed.
So I would not anticipate these types of you know 38, 40% growth rates.
It's not a sustainable number quarter after quarter and ingredients. It's it would be more in line with kind of what we've talked about on some previous calls that we do think this business is going to continue to grow.
But it's certainly not going to be at those growth rates over the long haul.
Okay. Thank you I'll get back in the queue.
Alright, Thanks Mitch.
Again, if you have a question. Please press Star then 1.
The next question will be from Alex Fuhrman with Craig Hallum. Please go ahead.
Hey, guys. Thanks for taking my question and congratulations on another really strong quarter here.
And would also love to get a little bit more and.
Color on what you said there about about inventory.
Covid kind of skewing the day math, they are but you know it sounds like at least and the second quarter. If I'm understanding you correctly, you're saying that you put away roughly as much as you sold out your aged inventory, so kind of reaching that.
Sort of equilibrium there.
And just kind of trying to understand if that's the case and why is and what you just reported and Q2, a repeatable fee 'cause it because it seems like the guidance for the year, which is which is very impressive either way no matter, how you slice it but it seems like Youre raised full year guidance is implying profitability in Q3 and Q4, that's about half of what you just reported.
And it for Q2, and so so just trying to understand that better you know could we see it if demand for age remains robust.
It would be kind of a new a new run rate at you and you do a better job and selling that product.
Yeah.
Alex I think the key thing to keep in mind is and we called it out and the prepared remarks, I think Brandon spoke to it.
Is.
The reason we said these were unprecedented itself is you got to keep in mind.
What we've been selling and this is I believe the fifth or sixth quarter in a row now where we had very significant aged whiskey sales is that at some point right you you're selling out of your older vintages. So the whiskeys that were put away in 2004.
15, 2016.2017 as an example.
There was limited defined amounts of that whiskey that was put away. So as we've had these strong quarters.
A lot of that whiskeys, either sold through at this point or the amount of inventory of those vintages is significantly reduced.
So that's why we're saying you know, it's it's not practical to sustain that level of growth quarter after quarter after quarter.
So that's the first part the second part is we do though every quarter right, we get to decide how much whiskey, we're gonna put away based on our read of the market dynamics and what we think the future growth of the category is going to be so in Q to Q2, we did lay down and appropriate.
Amounts of whiskey to maintain if you will or our N G. P O and the inventory levels at levels very similar to last quarter.
Okay that is that that is definitely helpful. There.
Any anything in particular that that you know you you were selling a lot of them and it sounds like you were selling the older stuff out of your your inventory and in terms of mash bills or was there anything that was and particularly high demand that you know maybe maybe you have a little bit of a hub.
And out of the hole and your assortment.
Yeah, I think it's been pretty consistent the demand for the different types of Nashville, we saw this quarter versus the last several so.
And that provides us good insight on what to lay down for the future as well, but there wasn't any 1 particular mash bill Alex that that really drove this.
Performance. It was really more kind of what I would call our our typical Nashville mix that we've been selling over the last several quarters.
Okay that makes that makes sense and then and then just kind of lastly on the topic of inventory and it sounds like from your prepared remarks that you're thinking for now is you know less goes juice is going to go into less coke brand and and <unk> inventories and do what it's been doing but obviously that is quite a portfolio.
With me that you've got with the co acquisition are there perhaps opportunities to optimize you know maybe maybe something that <unk> had that there is a you know what.
A bigger bulk market for and then maybe they would have thought or maybe something you have that you know there is greater demand and to 1 of their brands. You know curious if over time theres going to be more opportunities to optimize that hundred million dollar portfolio of inventory.
Yeah, I mean, that's our kind of what we get charged to do right is to figure out the best and highest use that drives the greatest margin return on that inventory, however, and here's the good news with the Luckow inventory.
100% of that at this point, we think we're gonna have strong enough demand on our.
American whiskey.
<unk> based whisky brands to utilize that inventory.
And again, that's going to be the highest.
Use and margin for the inventory to sell it as a brand versus bulk sales. So that's our intention at this point and we'll continue to put away.
And our Kentucky whiskey to support the growth price.
Profile of those brands that we see over the next several years.
That's great. Thank you guys very much.
Thanks, Alex Thanks, Alex Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Dave Colo for any closing remarks.
Thank you for your interest and our company and for joining US today for our second quarter call. We look forward to speaking with you again after the third quarter. Thank you.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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