Q2 2023 MGP Ingredients Inc Earnings Call

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Good morning, and welcome to the M. G. P ingredients second quarter 2023 earnings results Conference call. All participants will be listen only mode did you need assistance. Please signal a conference specialist by pressing star the Zip.

<unk> on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.

I'd now like to turn the conference over to Mike Houston with Lambert Global. Please go ahead.

Thank you I'm, Mike Houston, with Lambert Global Mvps 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 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 based on current expectation.

Company's actual results could differ materially from any forward looking statements made today due to a number of factors, including the risks and uncertainties described in today's earnings release and the company's other SEC filings.

The company assumes no obligation to update any forward looking statements or information included in this call. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance rec.

Reconciliations of these measures to the most directly comparable GAAP measures are included in today's earnings release, if anyone does not already have a copy of the earnings release issued by <unk>. Today, you can access it at the company's website Www Dot M D P ingredients dot com.

This time I'd like to turn the call. The N V Peace, 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 32023 provide.

Provide updates on key financial performance metrics and discuss the progress we've made against our strategy.

At the end of the call we will open the line for Q&A.

I am proud of the considerable progress we have made towards achieving our targets for fiscal 2023.

Our strong performance during the second quarter could not have been possible without our impressive and resolute team.

We achieved our best quarterly sales and gross profit performance in company history.

In addition on June 1st we closed on the acquisition, Penelope Bourbon, which expands our presence in premium plus price tier brands in our portfolio.

Penelope has been a fast growing brand ultra and Super premium price points within the American Whiskey category and is expected to be gross margin accretive to our branded spirits segment as.

As well as accretive to consolidated adjusted basic earnings per share.

We plan to build on this momentum and importantly, this acquisition is an example of executing against our strategy focus on premium innovation.

Consolidated sales for the second quarter of 2023 increased 7% year over year to $209 million, while gross profit increased 29% to $76 $3 million, representing 36.5% of consolidated sales.

Net income increased 26% to $32 million, while adjusted net income increased 31% to $33 $1 million.

Adjusted EBITDA increased 28% to $51.2 million.

In our distilling solutions segment.

Well the brown goods grew 30% compared to the prior year period.

The increase was driven primarily by increased pricing due to continued strong demand for both new distillate and aged whiskey.

Our branded spirits segment sales decreased 2% year over year due to volume declines in our mid and value priced here brands.

We remain encouraged by consumer trends overall, and specifically the demand for our premium plus price tier brands, which achieved sales growth of 29% compared to the prior year period.

Excluding Penelope premium plus sales grew north of 20% in the quarter.

Consumer demand for American Whiskey, and Tequila premium plus brands remained strong and continued to drive gross margin expansion.

Turning to our ingredient solutions segment. Our team has continued to execute at an elevated level and achieved record second quarter sales and gross profit results during the period.

Further optimization of the segment product mix to align with broader consumer trends resulted in an 18% increase in segment sales compared to the prior year period and gross profit of 33, 6% of segment sales.

Turning to discuss each segment in greater detail.

We posted another strong quarter and are scaling solutions segment with sales, increasing 9% to $116 $9 million year over year.

Gross profit for the quarter increased to $38 $7 million or 33, 1% of segment sales.

The increase in gross profit can be attributed primarily to the increase in sales of new distillate and aged whiskey.

Compared to the prior year period sales of Brown goods for the quarter increased 30% driven primarily by increased pricing due to continued strong demand for both new distillate and aged whiskey.

Brown goods sales growth has continued to outpace longer term market trends and has been primarily driven by craft as well as multinational customers.

Our confidence in our brown goods sales visibility through fiscal 2023 remains high.

Our significant marketing advantages continue to position us well to support continued growth in the American whiskey category.

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 and industrial alcohol, we continued to reduce the volumes produced and sold of our industrial alcohol and white goods products during the second quarter.

As a result white goods sales decreased by 4% year over year.

Sales of our industrial alcohol products decreased 22% during the second quarter.

As expected on a combined basis. These product lines continue to have negative gross margins in the quarter.

Last month, we announced the planned closure of the white goods and industrial alcohol distillery in Atchison, Kansas slated for January 2024.

This announcement.

Reinforces our strategy focused on shifting away from industrial alcohol and white goods products to mitigate the continued impact of increased input cost and excess supply available in the market.

The decision was not made lightly after careful consideration. We determined this is a necessary step following many consecutive quarters in which gross margins for white goods and industrial alcohol were negative.

During the past two years, the impact of additional supply of white goods and industrial alcohol into the market following COVID-19.

Combined with increases in local corn basis costs resulted in the production of these product lines at the Atchison distillery to no longer be economically viable.

Brandon will speak about the financial impacts as well as to provide additional details on a pro forma basis shortly.

Before that I want to clarify that this decision will not impact the operations of any of the companies other production facilities and we plan to continue normal operations at the Atchison distillery through the end of the year.

As a reminder, in an effort to pursue this strategy. We first had to solve how does physically decouple the athletes and the story from the ingredients facility.

Now that the plant has been identified to successfully decoupled. The facilities. We are now evaluating the most economically viable options for the waste starch stream.

As you recall the way start stream as a byproduct of the ingredient facility that is purchased by the adjoined distillery and results in an intercompany credit to the ingredient solutions segment.

We firmly believe these actions will enable us to further align our product categories and their supporting operations toward achieving our long term strategic objectives.

However, given the recent announcement of the Atchison distillery closure.

We will gain more clarity on how this decision will impact the back half of fiscal 2023.

We work with customers on their transition plans.

Turning to branded spirits segment sales totaled $57 $6 million during the quarter, a decline of 2% versus the prior year period.

While the decline was driven by lower volumes in our mid and value priced here categories. We are encouraged by the strong performance of our premium plus brands.

Our continued focus on investing behind our higher margin premium plus brands resulted in an increase in gross profit to $26 million or <unk> 41, 45.1% of segment sales.

The increase in gross margin can be attributed to the favorable performance of our higher margin premium plus brands.

As I briefly mentioned earlier during the second quarter, we closed the acquisition of Penelope Bourbon.

Fast growing brand that improves our ability to further participate in the popular American whiskey category, and which we believe has meaningful long term growth potential.

Okay.

We could not be more enthusiastic about this deal as it supports our long term strategy focused on premium innovation and enhances our portfolio of premium plus price tier brands.

The integration process is on track and we remain pleased with vanilla piece continued momentum as we expand its presence to new markets.

Our branded spirits strategy remains focused on growing profitability by leveraging the expansion of our premium plus brands portfolio.

With a particular focus on our tequila and American whiskey brands.

Turning to ingredient solutions sales for the quarter increased 18% to a record $34 $5 million, while gross profit increased to a second quarter record of $11 $6 million or 33, 6% of segment sales.

The increase in sales primarily reflects rising consumer demand for plant based proteins and food products with lower neck, carbohydrates, which drove higher sales of our specialty wheat proteins and starches as well as our commodity wheat starches.

Finally, I want to thank our team for their tremendous efforts and continued execution.

We remain encouraged by our diverse customer base, and our product offerings, which continue to align with broader consumer trends.

We believe our improved profitability and our proven ability to execute against our long term strategy.

<unk> to provide us with the momentum required to achieve our fiscal 2023 goals.

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 second quarter of 2023 consolidated sales increased 7% compared to the prior year period to $209 million gross profit increased 29% to $76 $3 million, representing 36, 5% of sales.

Advertising and promotion expenses for the second quarter increased 42% to $8 $6 million as compared to $6 $1 million in the prior year period.

Of this amount southern point $9 million was invested toward our premium plus branded spirits, which represented 13, 7% of total branded spirits segment sales in the quarter.

The year over year increase is consistent with our <unk> strategy and we plan to continue to increase the marketing spend on our higher margin premium plus price to your brands.

Corporate selling general and administrative expenses for the quarter increased $5 7 million to $23 $5 million as compared to the second quarter of 2022.

Operating income for the second quarter increased 25% to $44 $1 million due primarily to the previously mentioned increase in consolidated gross profit.

Excluding business acquisition costs associated with Penelope adjusted operating income increased 29% to $45.6 million.

Our corporate effective tax rate for the second quarter of 2023 was 25, 3% compared with 22, 4% from the year ago period.

The increase in our corporate effective tax rate was primarily due to higher income before income taxes and lower tax credits.

Net income for the second quarter increased 26% to $32 million, while adjusted net income increased 31% to $33 $1 million.

And diluted earnings per common share increased to $1.44 per share from $1 15 per share.

Adjusted basic and diluted earnings per common share increased to $1 49 per share from $1 15 per share.

Adjusted EBITDA for the quarter was $51.2 million, an increase of 28% compared to the year ago period. The increase was.

Primarily driven by the strong performance of all three business segments.

Now an update on commodities corn wheat flour, rye and natural gas represent our largest commodity expenses and each continued to experience elevated prices throughout the second quarter.

Compared to the prior year period, our input costs for corn increased 8%.

Wheat flour increased 24% Rai increased 47% and natural gas increased to 18%.

Our risk management process and our focus on products that are premium and more specialty in nature has continued to enable us to mitigate the impacts of inflation over the past several quarters and most of our product lines.

Additionally, we enter any given year with the majority of the commodities purchased against committed volumes. Furthermore, we did not experience any significant supply chain disruptions during the second quarter of 2023.

As Dave mentioned in July we announced the planned closure of our Atchison distillery and expect to incur one time aggregate pre tax charges of approximately $23 million to $31 million in fiscal 2023.

This range includes the following estimates.

17 million to $21 million and noncash restructuring expenses for asset impairments, including fixed assets inventory and leases.

2 million to $4 million in cash expenses for items, such as severance costs contract termination fees and consulting fees.

And 4 million to $6 million and capital expenditures in connection with the decoupling of the Atchison distilleries from the ingredient solutions facility also located at Atchison, Kansas.

Now I will look at the financial impact of the apps into stories performance on a preliminary pro forma unaudited basis for fiscal 2022 and year to date ended June 30th 2023.

For fiscal year 2022, excluding the financial impacts of the Epsilon distillery results, whereas falls.

Consolidated sales in the Sterling solution sales are reduced by $148 million Consol.

Consolidated gross profit has increased by $620000. The consolidated gross margin has increased by 720 basis points.

Distilling solutions gross profit is increased by $6 $1 million.

In ingredient solutions gross profit is reduced by $5 $5 billion.

Yeah.

For the year to date ended June 30th 2023, excluding the financial impacts of the Epson distillery results were as follows.

Consolidated sales and distilling solution sales are reduced by $62 $3 million consolidated gross profit has increased by $118000 in consolidated gross margin has increased by 650 basis points.

Just doing solutions gross profit has increased by $3 $5 million ingredient solutions gross profit was reduced by $3 $4 million.

The reduction in gross profit for the ingredient solutions segment in both periods is the result of increased cost of goods sold from no longer receiving an intercompany credit for the waste start slurry byproduct purchase by the joined as a sudden Kansas the story.

The value of the intercompany credit is derived from the value of corn, which has fluctuated over time.

These pro forma financials assume the loss of the waste starch slurry credit.

No gain or loss on disposal.

The next question comes from Vivien <unk> with Cowen and company. Please go ahead.

Hi, good morning.

Good morning, good morning Vivian.

I wanted to start on on the guidance, obviously very nice to see that how does it ever on on the bottom line, but given the guidance now incorporates Penelope I'm wondering if you can comment on the decision to hold the top line. Obviously the range is reasonably wide on but are there any offsets that are worth calling out relative to.

Yes, so the guidance we issued this morning. The rays does reflect continued strong underlying trends, we're seeing in our business and continuing to see from a sales perspective. It in our guide implies a year over year back half increase of 6% at the midpoint, which is very consistent with what we saw in the first half.

But our our sales guy, leaving it unchanged also reflects the uncertainty of the absolute story closure is having.

Is it implies year over year EBITDA margin expansion, which is the continued direction that we're looking to take our business.

Certainly and the improvement in.

Adjusted EBITDA margin is certainly nice to see them for my follow up question. Please you you noted that you've made some very good headway in terms of securing commitments in 2024 can you offer any more incremental color on that new versus aged and how the accounting.

But benchmark relative to prior years. Thanks.

Yeah, So as Dave shared earlier, the majority of our expected Brown goods sales next year are committed at this point in.

And that goes across all spectrums. So that's a multinational in craft customers for example, Vivian and it's also new distillate and aged.

At this point in time, because we do contract out multiple years for new distillate, it probably skews more towards the new distillate side of the multinational customer types as you'd expect but it is represented above our whole customer set and portfolio.

Terrific. Thank you.

The next question comes from Sean Mcgovern.

Mcgowan with Ralph M. K M. Please go ahead.

Thank you.

First question is on the decline.

Brent the segments under premium plus.

How much of that is due.

Managing it down versus.

Hey, Mitch what I, what I would add to what Brandon said is the other thing we spoke of on our Q1 call relative to brands was we felt there was excess inventory in the market at the distributor level.

And I'm sure you've been reading about destocking occurring in.

Spirits in general.

So we feel like we pretty much cycled through that and as we got to kind of mid to back half of the second quarter. We started seeing shipments pick up again, specifically in our premium plus France.

So I think overall, yeah at the price points, we have on those brands.

We're starting to see the shipments pick back up which is a great sign because it continues to show consumer poll on those key brands as well as we feel like we've kind of worked through the.

Overstock issues that we were battling through in the first quarter.

Okay and then just one last question on the ingredient solutions.

Volume there was also down.

1% and I'm, just curious how that foots with.

And then with the longer term trends of.

Whether it's plant based alternatives or higher fiber if you could just talk about that a little bit.

Yeah. So.