MGP Ingredients, Inc. (NASDAQ:MGPI) Q1 2024 Earnings Call Transcript

MGP Ingredients, Inc. (NASDAQ:MGPI) Q1 2024 Earnings Call Transcript May 4, 2024

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Operator: Good day, and welcome to the MGP Ingredients First Quarter 2024 Financial Results Conference Call. [Operator’s Instructions] I would now like to turn the conference over to Mike Houston. Please go ahead, sir.

Mike Houston: Thank you. I’m Mike Houston with Lambert Global, MGP’s Investor Relations firm. And joining me are members of their management team, including David Bratcher, Chief Executive Officer and President; 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. 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, except as required by law. 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 is 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 Chief Executive Officer and President, David Bratcher. David?

David Bratcher: 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, 2024, provide updates on key financial performance metrics and discuss the progress we have made towards our strategic plan. At the end of the call, we will open the line for Q&A. I am pleased with the results we posted this quarter and the progress we have made towards our long-term strategic plan. On a pro forma basis, when factoring in the Atchison distillery closure, our defiling Solutions segment achieved sales growth when looking at our business today compared to a prior year period without the adjusted distiller results. We also had solid sales growth in Ingredient Solutions in our Premium Plus brands within branded spirits.

All in all, this quarter was in line with our financial expectations as described during our previous earnings call. Other highlights for the quarter include the promotion of Amel Pasagic to the Chief Commercial Officer role, the commissioning of our newly built textured lead protein facility and several incredible brand initiatives, each of which we will talk about on the call today. Starting with the promotion of Amal to his snowy created role, he will continue to leverage the business intelligence and predictive data insights he developed as CIO and apply them across all three business segments. Amel’s wealth of experience and his unique strategic view of our business will be critical in driving the next phase of growth for MGP. We are excited about the insights we will bring to our business and as our commercial leader.

Turning to our Distilling Solutions segment. We are pleased to have completed the Atchison distillery closure in December of 2023, which led to a record quarterly segment gross margin in Q1 of 2024 as well as accomplishing our strategic intent of being browned focused in our distilling solutions business. As we reported last quarter, we have the vast majority of our anticipated total brown goods volume committed for 2024. Also, as we previously indicated, we expect the last 3 quarters of 2024 will result in stronger profits as compared to Q1 due to the variation in the timing of customer demand and the timing of our Bardstown, Kentucky distillery expansion project coming online in April. Turning to branded spirits. We are very pleased with the continued growth of our Premium Plus sales as they represent 42% of segment sales this quarter.

This represents a stark improvement from the 33% figure we experienced in the first quarter of 2023. This meaningful improvement was partially offset by lower volumes of our allocated Single Barrel Premium Plus brands as compared to 2023 due to the seasonal nature of these specialty programs. While the seasonal nature of these special programs put pressure on our gross profits this quarter, we were still able to expand gross margin to 44.9%, which is a testament to our continued investment in premiumization. Our branded spirits strategy remains focused on growing points of distribution by leveraging the expansion of our Premium Plus brand portfolio with particular focus on our tequila and American whiskey brands. As an example, we ship finality into 2 new states during the quarter.

Our brand marketing initiatives during the first quarter included entering into a sponsorship of Power bush #8 car under Richard Solders Racing, which broadly showcases our Revelerben brand and will continue throughout the racing season. In addition, we had six brands win double gold at the San Francisco World Spirits competition and successfully launched new innovative items such as Penelope Turkey, Penelope Rio and Yellowstone Rum Cask Finish. These are just a few examples of our innovation and marketing efforts to increase the sales velocity of our Premium Plus brands portfolio. Turning to Ingredient Solutions. Sales for the quarter were a record and primarily reflect continued rising consumer preference towards high protein, low net card diets, which drove higher sales of our specialty products.

We expect to see this trend continue in upcoming quarters as can be seen by anyone visiting their local grocery store and seeing the proliferation of keto and low net carb alternatives, which ties well to our Ingredient Solutions growth strategy. In addition, we are extremely proud of the grand opening of our texture protein facility, which was dedicated to the Ladd Seaberg, the late hesitant of our Chairman, Karen Seaberg. It was absolutely fabs to see Karen and her family, celebrate his memory and the indelible mark you left on the company with such a beautiful facility dedication. This concludes my initial remarks. Let me turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?

Brandon Gall: Thanks, David. For the first quarter of 2024, consolidated sales decreased 15% compared to the prior year period to $170.6 million due to the Atchison distillery closure. Excluding the impact of the Atchison distillery in both periods, consolidated sales were in line with the prior year period. Also impacting consolidated sales during the quarter, branded sales were down 3% driven primarily by the temporary shutdown of the Luxury distillery of Barstow, Kentucky to complete the distillation expansion as well as expected declines in our mid and value branded spirits price tiers. As expected, gross profit decreased 10% to $62.8 million, representing 36.8% of sales. This decrease was primarily due to lower sales of mid and value price tier brands as a result of the distributor realignment in 2023, lower sales of allocated single barrel printing plus brand spirits offerings in Q1 as planned, the temporary shutdown of our Luxco distillery of Arslan, Kentucky and the incremental costs incurred in Ingredient Solutions related to the drying of the waste start streams ready for commercial sale as well as our new extrusion manufacturing facility.

Excluding the impact of the Atchison distillery in the current period, gross margin was 37.3%. Advertising and promotion expenses for the first quarter increased $1 million to $8.7 million, primarily driven by increased advertising and promotion investment in support of our Premium Plus portfolio of brands. Brand sports-related A&P totaled $7.8 million for the quarter, represented 15.5% of segment sales. This remains consistent with our premiumization strategy. We will continue to invest in marketing spend against our higher-margin premium plus price tier brands. Operating income for the first quarter decreased 30% to $28.9 million. Adjusted operating income decreased 19% to $33.6 million. Net income for the first quarter decreased 34% to $20.6 million, while adjusted net income decreased 22% to $24.2 million.

Basic earnings per common share decreased to $0.92 per share from $1.40 per share and diluted earnings per share decreased to $0.92 per share from $1.39 per share. Adjusted basic and diluted earnings per common share decreased to $1.07 per share from $1.40 and $1.39 per share, respectively. Adjusted EBITDA for the quarter was in line with our expectations and totaled $40.2 million, a decrease of 17% compared to the year ago period, driven by the factors highlighted on our previous earnings call. In accordance with the applicable accounting guidance, we no longer expect to present the results of the Atchison distillary as discontinued operations in our financial statements. However, for reference, we have quantified the impact of the associate results and the pro forma schedules included in this morning’s earnings release.

Moving to cash flow. Cash flow from operations was $24.6 million in the quarter, a record for any first quarter and up from $5 million in the first quarter of 2023. Our balance sheet remains healthy, and we remain well capitalized with debt totaling $300.8 million and a cash position of $19.5 million. Turning to capital allocation. We remain focused on organic and acquisitive growth opportunities that align with our long-term strategy as well as underlying consumer trends, which we believe our business is well positioned to leverage. We will continue to evaluate M&A opportunistically with the goal of accelerating growth and increasing our capabilities and product offerings. Effectively mentioning was we put away with growing future disown solutions and brand Spirit segment sales remains a key priority and is critical to our long-term strategy.

Our investment in inventory of aging whiskey increased slightly this quarter to $254.5 million at cost, an increase of $4.3 million from the end of the year. Investing in capital expenditures to enhance our operational capabilities is another important capital allocation priority, and it resulted in capital expenditures of $13.1 million for the first quarter. We continue to expect approximately $85.8 million in capital expenditures for the year, which will be used for facility improvement and expansion, such as additional warehouses to support our recent capacity increases, driver investment to support our Luxco distillery expansion, the purchase of our previously leased bottling facility in St. Louis Missouri and a main fuel plant in Atchison, Kansas to better monetize the waste starts strain in our Ingredient Solutions segment.

During the quarter, the Board approved a $100 million share repurchase program, and we repurchased 59,84 shares of our common stock for approximately $5 million. The Board of Directors also authorized a quarterly dividend of $0.12 per share. It was payable on May 31 to stockholders of record as of May 17. The Board continues to be dividends as an important way to share the success of the company with shareholders. We will continue to focus efforts on optimizing product mix across all 3 of our business segments and invest in areas that we expect to generate the greatest long-term value for our shareholders. We expect the consumer fundamentals that have supported the historical growth in our business to remain intact throughout 2024. While we continue to monitor the potential impact of the inventory levels of distributors, overall American Lite supply and consumption patterns and inflation on consumers.

Despite these industry headwinds, we feel uniquely positioned to grow as a company in this dynamic operating environment. These factors, in combination with the strength of our underlying business support the confirmation of our 2024 financial outlook. Sales are projected to be in the range of $742 million to $756 million following the closure of the Atchison distillery. Adjusted EBITDA to be in the range of $218 million to $222 million, inclusive of the add back of share-based compensation expense. Adjusted basic earnings per common share are forecasted to be $6.12 to $6.23 range, with basic weighted average shares outstanding is expected to be approximately $22.3 million at year-end. And now let me turn things back over to David for concluding remarks.

David Bratcher: Thanks, Brandon. We are pleased with our positioning to achieve our 2020 objectives. Demand for our products in each of the 3 segments remain strong, and we believe our plans will continue to position the business for long-term success. Despite some reported softening within the branded spirits industry, we feel very optimistic about the long-term health of this industry and are encouraged by the continued growth of the Premium Plus category across the industry. Our strategy is to build a portfolio of branded spirits to increase our points of distribution, accelerating our sales velocity within those points of distribution through effective marketing, expanding our product offerings through innovation and closing a meaningful margin accretive M&A transactions.

In closing, I would like to restate what I said last quarter and that we are committed to evolving our company into a dedicated branded spirits company with desirable brands across the price point universe with a special focus on premium plus and higher-margin offerings as well as continuing to supply our market-leading premium American whiskey in bulk to both craft and multinational entities. We believe this is the optimal way to provide desired returns to our shareholders. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

Operator: We will now begin the question-and-answer session. [Operator’s Instructions] The first question comes from Gerald Pascarelli from Belport Securities.

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Q&A Session

Gerald Pascarelli: On your brown goods business within distilling Solutions, just — I guess this is a housekeeping question, but the down 3, I know you said on a consolidated basis, the quarter kind of came in, in line with your expectations. Was the low single-digit decline in brown goods in line with your expectation? And then as we look forward, do you continue to expect brown goods to outpace category growth? And then maybe just some commentary on if there’s been any change of tone from your customers regarding the demand for Newfield this year? Any color there would be helpful.

Brandon Gall: The quarter was in line with our expectations in our prepared remarks. We mentioned — or reminded everyone of the closure of the Luxco distillery as we prepared for its expansion and coming online in April. And so we were unable to sell new distillate out of that facility in the quarter. If you take that out of Q1 last year and you look at the brown goods growth year-over-year, it’s actually up with that mine. So it was in line with our expectations. We do continue to expect brown goods to grow over the course of the year. And as far as tone underlying from our customers, as we reiterated, we saw the vast majority of our sales committed. We’re working very closely with our customers to make sure that we can execute and produce as they need it. And so we reiterated our outlook this morning with that line.

David Bratcher: Yes, I would add that as you think about what Brandon and I said last quarter, we have really good visibility into the rest of the year because of the strategy that we put in place at the steel solutions. So as you continue on, I mean we haven’t heard or seen or felt anything that’s any different than what we had previously stated.

Gerald Pascarelli: Perfect. Next question is just on branded spirits. When we look at your gross margin in that segment, which continues to expand nicely, and we compare that to your profit before tax margin, there’s a fairly meaningful delta there, not just this quarter, but even historically speaking. So I guess like understanding right now that you’re in the process of building out your portfolio and the need to invest, I guess, longer term, can you talk about if there are opportunities or measures you could take to improve that profit before tax margin to maybe better align with finished goods peers? It does seem like that would offer a pretty big notable upside to earnings over time. So any color there would be great.

David Bratcher: Yes. And great question. So it did — the prorata for branded spirits was low in the quarter. I’ll remind you that a big reason for that is going to be the contingent liability that hits the SG&A on the branded spirit side related to the Beneli acquisition. So that was $4.1 million in the period. So that is going to be dragging down. But you’re exactly right, over time as we continue to execute on our strategy, specifically the higher-margin premium plus brands, we expect to gain leverage from that on both the SG&A infrastructure we have in place as well as our A&P investment. So again, just as a reminder, a lot of our brands in premiums are younger in their life cycle, more emergent and regional in nature. And as we continue to invest in raising that awareness with the consumer, we expect that to pay off over time.

Brandon Gall: And Gerald, I’d add, we said last quarter and said again this quarter, we aspire to evolve to be a brand to spirits company. And as such, we fully expect that compared to our peer group, we need to have a margin set that’s comparable. And this is why we work the strategy that we work. So we – as we continue to evolve and focus on what’s meaningful, that’s the plan. We should have that accretion ongoing.

Operator: The next question comes from Marc Torrente from Wells Fargo.

Marc Torrente: Just a couple here. On the guidance from here, Q1 obviously had some headwinds to work through, which you called out at the start of the year. There’s some modest upside in the quarter versus expectations. Guidance was maintained. Maybe just some comments on your increased level of comfort on the guide now and how you see the quarterly progression implied through the rest of the year?

Brandon Gall: Yes, Mark, thanks for the question. Yes, we shared a lot on the last quarterly call in anticipation of this just because there were some things to navigate. We wanted to message that as clearly as possible to you and the rest of the investor community. But yes, as you mentioned, Q1 played out exactly how we thought it might, maybe even slightly better in some ways. And our view for Q2 through Q4 are entirely consistent with what we shared on the Q4 call. We expect branded spirit sales to pick up as the year goes on, primarily in Premium Plus, which is typical for our industry. On the tilling Solutions side, as David mentioned, Luxco come online in April. So we can utilize that facility and the expansion we’ve gotten there on new deli sales.

We also have our customer commitments ramping up for brown goods. And then finally, even within Ingredient Solutions, we’ve got a Proterra facility that just opened and we’re really excited for. But we don’t necessarily have the sales immediately now to offset and absorb a lot of those costs. As the year goes on and as we further commercialize that facility and that asset, those costs will be absorbed. And over time, probably as we can to next year, that facility and our product line will become more and more accretive to that segment.

David Bratcher: I think as we look at our guidance numbers and think about our business moving forward, from now from 90 days ago, Brandon, and I still feel very comfortable with the guidance and the expectations that we established. Our total team is focused on that, and we are moving in that direction.

Marc Torrente: Okay. Great. And then just a few on brown goods demand. Volumes held up pretty well in the quarter. We saw pricing was down 11%. How did the mix of new versus age trends throughout the quarter? How much of that pricing is due to that underlying mix shift that you conveyed? How much of that is due to actual pricing? And then margins for the total segment also held in quite well, even with assumed lower mix. Maybe just how you see volumes versus pricing and margins evolving through the rest of the year.

David Bratcher: Yes. Good question. So we can start off with volumes. We expect volumes to increase as we did in Q1, but throughout the rest of the year. And the reason — the main reason for that is because of the success we’ve had in obtaining new distillate commitments. As far as price, yes, price/mix was down, but that was driven by mix, and that’s why we shared about kind of our mix evolution within Distilling solutions on our last quarterly call. So new distillate sales were very strong in the quarter as anticipated. And then our aged sales also came in as anticipated. But the reason why the margin set held steady in that low 40s as we shared it might, is because of the pricing we’ve been able to get in new distillate. Even though it’s a larger proportion of our total sales, the price in the gross margin contribution is greater this year and in future years. We anticipate that has been in the past.

Operator: The next question comes from Sean McGowan from ROTH MKM.

Sean McGowan: A question on margins, but just one on Ingredient Solutions. Can you talk about what some of the puts and takes are going on there? And how should we look at what we saw in the quarter as indicative of what the rest of the year might bring?

Brandon Gall: Yes. So yes, as you noted, Sean, gross margins for ingredients were in the teens, mid-upper teens in the quarter and really 3 main drivers. The first one is the beef starch intercompany credit. The segment used to receive when the assistillery was operational is no longer there. And so that’s going to be an ongoing item. That’s going to be a natural headwind to the margin set of the segment. But the other 2 items we view as more transitory. The first one being the incremental costs that we’re incurring to dry and ready that start stream for commercial sale. We expect that to continue being a headwind for the course of this year. But once we get the mini fuel plant distillery up and running, then we expect that to be largely offset and then, in fact, maybe have some positive gross profit to come with it at that point in time.

And then the third and final thing, which we also believe is more transitory is are the incremental start-up costs associated with the ProTerra facility. As I already noted, we expect as time goes on and we commercialize that asset to have the revenue and the gross profit to absorb those costs. So again, as we get more into 2025, we expect the margins to be reflective of that. So that being said, we do view Q1 as a low watermark for gross margins for the segment. We expect the segment to finish the year probably as we’ve said last call, in the mid-20s gross margin-wise. But then as we get into next year for a lot of those things I mentioned to start benefiting the segment once again.

Sean McGowan: Okay. And I don’t think I heard you talk as you usually do about some of the input cost headwinds. Is that because there’s been some stabilization there? Or you just kind of cut it out for brevity.

Brandon Gall: Yes. So some stabilization. Another main reason is the closer of the Atchison distillery. As you’ll recall, the product lines that we sold primarily out of their industrial-grade alcohol white goods and fuel are much, much more susceptible to even modest swings in underlying input commodity costs. So with the closure of that facility, corn and the related basis went from being our #1 raw material that we purchase. — to fourth or fifth. And with that, a lot of that risk with it. However, wheat flower for our Green Solutions segment, which is now our largest input that we buy commodity-wise, was up about 2% in the quarter, whereas Rye natural gas were both down year-over-year. I will remind you that a lot of our pricing on our brown goods, especially for new distillate is model priced for what’s committed and contracted. So pricing for that will move up and down with those underlying commodities so that we’re able to lock in our margin.

Operator: The next question comes from Bill Chappel from Truist Securities.

Bill Chappell: Just first question on the branded spirits side, you’ll face an easier comparison, certainly in the second quarter with the kind of the destocking distributors last year. Kind of maybe any update on where the distributor inventory levels sit? Are you continuing to see pressure there? Or is that for at least MGP and maybe for the industry, is that largely kind of path at this stage?

David Bratcher: I’m not going to speculate then for the industry because you do get kind of mixed views on that from what other report. I can tell you, in our business, yes, it’s stabilized. We’ve worked really hard with our distributors and understanding the inventory levels and managing those levels within to meet customer demand. So destocking for us at a distributor level is not a core as you know.

Bill Chappell: So you see that as a favorable comp as we — because the majority of the destocking was this time last year, is that correct?

David Bratcher: It’s a favorable comp, yes, sorry. Yes.

Bill Chappell: Perfect. And then just also maybe a little clarification on the branded growth this year. I know you had talked about rationalizing a few brands. I didn’t know if you quantified what that impacted in the quarter or what that would impact for the full year? Just kind of an idea of how the brands are growing, excluding that rationalization.