MGP Ingredients, Inc. (MGPI) Q4 2018 Earnings Report, Transcript and Summary

Good morning. And welcome to the MGP Ingredients Fourth Quarter and Full Year 2018 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. Please go ahead, sir.

Thanks, Laura. 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 2018. I'm Mike Houston with Lambert, 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 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 website, www.mgpingredients.com. At this time, I'd 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 a discussion of progress against our strategy. Then, we'll take your questions. Now, turning to results. 2018 marked the fourth full-year of the implementation of our strategic plan and again, we are reporting strong financial results, consistent with this plan. The improved momentum of our business and continued solid execution of the strategic plan allowed us to deliver on all elements of our guidance for the year. We saw increased demand for our premium beverage alcohol products in the fourth quarter as well as a very strong performance in our Ingredient Solutions segment. Consolidated net sales for the year increased 8.2%. Gross profit increased 10% and the operating income grew 16.9%. Looking at each segment individually, in our Distillery Products segment, full year net sales grew 7.9%, as we continue to see strong demand for our premium beverage alcohol, which grew 5.9% year-over-year. The growth within premium beverage alcohol was driven by an 11% increase in net sales of our brown goods. We are very pleased with the continued strong demand for our premium beverage alcohol products, supported by our ability to cultivate strong partnerships with existing customers, as well as attract new customers. For the third consecutive year, we have added more incremental new customers than the prior year. This is a direct result of our initiative to increase our sales coverage and better tailor our product offerings. These results also reflected the robust underlying growth of the American Whiskey category and our role in supporting that growth. The increase in net sales of our American Whiskey offerings was across our portfolio, with new distillate net sales driving the vast majority of the increase in the fourth quarter. While typical volatility of order flow was evident in quarterly net sales throughout the year, our premium beverage alcohol business delivered solid annual revenue growth and sustained margin as expected. Based on recently released 2018 data, from the Distilled Spirits Council, our full year net sales growth in total premium beverage alcohol outpaced the overall U.S. spirits industry. And net sales growth for our brown goods outpaced the American Whiskey category. We continue to grow share in a growing market, as we benefit from being exposed to the fastest-growing categories in segments. While segment gross profit grew 7.4% to $71.8 million due to strong demand and solid pricing for brown goods, pricing pressure in the white goods and industrial alcohol market impacted gross margins. Overall, gross margins declined 10 basis points for the year. We do expect these market driven headwinds to continue in 2019 and have factored them into our outlook. Sales of dried distillers grains or DDG had a positive impact on our distillery products segment in the fourth quarter, primarily due to improved pricing. While we have experienced improved pricing this year as compared to 2017, we maintain our view that these results are not a sustainable trend due to the unchanged macro environment that led to lower pricing beginning in the first quarter of 2017. Consistent with our long-term strategy, we continue to invest in our inventory of aged whiskey, which enhances our ability to attract and retain new distillate customers, supports the development of our own brands and strengthens our market position. Due to the sustained robust growth of the American Whiskey category, we continue to see strong demand for aged whiskey, as customers seek to fill inventory gaps, driven by higher than expected consumer demand. Throughout the year, we continue to leverage limited sales of aged whiskey to support our existing partnerships and attract new customers for our new distillate products. Even with these strategic sales, we increased our yearend inventory by 16.2% compared to the prior year, reaching $76.4 million at cost. Turning to ingredients solutions. Net sales for the year grew 9.9%, while gross profit improved by 28.3% to $11.8 million. Gross margins expanded 270 basis points, supported by higher net sales across all product categories. This was a very good year for ingredient solutions. We are particularly pleased with the gains we experienced in both our specialty wheat proteins and specialty wheat starch businesses for the full year. We continue to be well positioned against the increasing consumer demand for healthy eating alternatives. During previous calls, we have highlighted the increased consumer interest in plant based proteins and the success of our efforts to leverage this trend with our TruTex textured wheat protein product. While that consumer trend remains robust, we did lose a large customer for that product due to their decision to reformulate their plant based burger. Despite this loss, we are pleased with our project funnel of new customers and projects and are confident that we will continue to benefit from this trend over the longer term. Overall, both of our business segments continue to benefit from favorable consumer trends and our strategic plan has us well positioned to fully capture the potential these trends offer. Our 2018 results reflect both the strength of that positioning and the momentum we are building as we continue to execute against that plan. This concludes my initial remarks. Let me now turn things over to Tom Pigott for a review of the key metrics and numbers. Tom?

Thanks, Gus. As Gus highlighted, this quarter featured strong revenue growth and gains in gross profit in both segments. Overall, we were pleased with the balanced top and bottom line performance of the business. For the quarter, consolidated net sales increased 18.9% to $104.9 million, reflecting growth in premium beverage alcohol and the ingredient solutions segment. Gross profit increased 31.2% to $25.6 million, reflecting stronger gross profit results in both the distillery products and ingredient solutions segments. Gross margin increased by 230 basis points to 24.4%, reflecting a 190 basis point improvement in distillery products and a 380 basis point increase in ingredient solutions. For the year, our consolidated net sales increased 8.2% to $376.1 million as a result of growth in both segments. Gross profit increased 10% to $83.6 million, driven by strong gains in distillery products and ingredient solutions segments. Gross margin increased by 30 basis points to 22.2% for 2018, reflecting consistent performance in distillery products and a 270 basis point improvement in ingredient solutions. Corporate selling, general and administrative expenses for the quarter were flat compared to the prior year quarter. For the full year, SG&A increased slightly to $33.5 million from $33.1 million compared to the prior year, primarily due to investments in the MGP brand's platform in the form of personnel costs and advertising and promotion. Operating income for the fourth quarter grew significantly to $16.6 million compared to $10.5 million during the prior year quarter, reflecting gross profit growth in both segments. For the year, operating income increased 16.9% to $50.1 million compared to $42.9 million in the prior year, also primarily due to gross profit growth in both segments. Our income tax expense was $4.5 million in the current quarter compared to a tax benefit of $2.4 million in the prior year quarter. This benefit reflected the revaluation of the company's deferred net tax liability in response to the Tax Cuts and Jobs Acts becoming law in December of 2017. For the full year, the corporate effective tax rate was 23.9% compared to 20.7% in the prior year. Net income for the fourth quarter decreased 6.5% to $11.8 million and earnings per share were $0.69, reflecting the deferred tax liability revaluation benefit during the fourth quarter of 2017. For the full year, net income decreased 10.9% to $37.3 million and earnings per share decreased to $2.17 from $2.44 per share in the prior year, primarily due to the net gain on the successful sale of ICP in the third quarter of 2017 as well as the deferred tax liability revaluation. MGP's balance sheet remains strong, allowing us to continue to invest to grow as well as return funds to shareholders. We've discussed the strong fundamental cash-generating capability of our business, which allows us to provide strong cash flow even as we invest in our warehouse project and grow our library of aging whiskey inventory. Following on a strong 2017 performance, 2018 produced cash flow from operations of $33.5 million, even as the company invested a net $10.6 million in 2008 toward growing our barrel distillate inventory for aging. We continue to have very good access to capital. At year-end, MGP had $139 million available under its credit line and $5 million of cash on the balance sheet. Recently, the Board authorized a first quarter dividend in the amount of $0.10 per share. We are pleased to increase our quarterly dividend in response to the very strong financial performance and continued confidence in our business to deliver strong cash flow from operations. Additionally, the Board also authorized a $25 million 3-year share repurchase program. This program demonstrates our ability to both invest to grow as well as return funds to shareholders. Now, turning to guidance. As outlined in the press release this morning, MGP has offered the following guidance for fiscal 2019. 2019 net sales growth is projected to be in the mid single-digit percentage range versus 2018, subject to some volatility due to the current conditions in the industrial alcohol market. 2019 gross margins are expected to increase modestly compared to 2018. The company's estimate of growth in operating income in 2019 is 15% to 20% off the higher than expected 2018 results. The 2019 effective tax rate is forecasted to be approximately 21% and shares outstanding are expected to be approximately 17 million at year-end. Earnings per share is forecasted to be in the $2.55 to $2.65 range. Please note that the shares outstanding guidance and earnings per share do not include any potential impact from possible share repurchases. Now, let me turn things back over to Gus for concluding remarks.

Thanks, Tom. Overall, we are very pleased with our quarter and full year results and the progress we've made against our strategic plan. In our distillery products segment, our ability to leverage the continued growth of the American Whiskey category has produced strong results and offers us great potential. Our efforts and investments have us well positioned to continue to support the growth of this category. We have expanded our premium beverage alcohol product offerings, capabilities and sales coverage. The addition of our new international sales manager will enable us to more fully benefit from the global growth of the American Whiskey category. In 2018, we made significant progress in our $51.8 million warehouse expansion program, purchasing new land and opening new warehouses. We have now invested approximately $44 million and expect the project to be completed in 2020. We also continued to grow our inventory of aged whiskey and this valuable asset enhances our competitive position. While we have been consistent in our strategic use of limited sales of aged whiskey over the past several years, 2019 marks the next phase of our deployment of this inventory. We will begin selling both more aged whiskey and older aged whiskey. We will continue to work with our current and prospective customers and are pleased with our progress, implementing this initiative. As a result of sales already transacted and ongoing discussions with customers in the craft segment, multinational and national brand owners as well as the export market, we are confident that we have visibility to the aged sales we need to deliver against this year's guidance. Even with these increased sales, we expect to grow our inventory balance in 2019. And with the steady supply of inventory from our yearly put away, we feel confident that we have the resources required to support long-term growth. There is and will continue to be some competitive aged product in the market, in some cases, at lower prices than ours. We believe that our ability to consistently offer a wider range of high quality products will enable us to continue to achieve strong pricing in line with our expectations. While the focus of our distillery products segment will always be supplying other brand owners with premium distilled spirits, we continue to be pleased with the progress of our brands initiative. During 2018, we expanded both our portfolio of brands in our geographic footprint. To our brands portfolio, we added our first proprietary rye, Rossville Union Master Crafted Straight Rye Whiskey. We also introduced the second release of our award-winning Remus Repeal Reserve Series. Most recently, we launched Eight & Sand Blended Bourbon Whiskey, a blend of fine bourbons and whiskeys inspired by the American railroad. In terms of market expansion, during 2018, we introduced our brands into Arizona, Illinois and Colorado. Most recently, we announced our expansion in to Texas. This expansion is a result of our confidence and the progress we have made in our existing markets. Our portfolio of brands has consistently received high accolades. Winning awards generates consumer awareness, which leads to consumer trial and adoption, which eventually leads to additional retail distribution and support. We are beginning to see this progression take shape with our brands. We will continue to invest in our brand's portfolio and this investment is reflected in our profit outlook for 2019. We will also continue to maximize value in Ingredients Solutions segment. 2018 was an especially strong year for us as we saw strong growth in our key specialty product lines. We will focus on maintaining this high level of performance by leveraging the key consumer trends of plant-based proteins, high fiber, high protein, non-GMO and clean label as we have done in the past. We also made significant progress on our operational excellence strategy. We launched an enhanced comprehensive employee safety program, Safety Up, to raise our safety practices to the next level and make safety a more integral part of our culture. Additionally, both our facilities achieved AA ratings from the recent British Retail Consortium Food Safety Audits. Lastly, I want to mention that all of our facilities ran very well in the fourth quarter, overcoming the challenges we mentioned earlier in the year. We remain focused on these key strategies over the long term. While 2018 can serve as a reminder that we may experience some quarter-to-quarter volatility, we are confident that our strategy and investments have us well positioned and will provide us the resources we need to deliver strong growth in 2019 and beyond. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Alex Fuhrman of Craig-Hallum Capital Group.

Great. Thank you for taking my question and congratulations on a really strong year. I wanted to ask about the guidance for 2019 and specifically the commentary around this is the year where we're going to start to see some more meaningful deployment of aged whiskey. Just wondering when we should start to see that, if you're seeing that already in the first quarter or if that's perhaps more back-end loaded? And then just specifically with your comment about intending to continue to grow the aged inventory throughout 2019, just wondering how we should interpret that if we should then expect to see more substantial sales of aged product in 2020 and thereafter? Or if perhaps, I know in the past, you've talked about 4-year-old whiskey really being the sweet spot where you're getting the greatest return on aging it. Is it possible now that perhaps there are opportunities to get an even greater return on 5 or 6-year-old whiskey?

Alex, you are correct. As I said, 2019 is really the next phase of this deployment. Aged, sales of aged whiskey will be a key driver of our growth in '19. We have started contracting that. We have started transaction-ing it. In terms of how it will flow out over the year, we will try to provide color on that much as we did with the fourth quarter, where we said the vast amount was due to new distillate, so we'll try to provide color on what's driving our revenue growth. But as you know from our past history, our business can be choppy and this is not going to flow out like a consumer product, but we are, we feel very confident that we have visibility to the aged sales. We need to deliver the guidance this year and it will continue to be a driver of our growth going forward in future years. We are going to increase our inventory, so we're going to continue to put away whiskey at a strong pace to make sure that we have the incremental inventory in future years to continue to drive that growth from incremental sales of aged whiskey.

And then just thinking about the guidance for the year, looking for mid-single digit growth in revenues. Is there anything you can share with us about your expectation for the beverage segment, is that expected to be in line with that mid-single digit growth as well?

Well, we don't give guidance by business segment, but we do have two headwinds or factors that could go into that. One is the continued headwind in industrial alcohol and we're seeing a little bit more competitive pricing in white goods, in general, so that's certainly a headwind that's factored into our guidance and then ingredient solutions is going against a very strong comp and that's also factored into our revenue guidance.

And the next question comes from Bill Chappell of SunTrust.

Thanks, good morning. Hey, Gus. Bear with me, but I'm going to ask a few short answer questions that maybe help clear my head a little bit on this. Is there any change in expectation that you can get three times the price for aged inventory.

No, even though I highlighted that there is some competitive aged whiskey out in the market and will continue to be, we think the consistency of our offerings, the quality of our offerings, that combination and really our efforts to provide structure to unstructured market, will allow us to continue getting strong pricing. So, no, no change in our expectation.

And if I look at your guidance for '19, that includes, is it fair to say that includes what covers part of what you've contracted for so far, but does not include all, selling all of the class of 2015 inventory?

It includes us selling, the aged whiskey, we need to deliver our guidance. As I mentioned before, we have some potential headwinds, industrial white goods pricing, strong comp in ingredients. And we don't feel the need to, we don't think it's in our best interest, our interest is in maximizing the value of that inventory, and so as opposed to focusing on sweeping out the warehouse of all four-year-old, that wouldn't be prudent. So we will judge the market, use it judiciously, use it to make sure we deliver the guidance and get them, if pricing is still great and we can sell more, we will, but we're not going to focus on emptying the warehouse at all cost just to do that. So we'll constantly look at the market, we feel confident we have the levers, both for this year and future years to continue to drive that growth.

And if you look at, I think you kind of alluded to that. But people have called around for some of the third party distributors and found that you can get a barrel for less than three times? Just kind of maybe highlight why that's not a concern? And also kind of tying into that, naturally, the bourbon facility, the craft industry has boomed and actually some of these companies are going to go out of business. Doesn't that supply change the dynamics down the road in terms of what you can get for your aged barrel distillate?

Yes, so, you are correct that there are and will continue to be other people out there selling aged whiskey. I think the two things that is important to focus on is consistency and quality. So if you're a brand owner, what you want is a consistent high-quality supply over the years. So as you referenced, if somebody goes out of business, that means there will be inventory for a short period of time, but it won't be able to continually source that same product over time. So we work with, we've built strong partnerships with our customers, we guarantee them that we can deliver, we can support their growth long term, they will be able to get the same consistency of mash bill, the same consistency of quality that they've always gotten from us and so that puts us in a strong position to continue to achieve the pricing we expect.

And then can you just, two last questions on industrial. Can you just kind of at least put some parameters around it of how this compares to the drop-off in industrial we saw, what, two years ago and three years ago, is it that kind of headwind or is it just a headwind?

I hesitate to quantify that, because the industrial market has sort of consistently surprised us with the volatility, so that's some of the reason for the, how we baked it into our guidance. I think, really, until there's a fundamental change in the structure of the industrial market, there will continue to be strong volatility.

And then last one from me on the protein side, do you expect that business to grow this year with the loss of a large customer in line?

We don't give guidance down to that level, but we do expect that business to grow over the longer term. That's, the trend is very strong. Our product offering is very strong, our position in that market is very strong. As I mentioned, our project funnel, we have people looking to use it in chicken and beef and crab. So we're very, very encouraged by the breadth of uses and applications and the customer interest in using it and are very confident in the long-term trend for that product.

Got it, thanks. I'll turn it over.

And this concludes our question-and-answer session. I would like to turn the conference back over to Gus Griffin for any closing remarks.

Thank you all for your interest in our company and for joining us today. We are certainly pleased with the continued strength and momentum we experienced this year and look forward to talking with you again after the first quarter.

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