Q2 2022 MGP Ingredients Inc Earnings Call
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Good morning everyone and welcome to the mgp ingredients. secondction quarter 2022 financial results conference call.
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At this time. I'd like to turn the floor over to Mike Houston of lambert.
Sir Please go ahead.
Thank you. I'm Mike Houston with lambertden company mgp's Investor Relations firm, and joining me today are members of their management team, including Dave colo, President and Chief Executive Officer, and brand gul, Vice President of finance and Chief Financial Officer.
We'll begin the call with management's prepared remarks and then open the call up to questions. 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 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. Additionally, this call will contain reference to certain non-GAAP measures which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K.
If anyone does not already have a copy of the press release issued by mgp today, you can access it at the company's website W mgp ingredients com.
At this time. I would like to turn the call over to mgp's President and Chief Executive Officer, Dave colo Dave.
Thank you Mike, and thanks to everyone for joining the call today.
On this call. We will begin with an overview of our performance for the quarter ended June thirtieth, twent y and 22, provide updates on key financial performance metrics and discuss the progress we have made against our strategy.
At the end of the call, we will open the line for Q a.
Turning to review of our performance during the second quarter, we made meaningful progress towards executing our long-term strategic plan and remain encouraged by the demand for our products across all business segments.
Consolidated sales for the quarter increased 11% to $195 million. Gross profit increased 4% to $59.2 million, representing thirty point 4% in sales.
Reported operating income increased 28% to $35.3 million.
In our distilling solutions segment, we continue to experience strong demand for new distillate and aged whiskey.
This momentum continues to contribute favorably to top line growth, with a 29% increase in Brown Wood sales for the quarter versus the prior year quarter.
As for our branded spirits segment, consumer demand for our premium plus brands, which includes premium, super-premium and ultra premium spirits brands such as yellowstone, remus and elneor, also remains strong and continues to drive gross margin expansion.
Our ingredient solutution segment continues to execute at a high level and during the quarter, achieved record results.
Further optimization of the segment product mix to align with consumer demand trends resulted in a 21% increase to segment sales compared to the prior year period.
Looking at each segment and greater de tell.
We posted another strong quarter in our distilling solutions segment, with sales increasing 19% to $107.1 million.
Gross profit for the quarter decreased to $29.8 million, or 28% of segment feales.
The decline in gross profit can be attributed primarily to the impact of increased commodity and natural gas costs and additional supply enterning the markets for our industrial alcohol and white good offerings.
These factors were consistent with our expectations for the quarter.
We continue to benefit from strong demand in each of our customer categories for browngoods.
Our diverse-aged whiskey library, coupled with the season sales and customer service team and the team's high level of execution, continues to support the segment's growth trajectory and has enabled us to maintain strong pricing and margins.
Sales of new disillate also posted strong growth during the second quarter.
This growth was attributed to an increase in demand compared to the prior year quarter.
Our significant market share and scalelet advantage continues to position us well to support ongoing growth in the American whiskey category.
As discussed during our call last quarter, demand for a to whiskey continues to be very strong.
We will continue to be strategic with our aged whiskey sales to enable us to meet expected customer needs for the balance of this year as well as position us to meet anticipated customer needs in the coming years.
Turning to white goods sales creates 4% versus the prior year quarter.
The decline was primarily due to lower volumes for our whitegoods premium beverage products.
Similar to last quarter, our industrial alcohol product sales decreased 13%.
The decline in industrial sales was in part attributed to reduced third-party sales volume of industrial alcohol produced by icp, our former joint venture partner.
Consistent with last quarter, we expect margins for both industrial alcohol and white-goodits products to remain on levels in the low single digits and, in some cases, to incur negative gross margins.
This is a result of additional supply during the market and its anticipated impact on profitability, as well as increased input costs, primarily foren and natural gas costs.
We continue to focus on migrating away from industrial alcohol and toward our white woods premium beverage products, whose customers historically, are longer-term in nature and pricing is less susceptible to white swings.
Turning to branded spirits, sales total $58.6 million for the quarter, a decline of 3% versus the prior year quarter.
While our premium plus brands performed well, we experienced a decline in sales driven by lower volumes in the mid and value price points categories.
Even with a slight decline in sales versus the prior year quarter, gross profit increased to $21 million or 36% of segment sales.
The increase in gross margin can be attributed to the favorable performance of our higher-margin brands, to a requred nonrecurring accounting step-up in the prior year period.
The branded spirit segment remains focused on improving our portfolio profitability by optimizing margins through expansion and innovation in the premium-plus price categories.
We remain committed to successfully executing our premiumization strategy and'll continue to invest in marketing support to achieve sustainable and profitable growth for our brands in this category.
Evidence of our commitment can be seen on larger media buys, resulting in television commercials, increased social media presences and the use of key influencers to drive brand awareness for our premium-plus brands.
Our strategy is simple: grow profitability through leveraging the expansion of our premium-plus brand portfolio, with particular focus on tekkea and American whiskey, both which continue to expand around the globe.
Turning to ingredient solutions, sales for the quarter increased 21% to a record of $29.3 million.
Similar to last quarter. The increase in sales was primarily due to higher average selling prices of specialty wheat starches and proteins.
We are pleased with the progress we have achieved in this segment to date.
We are confident that our extensive project pipeline for these products, along with further optimization of the segment product mix to meet our customers' needs, will drive long-term growth for the segment.
An example of this will be seen in the second half of this year, as we launched our protera brand into a new channel of distributionselling to colleges and universities further use in their menus as a clant-based meet alternative.
Before I turn the call over to granded, I want to reiterate how encuraged we are by our diverse customer base and our product offerings continuing to align with consumer trends.
Our robust gross margins and ability to execute against our long-term strategy continue to provide us with the momentum required to achieve our fiscal 2022 goals.
This concludes my initial remarks. Pl me now turn things over to Brandon. Call for a review of the key metrics and nums. Brandon, thanks Dave. For the second quarter 2022, consolidted sales increased 11% to $195 million as a result of sales growth in the distilling solutions and ingredient solutions segments.
Gross profit increased 4% to $59.2 million.
Chris margin decreased 30%.
As day mentioned earlier, we remain committed in making investments in marketing as part of our premization strategy.
As such, our advertising and promotion expenses for the second quarter of 2022 increased $2.7 million to $6.1 million as compared to the second quarter of 2021.
Primarily driven by incremental inestment in the ultrapremium, super-premium and premium priced here in our branded spirit segment.
Corporate selling, general and administrative expenses for the second quarter 2022 decreased $7.9 million to $17.9 million as compared to the second quarter of 2021, primarily due to the onetime acquisition cost in two and 21 related to the luxtwo acquisition that did not recur in 2020 -two.
Operating income for the second quarter increased 28% to $35.3 million, primarily due to the increas in sales and gross profits and, as previously discussed, the reduction in na. Adjusted operating income decreased 4% from $36.9 million due to the increased investment in advertising and promotion in support of our brand spirit segment.
Our corporate effective tax rate for the second quarter two and 22 was 22 point four percent, compared with 24 pointy-two percent from the year ago period, resulting from vorable tax benefits concerning our capital spend and foreign operations.
Net income for the second quarter increased 26%: $25.4 million. Basic and diluted earnings per shareincreased to $1: 15 cents per share from Ninety one cents per share.
Basically ded. Adjusted EPS decreased to $1- 15 cents per share from $1 in 27 cents per share.
Adjusted EBITDA for the quarter was $40.1 million, a 5% decrease from the year ago, perioddriven primarily by increased advertising and promotion expenses for our premian-plus Tier spirits brands.
As well as increased combded costs specific to industrial liicages to alcohol in the price elasticity resulting from the additional supply that is these markets.
Additionally, relative to the prior quarter, our input costs per corn increased FIF be 4%, we F increased 23% and natural gas increased 70 form percent.
Although the average selling price for industrial alcohol and white goods increased for the quarter, it was not enough to offset the hering input costs.
Previously we expected to see an approximate 700 basis point decline in year-over-year gross margin percent for our light goods and industrial alcohol products on a combined basis. In 2022 we.
Given these recent market dynamics, we now believe this decline could approach 1100 basis points for the full year.
That said, we remain committed to pricing through these increases where possible, and our full year consolidated guidance contemplates these inflationary headwinds.
Year-to-date cash flow from operations totaled $43 million, reflecting the consistent and strong cash generary capability of our business.
Strong free cash flows further highlight the value and execution of our long-term strategy providing mgp with adequate support remin in our expansionary projects.
mgp's balance sheet also remained strong, allowing us to continue to invest to grow. We remain well capitalized, with debt toiling $232 million, the strong cash position of $37.4 million.
During the quarter, our investment in inventory of aging whiskey increased by $4.9 million to $184.9 million at cost.
This net increase was driven by increased putaway during the quarter. Matching whiskey putaway with growing future distilling solutions and branded spirit segment sales is one of our priorities and long-term strategies.
We announced last quarter that we expect approximately $47.2 million in capital expenditures during 2020 -two.
Which represents an approximate $1 million increase above the forecast we provided during the fourth quarter 2021 earnings call.
We continue to prioritize investments that enhance our operational capabilities and have identified opportunities to accelerate ongoing projects.
These opportunities include the construction of the textured protein facility in actes in Kansas.
As well as new opportunities that will strengthen our competitive position in the markets we serve.
Each of these projects remains on track.
The Board authorized a quarterly dividend in ount 12 cents per share, which is payable on September . Second to stockholdres of record at the August nineteenth.
The Board continues to view dividends as an important way to show the success of the company with shareholders.
We continue to believe our capital allocation strategy, focused on organic and acquisitive growth, aligns well with our long-term strategy.
Leveraging this approach, we are able to better position the business to benefit from underlying consumer trends.
We will continue to pursue MA and conduct expansionary projects to accelerate growth and increase our capabilities and product offerings.
And now let me turn things back over to Dave for concluding remarks.
Thanks brenan. We are very pleased with the strong results delivered year-to-date, despite the increased commodity and energy costs.
Demand for our products remain strong and we believe our business continues to be well positioned to mitigate these challenges through the balance of the year.
While we anticipate volatility in the broader economy to persist in the near term.
We remain encouraged by our diverse customer base and product offerings and believe they continue to align with consumer trends.
We believe our team's capabilities- strong market position, robust growth margins and abilility to execute against our long-term strategy- will provide us with momentum to achieve our fiscal 2022 goals.
We will be deliberate in all actions we take in navigating the balance of the year, including continuing to further realign our production and sales mix, with focus on increasing our highest margin productssupported with increased investment in advertising and promotion to support continued growth in our premium-plus Tier spirits branch.
For these reasons, as well as our strong first half performance.
We are increasing our financial outlook for the fiscal year into December . thirty-first T, went y and twenty-two.
Our revised outlook for the full fiscal 2022 year assumes the following.
Sales projected to be in the range of $745 million to $765 million, compared to our previous range of $69 million to $715 million.
Adjusted EBITDA to be in the range of $156 million to $163 million, compared to our previous range of $15 million to $157 million, and basic adjusted earnings per common share in the range of $4 41 cents to $4 65 cents, compared to our previous range of $4 15 cents to $4 35 cents.
We are confident that each of our business segments remains well positioned against strong macro consumer trends and we continue to believe that our strategy will drive long-term sustainable growth.
As we progressed our ESG initiative. We recently disclosed our environmental and sustainability policy statement and our waste information for the first quarter, as well as our energy management and greenhouse gas disclosures for the first half of the year.
These disclosures can be found on our company website under the social responsibility section.
We remain on track to disclose the company's water usage information through the third quarter and to release our environmental sustainability report- calendar year 2022- in early 2020 -three.
We are also working with a third party to complete the holistic assessment of the company's ESG program to ensure we have an effective and optimized approach to our ES journey going forward.
We are committed to refining the effectiveness of our tactical execution and we will continue to leverage the strong foundation we have established over the years, with the objective to deliver sustainable long-term value for our shareholders.
That concludes our prepared remarks operator. We are ready to begin the question-and-answer portion of the call.
Ladies and gentlemen, at this time we'll begin the question and answer session.
Once again to ask a question. You may press star and then one using a touchdown telephone.
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Once again, that is Star. And then one to join the question que.
Our first question today comes from Sean mccallwan, from Ross capital partners. Please go ahead with your question.
Thank you very much. General question about consumer behavior: do you think, in the face of general inflation, particularly in certain categories, that consumers are likely to be trading up in their alcohol choices? Or kind of being more conservative? Your performance in the quarter suggests no slowdown in that premiumization, but I was just wondering what your outlook says.
Yes I think, Sean. I think your reads right through the second quarter of this year. Actually, if you look at our what we call our premium plus priced Tier brands, they actually grew close to 12% in revenue for the quarterso we really haven't seen to date any trade down by consumers in their spirit choices. I think if inflation continues to stay high like it had, and you the 8% to 10% range longer term, that may change. But everything we've seen todayate, and even the research that is published in our industry, suggest that consumers are maintaining their position of you kind of being dedicated to brands.
They consume in the the premium plus price gears.
Thank you. one quick follow-up. Can you update somewhat your expected tax rate effect? The tax rate would be for the year.
Yes we expect that to be in the point - 4% range for the remainder of the year.
ok Thank you.
And our next question comes from Vivian aser, from talent. Please Goy with your question.
Hi Thank you good morning. My first question is on Brown spirit within distillary products. I was wondering if you could give any incremental color on the shape of the quarter from an ordering perspective. I mean there's just been so much volatility in terms of consumer inflation. I'm wondering how your customers are responding to that intra quarter thanks.
viian. We continue to see very strong demand in our Brown goods, both aged whiskey and new distillate, and I think you know we published our results. For Brown goods we're up 29% in revenue for the quarter, So still a very strong demand and we, you know, we're really in a position where we're kind of having to govern or moderate our aged whiskey sales in particular for the balance of the year to make sure that we have adequate inventories to support future years' growth. But we've seen really no let up in demand for both aged and new distillate through the quarter.
But just a follow up on that: was there even incremental demand in June , because that's when gas prices started rolll over?
Yes I mean we don't in this in the Brown goods business. What we tend to do is we look at it on a full year basis and really don't get too hung up on months-to-month changes in sell. But we've really seen no pullback in demand related to what's going on with a current inflationary environment.
Okay fair, not. And then my unrelated follow up. Please just on on margin. So obviously the the midpoint of your adjustity E, bit a margin comes down. You've explained the incremental gross margin headwind going from 700 to 1100 basis points. Brandon, anything else to call out in their things?
Yeah it's a couple of things there, beian. It's about an incremental $5 million above what we thought was going to happen at the beginning of the year, and you know a lot of that pressure. At this point we're seeing- although it's going totake place throughout the course of the year- probably a little bit more loaded into Q2 in Q3 relative to Q1 in Q4. So that that's additional context for you vian.
Thank you.
And our next question comes from Mitch peneurro, from.
Start on. Please go ahead with your question.
Yes good morning. It just just huge quick. He's really 1, one to follow up.
When it comes to, I sort of mean you look at price mix, I mean the quarter for the premium beverage alcohol being down, I guess 5%. How does that sort of foot which is that? Is that just a mix of new and aged?
distillant, or is there?
Anything else is pricing, is less pricing down at all.
Mitch is. And so Prem verage alcohol for the quarter, just to be clear, was actually up 19% within. That is like white goods and Brown goods: Brown goods rection 1%, as they've already mentioned in white goods was off about 4% just due to lower volumes in the quarter. So you know, overall from a Prem beverage alcohol standpoint and especially from a Brown good standpoint, we are still seeing continued strength in demand.
You know, throughout the quarter.
Okay I guess I'm sorry. I saw price mixing down 5%.
I.
In the queue. Maybe I' misread that So I apologize that the volume was down 5%. Price mix is actually up 24%.
Okay yes okay sorry, I had that backwards in my note right, Thank you, and then and then, have you guys seen any? I mean out of stocks.
Affect.
In the branded spirit segment, the adofstocks, have any impact on your sales.
Not really Mitch. I mean we have.
Benefit a little bit and some of our value brands, because some of our competitors have had out-of-stock issues in some of of their products and we've been able to go andf some of those gaps.
But we've done- our team's done- a really good job managing the supply chain issues and some of the constraints that you're probably well aware of in the industry, and we've had no really material impact on our business related to shortages.
ok Thank you much.
Our next question comes from Bill Chapel from Truest securities. Please go ahead with your question.
Thanks good morning.
ora a a few questions. I could start on the guidance. Certainly appreciate the beat in the rays, but you kind of looking at the math, it kind of calls for 35, 40% of your earnings to come in the back half of the year, which it traditionally the business is is more equated And if's not anything more, fourth quarter weightated, just with timing of orders for for age and new distillit. So is there something different in your business where that would be the case, where we just kind of looking at a general conservatism until the orders come in?
Yeah B I thanks for the question and you hit it on the head by bring up Brown goods in order patterns because, as we've always said and you said just now, you know the visibility is the timing quarter-to-quarter is not always great, but look at us in the whole year, Q1 for Brown goods is an exceptionally strong quarter from a sales perspective and that's really kind of you know, as we've, as we look at the full year.
It's going to be nationally weighted a little bit more toward that, and that's how we see the rest of the year playing out.
Okay and then a couple on on white goods made. Do feel like we're at a stable area from that mean I I understand there's still supply in industrial But in terms more vaca Gen, do you feel like the market is fairly stable and you have some visibility going forward, or could it get worse? Just trying to understand how that plays out.
yesbill, I think, I think at this point Brandon red dock, I think. Corns up 54% versus the prior year quarter. Natural gas is up 74%, as you probably well know. Commodity prices have started to come off a bit corn, not so much natural gas.
But we feel like in the revised guidance we've provided that we've taken into account- the best of our ability anyway- how those impact the profitability of white goods for the balance of the year. So we think we've got that baked into the guidance.
Okay and then turning to LUX, mean before you, before you bought the business or acquired the brands, it was, I think, growing low single digits, flattish to low single digits, obviously ticked up pretty nicely to high single to to double digits over the past few quarters and now drop took out of negative three this quarter. I mean, how should we? I know you're not going to give us segment guidance, but I mean what's the general range you do you think we're going of going back to that low single digit overall business with the value brands kind of bring down some of the premium brands. It could it be better, could it be worse. Just trying to understand. You know how I should be looking at that going forward.
Get pret question Bill. So in November , at our Investor Day, we shared that we expect this segment to grow in line with total distilled spirits and which is in that.
Know one to 3% in total historically and that's that's how we continue to view it in given our portfolio is very well balanced in pretty well representative of overall total distilled spirits. However, that being said, you know our focus is not necessarily in the top line but more in the gross margin line, in in the brand contribution line. So that's why we're focusing our efforts on the premium plus priceed tiers in the eleven point percent growth that those three tiers collectively contributed. The second quarter we thought was a great sign for the portfolio.
The other thing I'd add is we did in Q2 cycle over some channel reload, if you will, in Q2 last year, associated with the on-premise.
Had a reboot.
So I don't know that I you know overread the quarter from that just because of the the channel reload if you will from the prior quarter sure and then last for me. If you you touched on a little bit past couple of quarters but.
Talking about continuous improvement program and what it's done for the ingredient business. I mean, it's a pretty obviously meaningful margin improvement. But maybe you can talk a little bit more about where we are in that program and then what you think you can do for the, the distilled spirits business, particularly in Indiana. If you apply the same kind of practices, that be great. Thank thanks for that question though. Yeah, we've. We've made tremendous progress with our continuous efforts, improvement efforts in the ingredients business. It's a big reason that you see the 1, the ability, the increas capacity and through put in that facility to support the strong sales growth that we're seeing. But alsoso it's it's helpal, TH our cost structure, which is also helped drive gross margin improvement. And we're taking those same concepts and starting to roll them out to our distillvery relocations, with actually lan for Indiana distillvery being the the next focus, because we we need to improve the throughput of that the story to support our demand growth. But in general, you'll see us the very pragmatic and how we roll that out. Our plans are: roll it out across all of our different sites and, as you, as you well know, bill that pay dividends. It helps us increase our gross margin percentages over time and we then have optionality on how to reinvest those additional gross profit dollars, either to drop to the bottom line or revest in the brands as an example. So we're committed to that process. We've recently promoted an individual that was instrumental in helping us with the ingredients continuous improvement efforts, put them into a company wide role to the continuous improvement So it will continue to pay dividends force in the long run.
Great thanks for the color that.
And our next question comes from Ben cleay from Lake Street capital markets. Please go ahead with your question.
All right, Thank you takeking my questions first. one regarding the branded spirits segment. So ly solid year-over-year numbers but I'm trying to get a a better se. That is kind of sequential tren here from the first of the second quarter. As you noted that the- the premium fus categories you know- had a very good year. Year-year performan's like they declined of its sequially topartially offset growth in other cateories. 'm just wondering if you can talk about kind of what you've seen in this segment here you know, year-to-date and both from a volume in perspeive and a margin perspective, as it looks like the q1- to be q1- gross margins in that segment were very, very strong and's a bit of a decline here in the second quarter.
And we- we spoke about this on the last called Q1 and branded spirits- had a very, very strong quarter on American whiskey shipments, primarily related to our yellowstone brand, which is growing very, very nicely. And what happened is the wholessellers underestimated the demand in that we experienced in Q4 of last year, So their inventories were pretty much depleted. So we replenished wholesseller inventories in Q1 and that's what really drove that high gross margin saw in the branded spirits segment for the quarter and that that explains the increase and then the sequential decline in gross margin coming from Q1 to Q2 was primarily related to that strong pipeline refill, if you will, on the yellowstone. We continue to see though, good performance in our American whiskey and super premium to kila brands.
So everything is pretty much on track with what we expected through the first two quarters.
Got to got a perfect ne and then follow. Question on moving over to the ingredient segment, the proter lach that you talked about in the University category woning, to give kind of prov a bit of contextand this is this: a lach on kind of trial basis hasn't already been triing launch is going to be more widespread, kind of what regions are you know what regions are going to be targeted for the initial launch, and any additional color there would be really helpful. Sure, the protera product we're, if you will, the kind of the channel we're focusing on initially as colleges in universities. We are, we we sold it into a number of universities across the U's, So it's not specific to any particular geographic region and it's been well received and we should start seeing shipments, you know, by late into Q3, into Q4 and it is a, it's a piloot in the sense that we're targeting a specific channel to learn from, you know, the receptivity of the product line. There's any additional you know tweaks we need need to make to the products, but what I can tell you is the reception to this product within the colleges in universities at this point has been very strong. So I think it's going to be a great learning experience for us and if it's, if it's a successful- we believe it will be- we think there's going to be additional opportunities, obviously the in food service, beyond just colleges and universities.
Got it it very interesting. ll stay tuned for updates their next quarter. I appreciate you taking my questions and congratulations on a good quarter and I'll get back in Q.
Right tax panscing spend.
And ladies and gentlemen, at this time, and showing our additional questions, I'd like to turn the floor back over to Dave colo for any closing remarks.
Thank you for your interest in our company and for joining us today for our second quarter earnings call. We look forward to talking with you again after the third quarter.
And ladies and gentlemen with, that will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.