Good day. And welcome to the MGP Ingredients Inc., Fourth Quarter and Full Year 2017 Call and webcast. 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 Mr. Mike Houston. Please go ahead.

Thank you. Good morning, everyone. And thank you for joining the MGP Ingredients conference call and webcast to discuss the Company's financial results for the fourth quarter and full year 2017. I'm Mike Houston with Lambert, Edwards, MGP's Investor Relations firm. And joining me today are members of their management team, including Gus Griffin, President and Chief Executive Officer and Tom Pigott, 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 revenue, earnings and capital structure, 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. If anyone does not already have a copy of the press release issued by MGP today, you can access it at the Company's Web site, www.mgpingredients.com. At this time, I would like to turn the call over to MGP's President and Chief Executive Officer, Gus Griffin. Gus?

Thank you, Mike. And thank you all for joining us. On this call, we will provide an overview of our results, updates on key financial performance metrics and discussion of progress against our strategy. Then we will take your questions. Now turning to results. 2017 marked the third full year of the implementation of our strategic plan. We continue to build on the strong foundation we've established. And we are very pleased with the results for this quarter and the year as they underscore this continued progress against our long term strategic goals. Both of our business segments showed strong growth over the prior year, driving operating income growth that was consistent with our guidance. Consolidated net sales for the year increased 9.2%, gross profit increased 16.4% and MGP met its guidance of 10% to 15% growth in operating income, excluding the special items from 2016. Looking at each segment individually. In our Distillery Products segment, full year net sales grew 9.7% as we continue to see strong demand for our premium beverage alcohol. Total food grade alcohol net sales grew 11.9% for the year, driven by year-over-year growth of 18.4% in premium beverage alcohol. The growth within premium beverage alcohol was driven by 25% increase in net sales of our brown goods and an 8.3% increase in net sales of our white goods. These results reflect strong underlying market trends, the benefits of us building strong partnerships with existing customers and our successful efforts to attract new customers for our range of whiskey, vodka and gin offerings. The Distilled Spirits Council recently released their annual economic bridging, which highlighted the strong market trends. For the eight straight years, spirits gained share of total beverage alcohol with sales volume for total Distilled Spirits increasing 2.6% and American whiskey grew annual…

Thanks, Gus. As Gus highlighted, this quarter featured strong revenue growth in gains and gross profit in both segments. Overall, we're pleased with the balanced top and bottom performance of the business. For the quarter, our consolidated net sales increased 8.7% to $88.2 million, reflecting growth in premium beverage alcohol and specialty ingredients. Gross profit increased 11% to $19.5 million, reflecting gross profit results in both distillery products and Ingredients Solution segments. Gross margin increased 40 basis points to 22.1%, reflecting a 50 basis points improvement in Distillery Products. For the year, consolidated net sales increased 9.2% to $347.4 million as a result of growth in premium beverage alcohol and specialty ingredients. Gross profit increased 16.4% to $76 million, driven by strong gross profit results in both the Distillery Products and Ingredient Solution segments. Gross margins increased by 140 basis points to 21.9% for 2017, reflecting 160 basis point improvement in Distillery Products. Corporate and selling and general administrative expenses were up $2 million due to increases in incentive compensation, personnel cost and professional fees for the quarter. For the full year, SG&A increased $6.4 million to $33.1 million, primarily due to investments in the MGP brands platform and an increase in incentive compensation. Operating income for the fourth quarter was relatively flat at $10.5 million compared to $10.6 million during the prior year quarter, reflecting gross profit growth in both segments offset by investments in SG&A. For the full year, operating income increased 2.2% to $42.9 million compared to $42 million during the prior year, primarily due to gross profit growth in both segments offset by investments in SG&A and the decrease in the other operating income related to special items recorded in 2016 totaling $3.4 million, which were excluded from our guidance. Our corporate effective tax benefit was…

Thanks, Tom. We are pleased with our quarter and full year results and the progress we made against our strategic plan. We demonstrated our ability to maximize value by strongly growing our premium beverage alcohol business and our Distillery Products segment and reestablishing our plant based protein platform with TruTex in our Ingredient Solution segment. We continued to maximize the value of our production, meeting strong customer demand by expanding our premium beverage alcohol product offerings, capabilities and sales coverage. While the focus of our Distillery Products segment will always be supplying other brand owners with premium distilled spirits, we are pleased with the progress of our brands initiative. Here in 2017, we’ve focused on developing our portfolio of brands, including the launch of our limited edition Remus Repeal Reserve in the fourth quarter. We also worked to develop our organization, adding key people and strengthening our systems and processes. As a result of that work and the performance of our brands in current markets, we are now ready to expand into additional markets. In the first quarter of 2018, we will be expanding into Arizona, Colorado and Illinois. We also continue to invest to grow, progressing further on our warehouse expansion and putting away barreled whiskey inventory during the year. Our investment in warehouse capacity is now authorized to reach $33.8 million and through year end, we had incurred approximately $26 million of this investment. We remain committed to investing to capitalize on the macro consumer trends benefitting both of our business segments. We are well positioned in the market and remain focused on our key strategies over the long term. While we may experience some quarter-to-quarter volatility, we remain confident that focusing on these strategies will drive superior long term shareholder returns. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer-portion of the call.

We will begin the question-and-answer-session [Operator Instructions]. The first question comes from Bill Chappell from SunTrust. Please go ahead.

Can you talk a little bit about just the timing of shipments in the third quarter, fourth quarter? How much that affected some of the premium spirit sales? And then anything more you would talk about in terms of if you know exact levels of lightly-aged whiskey that was sold in the fourth quarter versus third quarter?

Bill, we're not ready to peel back that any further into actual. We gave the brown and white sales. But in terms of peeling those back any further into particular product segments or particular product types, we're not ready to do that. And in terms of a quarter-to-quarter volatility, as we've said we have some of that. Some it's due to the nature of our customers, their order patterns and so forth. And so we think what is really important is we look at the long term and we would encourage you to look at the long term rather than volatility within quarters.

And on the inventory build for barrel distilled, obviously you did increased it in 2017, the increase wasn't as much as 2016 and 2015. How do you look at it both from a market demand standpoint but also from a natural gas and corn and other input standpoint for 2018? Should we see the level of some million growing from here, or do you feel like you've topped out and it should be a lesser amount going forward?

First of all, we're committed this year to growing it, we're committed to continuing to grow it. Still very favorable conditions, I think in terms of natural gas and commodity prices and barrel availability. That's all good. In terms of demand, both short term and long term, certainly all the data points to the continued of the growth for the category. So we feel very good about that. We were able to put away a substantial amount in this fourth quarter. And it's important to understand that we're not just putting away barrels, we have plans to put away specific match builds and specific quantities of those match builds. In the fourth quarter that just simply just lined up better with our customer orders, so we were able to -- we're producing for our customers and putting away for our shelves. At the same time, we're early in the year that didn't quite line up that way. So we're pleased we were able to put that away. And obviously, it didn't have any impact on our fourth quarter sales even though we were putting away a lot of barrels. In terms of longer term, as I said we're committed to building net inventory. We expect the rate of growth to slow as we start selling more aged whiskey and we will think those sales would start to increase in 2019.

And then last one from just in terms of customers, I mean there is a lot of conversation about new competition coming on. Are you winning any new customers, this quarter or last quarter? Or is it mainly just trying to maintain your current customer count. Can you take on new customers, just trying to understand how the ebbs and flows of the customers work for specialty brown spirits?

We are taking on new customers. We are winning new customers. We are committed to investing both in terms of inventory and warehouses and people and new capabilities and new product offerings to make sure that we maintain our strong position in the market. Certainly, there are competitors out there. We think the basket of services we offer, our capacity our commitment, our ability to meet their long-term needs, our ability to sell them rightly aged whiskey now and eventually sell them four year old or older whiskey, all those things together and particularly our commitment to them, to that partnership and to their long term success, sets us apart and gives us a very strong position in the market.

The next question comes from Mr. Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead.

I wanted to ask about your food ingredients business. I know that’s not an area where perhaps as many people are focused, but it looks like you’ve had several strong quarters in a row there. The gross profit up pretty nicely for several years in a arrow now. How much of that do you think is sustainable? Would you say that the ingredient solutions business I mean is that part of when you talk about the company growing revenues high single digit in 2018, which you envision ingredient solutions being a big part of that. And just trying to understand there has been a lot of evolution in the landscape, big increase in interest in plant based proteins and other products. We’ve grocery stores and restaurants. Can you give us a better sense of what types of products customers are increasingly using your ingredient in and how that could evolve over the next couple of years?

Well first, let me say we’re really excited about the macro trends. For the last 18 months, as we’ve been talking about this, sometimes I feel like I was talking to myself because a lot of the work was going on behind the scenes and wasn’t really showing up in the P&L or at least it wasn’t showing up at a level that got other people excited, other people outside the company and excited about it. So these trends of enhanced protein, enhanced fiber, non-GMO and particularly plant based proteins very strong. And so while it’s a small piece of our business and we’ve been doing a lot of work behind the scenes to get ourselves positioned to really maximize that potential. As you pointed out, over the last three years, gross profit dollars have grown 50%. Our margins have expanded 560 basis points. So we’ve had a lot of good things going on there. And for these reasons, we really see Ingredient Solutions as a core piece of our long-term strategy. Your question about how are people using it, we continue to see people expanding how they use our Fibersym product. And so at some place it’s a low carb offering in some products, some place its increased dietary fiber, niche thereafter. We're also seeing for our rice product, we're seeing expanded usage of that to enhance protein. And then of course our TruTex business, which we're particularly excited about, we're seeing an ever increasing range of customers and what they are offering to the end customer in the ways that they're taking that textured wheat protein and turning it into an alternative to animal protein.

And then if I could just ask briefly on your brands. Can you comment a little bit on how they performed in some of the news markets? It sounds like you're going to see new places in 2018. Can you give us a sense of I guess just in the some of the original markets that you launched the brands in. Do you feel that you're in the third, fourth, fifth inning where you are in the evolution in those markets and how do we should think about that as you move to incrementally more markets presumably every year?

As we've said before, this is a very long term initiative. We expect -- we want to do the right things now to build these brands the right ways, to build our organization in the right way, find the right partners. So that long term these will be significant contributors to us. And so it's really important for us to make careful prudent steps. And as we get confidence as we get learnings to make additional steps. So in our original markets, we had to -- we learned that our packaging wasn't right until American Wheat Vodka and we went back and repackaged it before we went any further. When we brought the George Remus brand, we completed the packaging and strengthening to positioning and strengthened the actual product itself before we went any further. So we've really -- we're careful to make those steps. We've build out organization and not only our people but our processes and our systems to the point we said okay, this is a robust enough organization to support another step. The brands themselves after we repackage till after we repackaged George Remus, as we introduced the Remus Repeal Reserve. We said, we have the right system behind it, they're doing well enough in the market, we're confident that in their point of evolution that they're getting traction, that the consumers understand the proposition, they like the brand that our distributor partners are getting behind them, because they see the potential in the brand. So we felt good enough about those results, that now the next to your markets, the Arizona, Colorado, Illinois, are significant markets. They're still only puts us in a portion of the U.S., but we think it's -- we have enough confidence and the performance of the brands in the existing markets, both with consumers, the takeaway of retail, and also with our distributor partner support that we felt, okay, now we can go to another -- take another step up in terms of market complexity, market size. And we'll and test our theory that we know that we have what we need in place.

The next question comes from Mr. Francesco Pellegrino from Sidoti and Co. Please go ahead.

So I want to ask you about the premium beverage alcohol sales growth, the additional color about brown experiencing 25% growth and white 8%. I don't want to get into the mix of the quality of the aging that was sold throughout the quarter. But could you breakdown that 25% for brown a little bit more? How much of it was due to pricing, how much was it due to volume?

We’re not prepared to pull that back any further that this time.

So it looks as if you guys are maintaining your long-term guidance. And when I looked at the guidance that you guys had provided last year, you had provided 2016 as a base and more of a two year period outlook with some additional insight just for the 2017 year. And I guess just taking a step back and saying what went wrong, what went right. You guys are guiding for just modest revenue growth for the consolidated business and you got some pretty strong growth towards the entire year. And I’m wondering what exceeded your expectations, maybe what underperformed what movements that you have going in the right direction to get that outsized top line growth.

So Franceso, I think overall the business performed in line with our expectations. Drilling down on the revenue piece a little bit more within premium we saw as you mentioned the 25% growth in brown goods. And a lot of that was supported by the broader category trends that Gus highlighted so primarily volume as our customers’ business grow. Certainly we look to take pricing when we can but you know going forward, I think we nothing has really changed in terms of how we view the market, we continue to feel optimistic and that’s evidenced in both our put away this quarter, which was one of our strongest quarters to date, as well as the incremental investment we’re making in warehouses for this year. So does that answer your question in terms of how we’re looking at?

Is there a number or range that you guys are thinking about for CapEx spending in 2018?

We’re going to be fairly consistent with this year at $22 million is currently what we have in the plans for 2018. And that will include continuation of the warehouse program as that program is now authorized at about $34 million.

And when I think about the initial roll out for Arizona, Colorado and Illinois. Did I get those three right?

Yes.

Could you just maybe help us understand maybe what the initial sell-through into those empty channels will be and maybe what the volume uptick? Whether its cases barrels could be in the first half or first quarter? Because it sounds as if nothing really occurred in the fourth quarter?

We said we’re going to go into those in the first quarter. And so again, this is a long-term gain. So we’re not trying to get distribution in every retail outlet in any of those markets. We’re very focused, which serves us well in terms of maximizing our resources. It serves us well in terms of our partnerships with our distributors, because we’re not asking them something unrealistic. We’ll give them a target list of accounts, the ones that really matter in terms of building the brand for the long-term. So we’re not asking for 100 cases on the m-cap and a grocery store, we’re asking for to make sure we get distribution the key on premise bars and restaurants and the key off premise stores where people come to look for premium products like that. And then we’ll gradually build that distribution all through ’18. And so we don’t break out those sales anyway but you wouldn’t see a tremendous pop in early months. Surely there will be some pipeline there'll be some pipeline with the distributor. But what really matters is building that quality distribution, making sure we're running the marketing programs and our sales effort behind it and building those brands over the long term. So as I said, it's really we're focused in the long term and we do it right it won't show up in our numbers there for a while.

And just the last question for me. When I do the math for the out years revenue and earnings growth potential for the business, you can arrive at some really interesting numbers. The one thing that has been a little bit puzzling to me I guess over the -- that I saw in 2017 is how do you get operating leverage from this business model. Because your volume sales on a consolidated basis were up 10% but your SG&A grew 22%. So maybe a different way to ask the question will be. What percentage of your SG&A currently is fixed and what percentage of that is variable? And at what point do we get to see significant operating leverage in the model?

So yes, SG&A was up sizably in 2017, up 24%. And a lot of that was investment to set up the fundamental brand based business platform for both in terms of people and a base level of A&P spend. Now, as we go forward, we do continue to, in '18, expect SG&A to grow as we expand that platform but not at the rate it grew in 2017. So overtime, as we further establish this branded platform, it certainly will fund that SG&A investment we're making for the longer term.

I think it's important to understand that we really came from ground zero. So when you add people, the incremental increase is significant. But as we go forward, we won't be adding those similar types of incremental increases.

And as you start to tap into that 2015 barrel distilled inventory levels and leverage the infrastructure or the cost base that you currently have in place. That's what I'm really getting at…

Yes, you’ve got two drivers going forward, the moderation of SG&A as well as the margin growth you get from deploying the aged inventory.

[Operator Instructions] The next question comes from Chris Leshock from Ballast Equity. Please go ahead.

Couple of questions here I'd like to turn through. Are there any tax savings on the excise tax side of things coming from the recent tax law changes in December that could benefit you guys on the top line?

For us directly no. Our customers are the primary beneficiaries from that tax law change. But certainly, any favorable tax change for the overall industry is a benefit for all the players.

I know it's pretty substantial if you're selling to retail. You mentioned the three states you're adding in the first quarter. If you count those, how many total states are you selling in at the end of the first quarter?

I believe 12.

And at what point will you start to give some -- either some information or some data on the branded sales?

Right now it’s not material impact our business. Certainly, when it reaches that threshold where it becomes a more material driver, we’ll certainly begin to split that out for you. For right now, it’s important for us. It’s a start up business in an incubation mode and it’s important that we focus and invest on it and then overtime we’ll be able to share more in terms of results.

Chris, I think it’s important to understand, we’re taking a slightly different dramatic approach to many people who launch brands. So it’s not uncommon to see the announcement that somebody starts out in from on and then in the first quarter they are in all of the coast and by the end of the year they’re nationwide, which may work fine for their expectations and what they want to do with their brand and how they’re trying to build it. We’re taking a very deliberate approach. So this was a brand new initiative for us getting into brands. We want to make sure we didn’t stuff our toe too bad. We want to make sure that that we had, not only right sales in marketing but also the right way to account for things, the right way to process the orders and so forth. So it really was completely from ground zero. And then we want to make sure that we don’t get too aggressive and cause ourselves problems. In terms of we want to make sure that our customer service and our order processing and all of that was there to support it, we want to make sure that our marketing programs were effective. So some people might take a big gamble and hope for a big hit. We’re taking a very pragmatic steady approach to it. If we do well in Arizona, Colorado and Illinois, we’ll say okay, those are big markets, those are bigger markets than we’re in now. And then we’ll say okay, now we’re ready to go into another tranche of more meaningful markets, because we’ll have confidence in our sales and marketing and people and programs and systems and they’ll be battle tested and we know that we’ll be able to support bigger effort.

Would it be fair to say that the 24% increase in SG&A, the bulk of that increase or at least say the majority of that increase, was related to the branding efforts over the year?

The biggest driver was the branding efforts, yes.

At least from my perspective, Gus, I can see the plan you’ve laid out we’ve talked about it several times in the past. And not concerned but the spend dollars are clearly showing up now and starting to impact profitability a bit. I think that was probably the biggest surprise in the quarter was the $2 million increase quarter year-over-year in SG&A. But as we all know, you’ve got one chance to roll this out and do the branding effort right. And apology on doing it slow and steady, but in the same breadth, it will be nice to see some of the top line revenue dollars showing up at some point. So any help you can give on that would be appreciated. One last question, just wanted to clarify on the warehouse expansion that’s now up to $34 million in total spend. What was the total spend approval prior to this? And in general, is the warehouse capacity pretty much fully utilized, or is there -- has it been below capacity?

So we were at about $28 million prior, so we've added to it. And that's really continued customer demand that is driving additional tranches to this warehouse program. Essentially as the warehouses get completed, they get immediately put in dash. And so we forecast out with our customers in terms of their overall needs. And as they continue to up their estimates of growth, we continue to add warehouses to support their growth.

Any rough split of the warehouse capacity? How much product is in there? Is customer bought and paid versus product that you are funding the cost on?

The majority is for supporting our customers, yes.

This concludes our question-and-answer-session. I would like to turn the conference back over to Mr. Mike Huston for any closing remarks.

I think I'll take that. Thank you for your interest in our company and for joining us today for our fourth quarter and full year call. We are certainly pleased with the continued strength and momentum we experienced this year and look forward to talking to you again after the first quarter.

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