MGP Ingredients, Inc.

Good morning and welcome to the MGP Ingredients Second Quarter 2023 Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero 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 would 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, 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 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 expectations. The 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 reference to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. 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 MGP today, you can access it at the company's website, www.mvpingredients.com. This time, I'd like to turn the call to MVP'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 30th, 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. I am proud of the considerable progress we have made toward 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. Adjusted EBITDA during the second quarter was also the second best quarter in company history second only to the record first quarter of 2022. In addition, on June 1st, we closed on the acquisition of Penelope Bourbon, which expands the presence of premium plus price tier brands in our portfolio. Penelope has been a fast-growing brand at 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 well as accreted 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 focused on premiumization. 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, sales of 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 price tier brands. As a reminder, we experienced significant one-time volume gains in our mid and value brands in the first quarter associated with our distributor realignment. 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 our American Whiskey and Tequila Premium Plus brands remain strong and continue to drive gross margin expansion. Turning to our ingredient solution 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 in our Distilling 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 good 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. Looking ahead to fiscal 2024, our visibility is beginning to take form and we believe we have the majority of our expected distilling solutions segment brown goods sales for next year already committed. Our significant market 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 continue 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, and 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 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 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 company's 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 to physically decouple the assets and distillery from the ingredient facility. Now that a plan has been identified to successfully decouple the facilities, we are now evaluating the most economically viable options for the waste starch stream. As you recall, the waste starch stream is a byproduct of the ingredient facility that is purchased by the adjoining distillery and results in an intercompany credit to the ingredient solution 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 as 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 price tier 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 45% 0.1% 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, a 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. We could not be more enthusiastic about this deal as it supports our long-term strategy focused on premiumization and enhances our portfolio of premium plus price tier brands. The integration process is on track and we remain pleased with Penelope's continued momentum as we expand its presence to new markets. Our branded spirit 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 net 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 continue 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?