MGP Ingredients, Inc. (NASDAQ:MGPI) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning, and welcome to the MGP Ingredients First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Houston, Investor Relations at Lambert. Please go ahead.

Mike Houston: Thank you. I’m Mike Houston with Lambert, MGP’s 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, 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 and overall consumer and industry trends. 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 report 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 references to certain non-GAAP measures, which we believe are useful in evaluating the company’s performance. Reconciliations of these measures to 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 MGP today, you can access it at the company’s website www.mgpingredients.com. At this time I would like to turn the call over to MGP’s President and Chief Executive Officer Dave Colo. Dave?

Dave Colo: Thank you, Mike, and thanks everyone for joining the call today. On this call we will begin with an overview of our performance for the quarter ended March 31, 2023, 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. Our year is off to another strong start and we remain encouraged by our continued momentum this quarter. During the first quarter, we achieved our second best quarterly gross profit and adjusted EBITDA performance in company history. The results this quarter were second only to the first quarter of 2022, which represented a record for the company. The continued strength and value of our business model and long-term growth strategy underpinned our success this quarter.

Consolidated sales for the first quarter of 2023 increased 3% to $201 million, while gross profit decreased 3% to $69.8 million, representing 34.7% of consolidated sales. In our Distilling Solutions segment, we achieved record sales of brown goods, resulting in an increase of 10% from the prior year period. The increase was driven primarily by strong new distillate customer commitments, higher pricing across all brown goods and stronger-than-expected customer demand for spot purchases. In our branded spirits segment, revenue increased 2% for the quarter, while revenue for our Premium Plus price tier brands decreased 14% compared to the prior year quarter. As we mentioned during last quarter’s earnings call, our branded spirits premium plus price tier revenue, primarily related to our Yellowstone brand was impacted during the quarter by higher-than-normal inventory levels at distributors.

Excluding sales of our Yellowstone brand from current and prior year periods, premium plus brand revenues were up high single-digit percentages compared to the prior year. During the quarter, we completed a realignment of our national distribution capabilities with Republic National Distributing Company or RNDC. Associated with this realignment, we positioned inventory at additional RNDC distribution centers as part of the transition, which resulted in increased shipments, primarily related to our mid and value brands toward the end of the first quarter. Turning to our Ingredient Solutions segment. The team has maintained a high level of execution and continues to optimize the product mix to benefit from broader consumer trends, including the shift toward plant-based diets.

These continued efforts are reflected by the segment sales growth of 10% and gross profit growth of more than $4 million during the quarter. Each of these figures represents another record for the segment. Looking at each segment in greater detail. Sales for our distilling solutions segment increased 2% to $113.2 million during the quarter. Gross profit decreased to $33 million or 29.2% of segment sales. The decline in gross profit can primarily be attributed to higher input costs for white goods, and industrial alcohol as well as our inability to pass through these costs, due to excess supply of these products in the market. As expected, planned volume reductions for aged brown goods within the quarter, also impacted gross profit although, this was primarily or partially offset by increased volume for new distillate and increased pricing across all brown goods.

Sales of our premium beverage alcohol increased 2%, with continued strength in brown goods sales this quarter, supported by ongoing solid demand for our new distillate and aged whiskey. We remain confident that our significant share, scale advantage and our aging whiskey inventory position, will continue to support the demand within the American whiskey category. We’re pleased with the improvement in demand visibility and consistency, that we achieved in brown goods as brown good sales growth continues to outpace longer-term market trends, and is primarily driven by craft as well as multinational customers. In an effort to moderate the impact of increased input costs, and excess supply available in the market, for industrial alcohol and white goods, as discussed on our previous call, we reduced the volumes produced and sold of our industrial alcohol and white goods products during the first quarter, to minimize the negative impact on our profitability.

As a result, white goods sales for the quarter decreased by 21% and sales of our industrial alcohol products decreased 9%. As anticipated, industrial alcohol and white goods incurred negative gross margins for the quarter. On a combined basis, when compared to the prior year industrial alcohol and white goods gross profit decreased $2.8 million, which was in line with our expectations. As stated in our last quarter call, we anticipate these headwinds to persist throughout the year. We continue to believe 2023 industrial alcohol in white goods gross profit dollars, on a combined basis for the full year, will decline $4 million to $7 million compared to the prior year. We continue to explore further actions that can be taken with respect to our white goods and industrial alcohol products, to minimize the headwinds associated with these products.

Turning to branded spirits. Segment sales for the first quarter increased 2% versus the prior year period to $56.9 million, driven by increased volume of our mid and value price tier brands, resulting from the recent realignment of our national distribution capabilities toward the end of the first quarter, as well as increased pricing. Gross profit decreased slightly to $24.6 million or 43.2% of segment sales. The decline in gross profit can primarily be attributed to decreased shipments of the Yellowstone brand, as described earlier in the call. This was partially offset by the benefit of cycling through lower cost inventory, at the start of the year. We anticipate the product mix of our overall branded spirits portfolio, to normalize as we cycle through these dynamics over the balance of the year.

Sales for our premium plus portfolio decreased by 14% compared to the prior year. As previously mentioned, the decline reflects cycling over a record quarter of premium plus sales last year, as distributors purchased more than expected resulting in a tough year-over-year comparison. We remain encouraged by the ongoing strength in demand for premium plus, American whiskey and tequila brands, and we’ll continue to invest in marketing support to achieve sustainable and profitable organic growth for our brands in these spirits categories. Turning to Ingredient Solutions. Sales for the quarter increased 10% to $30.9 million while gross profit increased to $12.2 million or 39.5% of segment sales. The increase in sales was primarily driven by higher sales of specialty wheat proteins, as well as commodity protein and commodity wheat starches, as rising consumer demand for plant-based proteins and food products with lower net carbohydrates continue to gain popularity.

Gross profit this quarter also benefited from cycling through lower cost inventory at the start of the year, driving the segment’s gross margin higher. The momentum we continue to realize across our specialty ingredients products, is driven by ongoing consumer demand for foods containing plant-based proteins and high fiber content. As we continue to align with these trends, construction of the textured protein extrusion facility that we previously announced, remains on schedule with an expected start date during the fourth quarter of 2023. Finally, I want to thank our team for their tremendous efforts and continued execution. Their ability to build on the momentum we generated in 2022, to meet consumer demand and align with long-term trends enabled us to deliver strong results in the first quarter.

This concludes my initial remarks. Let me now turn things over to Brandon Gall, for a review of the key metrics and numbers. Brandon?

Brandon Gall: Thanks, Dave. For the first quarter of 2023, consolidated sales increased 3% to $201 million, as a result of increased sales in each of the reporting segments. Gross profit decreased 3% to $69.8 million representing 34.7% of sales. Advertising and promotion expenses for the first quarter increased $2.2 million, or 41% to $7.7 million as compared to the first quarter of 2022. Of this amount, $7.1 million was invested against our Premium Plus branded spirits, which represented 13% of total branded spirits segment sales in the quarter. The increase is consistent with our premiumization strategy and reflects our continued effort to increase marketing spend on our higher-margin premium plus price tier brands.. Corporate selling, general and administrative expenses for the quarter increased $4.3 million to $20.5 million as compared to the first quarter of 2022.

The increase was primarily driven by planned personnel expenses, as well as other miscellaneous expenses for the quarter. Operating income for the first quarter decreased 17% to $41.6 million, primarily due to the previously mentioned decrease in consolidated gross profit as well as higher, but planned advertising and promotion and SG&A costs. Our corporate effective tax rate for the first quarter of 2023 was 23.7%, compared with 23% from the year ago period. The slight increase in ETR was due primarily to lower state tax credits taken in the current year period. Net income for the first quarter decreased 17% to $31 million. Basic earnings per common share decreased to $1.40 per share from $1.69 per share. Diluted EPS decreased to $1.39 per share from $1.69 per share.

Adjusted EBITDA for the quarter was $47.1 million, a 15% decrease from the year ago period. The decrease was primarily driven by increased advertising and promotion and SG&A expenses, as well as gross profit declines year-over-year primarily in our distilling solutions segment. Turning to commodities. Corn, wheat flour, rye and natural gas represent our largest commodity expenses, and each continue to experience elevated prices throughout the first quarter. Relative to the prior year’s first quarter, our input cost for corn increased 15%, wheat flour increased 8%, Rye increased 61%, and natural gas increased 16%. Despite these elevated input costs, our risk management process and our focus on products that are premium, and more specialty in nature have enabled us to mitigate the impact of inflation over the past several quarters in most of our product lines.

Additionally, we enter any given year with the majority of commodities purchased against contracted volumes. However, for various reasons, we do not contract 100% of our sales. Furthermore, we did not experience any significant supply chain disruptions in the first quarter of 2023. Cash flow from operations was $5 million in the first quarter, down from $22.2 million in the first quarter of 2022. The reduction in cash flow from operations was driven by an increase in accounts receivable due to the timing of customer sales, lower net income for the quarter and increases in inventory primarily our barrel distillate. Our balance sheet remains strong allowing us to continue to invest to grow. We remain well capitalized with debt totaling $229.6 million and a cash position of $31.7 million.

Turning to capital allocation. Our approach which is focused on organic and acquisitive growth aligns well with our long-term strategy, as well as the underlying consumer trends our business is well positioned to leverage. We plan to continue to pursue M&A and conduct expansionary projects to accelerate growth and increase our capabilities and product offerings. In addition to M&A, laying down whiskey is another capital allocation priority for the company. Matching whiskey put away with growing future distilling solutions and branded, Spirits segment sales is critical to our long-term strategy. Our investment in inventory of aging whiskey increased $11.6 million at cost, as compared to the fourth quarter of 2022. Investing in CapEx to enhance our operational capabilities is another important capital allocation priority and resulted in capital expenditures of $9.8 million in the first quarter an increase of $4.8 million versus the prior year quarter.

We continue to expect approximately $58 million in capital expenditures for the full year 2023, which we anticipate will be used for facility improvement and expansion, such as our new textured protein extrusion facility in Atchison, Kansas, our distillation expansion at Lux Row Distillers in Bardstown, Kentucky and the addition of whiskey barrel warehouses to support continued growth at our Lawrenceburg and Bardstown distilleries. These previously announced expansionary projects remain on track from a timing and cost perspective. Additionally, we plan to prioritize investments in facility subsidence projects as well as environmental health and safety projects. The Board of Directors authorized a quarterly dividend in the amount of $0.12 per share, which is payable on June 2 to stockholders of record as of May 19.

Board continues to view dividends as an important way to share, the success of the company for stockholders. We remain deliberate and disciplined as we continue to evaluate M&A opportunities invest and put away of American whiskey and conduct expansionary projects that accelerate growth and increase our capabilities and product offerings. And now, let me turn things back over to Dave for concluding remarks.

Brandon Gall : Thanks, Brandon. We are pleased with the solid results delivered this quarter, despite increased costs and broader macroeconomic uncertainty. Demand for our products in each of our three segments remains strong and we believe our business continues to be well positioned. We expect to maintain a high level of operational execution and remain deliberate in our actions, as we navigate the market dynamics this year, which is why we are reconfirming our full year fiscal 2023 guidance. We expect revenue to be in the range of $815 million to $835 million. Adjusted EBITDA is expected to be in the range of $178 million to $183 million and adjusted basic earnings per common share is expected to be in the range of $5.05 to $5.20 per share, with basic weighted average shares outstanding expected to be approximately $22.2 million at year-end.

At MGP, our commitment to sustainable development is underpinned by a core value, respect for people and nature. We take great pride in our craft and refuse to settle for anything less than exceptional, which is why we embarked on the difficult, but important work to establish an ESG strategy that would help hold ourselves accountable in all areas of our business and operations. As a result, we are proud to announce, that we released our inaugural sustainability report for calendar year 2022 earlier this April. This follows the comprehensive ESG materiality assessment we completed last year to better align our priorities with those of our stakeholders. This work ensures we are focusing our time and resources on the areas that matter most and help us to establish the four main pillars of our ESG strategy; people, planet, products and process.

Our approach to ESG is based on a commitment to a culture of continuous improvement, in which our stockholders, employees and the communities where we operate, all benefit from a business platform based on sustainable growth. While we are early in our sustainability journey, we are proud of the progress we have made to date, and our progress on other ESG initiatives. This report is available for download under the Sustainability section of our website. We remain committed to leveraging the solid foundation we have established over the years, with the ongoing objective of delivering sustainable long-term value for our stockholders. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bill Chappell with Truist Securities. Please go ahead.

Operator: The next question is from Vivian Azer with TD Cowen. Please go ahead.

Operator: The next question is from Marc Torrente of Wells Fargo. Please go ahead.

Operator: The next question is from Sean McGowan of Roth MKM Partners. Please go ahead.

Operator: The next question is from Gerald Pascarelli with Wedbush Securities. Please go ahead.

Operator: The next question is from Ben Klieve of Lake Street. Please go ahead.

Operator: The next question is from Mitch Pinheiro of Sturdivant & Company. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dave Colo for closing remarks.

Dave Colo: Thank you for your interest in our company and for joining us today for our first quarter earnings call. We look forward to talking with you again after the second quarter.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.