Good day, and welcome to the MGP Ingredients Conference Call and Webcast. All participants will be in a 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.

Thank you, Shantel. Good morning, everyone, and thank you for joining the MGP Ingredients conference call and webcast to discuss the company’s financial results for the third quarter 2019. I’m Mike Houston with Lambert and Company, MGP’s Investor Relations firm. And joining me today are members of their management team, including Gus Griffin, 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, 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. 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 anybody does not have – 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 for the quarter, updates on key financial performance metrics, and a discussion of progress against our strategy. Then we’ll take your questions. Now I will turn to the results for the third quarter. While the overall American whiskey market remains robust, and our position within that market is still very strong, timing and volatility of customers’ orders continue to be a challenge this year. As in previous quarters this year, we saw forecasted orders delayed due to customer funding issues and their desire to delay purchasing as long as possible. These issues have affected sales of both new distillate and aged whiskey inventory throughout the year. Despite this, we did have a very strong quarter for sales of aged whiskey, selling both more whiskey and older whiskey, as customers continue to need our inventory to launch new brands, fill holes in their inventory and support brand acquisitions. We believe these customer needs will be ongoing. While we are behind where we would like to be at this point in the year, we are off to a strong start to the fourth quarter, and we are confident in our line of sight to sales required to deliver against our full-year guidance. Looking at each segment individually. In our Distillery Products segment, sales for the quarter were down 6.4% to $73.3 million. While sales of aged whiskey were very strong this quarter, sales of new distillate declined for the quarter as in addition to funding issues and timing delays. Some of our existing customers reduced orders versus the prior year to work through temporary excess inventory situations. We do not believe these changes in short-term order patterns are any indication of…

Thanks, Gus. For the quarter, consolidated sales decreased 4.6% to $90.7 million, reflecting a decline in our Distillery Products segment, partially offset by an improvement in Ingredient Solutions segment. Consolidated gross profit decreased 4.1% to $18.8 million as a result of gross profit declines in both the Ingredient Solutions and Distillery Products segments. Consolidated gross margin increased approximately 10 basis points to 20.7% of sales, up from 20.6% in the prior year quarter. Corporate selling, general and administrative expenses for the quarter were $7.2 million, down 5.2% versus prior year. The decrease was due to lower personnel costs, including reduced accrual for incentive compensation based on year-to-date performance and other cost saving initiatives. This was partially offset by increased costs related to the company’s agreement to pay $1 million fine and an administrative civil penalty of $251,000 in connection with the chemical release incident in Atchison, Kansas in October of 2016. Excluding the resolution of those legal matters, we remain focused on effectively managing these costs, while still investing to grow. Consolidated operating income decreased 3.4% to $11.6 million, compared to $12 million during the prior year quarter, primarily due to a decrease in gross profit in both the Ingredient Solutions and Distillery Products segments, partially offset by the decrease in the previously described SG&A expenses. Our corporate effective tax rate for the quarter was 26.9%, compared with 22.9% in the year-ago period. The increased rate as compared to the prior year period was primarily due to the discrete tax impact of a previously described resolution of certain legal matters. Net income for the quarter decreased 8.8% to $8.2 million and earnings per share decreased to $0.48. These decreases from prior year results were primarily due to the decrease in operations and the change in income tax expense as earlier…

Thanks, Brandon. Now, I’d like to touch on some additional initiatives that support our long-term strategic plan. Our long-term strategy has us well positioned in the market and aligned with strong macro consumer trends. We continue to make the necessary investments to deliver long-term growth. We continued to expand our warehouse capacity during the quarter, bringing our total spend to date on the project to approximately $46.4 million of the $51.8 million budgeted for the project. As Brandon mentioned, we also invested an additional $9.7 million in our aging whiskey inventory. This brings our inventory of aging whiskey to $95.2 million at cost. We remain confident in the long-term value of this inventory and its ability to meet the needs of our ever-growing and diverse mix of customers. While we will be selling aged whiskey from this extensive library of inventory, we plan to grow the value of this inventory at cost through 2019. We remain confident in both the demand and pricing for our aged whiskey, as well as our plan for maximizing the long-term economic value. We continued to progress our brands initiative and are pleased with the strong gains we’ve made in our current markets. As a result, we are now beginning to expand into additional markets with the addition of Connecticut, Maryland and Washington, D.C. this month. We are seeing strong consumer acceptance of our core portfolio and great anticipation for our limited edition offerings that will be released next month. While we are not where we’d like to be in terms of year-to-date operating income growth, we are confident in our ability to achieve our full-year guidance. Both of our business segments continue to be aligned with strong macro consumer trends and our strategy has us well positioned for longer-term growth that will drive superior long-term shareholder value. Operator, we’re now ready to begin the question-and-answer portion of the call.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Alex Fuhrman, Craig-Hallum Capital Group. Go ahead, please.

Great. Thanks for taking my question, guys. My first question, I guess, is the reiterating of the full-year guidance. I mean, that would imply a pretty nice double-digit increase in sales here in the fourth quarter, along with a really nice increase in gross margin. Just wondering what you can tell us, Gus, about your confidence in that? I mean, it sounds like you’ve transacted some sales already here in October. Can you give us a sense of how much of your anticipated Q4 sales has already been transacted and for the sales that you anticipate for the rest of the year? Again, can you just give us a sense of what gives you the confidence that, we’re not going to see this pushed out another quarter or two? Are these maybe larger customers or customers you’ve had a more longstanding relationship with? Just anything you can tell us about that would be helpful?

Sure. As opposed to after the second quarter, when we gave you the percentages by how much had been transacted and how much we’re in discussions with and how much had been targeted with, we’ve progressed that quite a bit. And so now we’re really down to about a dozen customers that we’re dealing with. We’re an active ongoing discussions with them, specific customers for specific inventory to deliver those sales. The majority of them – the vast majority of them are existing customers. We don’t need them all to come through, and we feel – so we feel very good about that outlook. And that’s why we’re so confident in our ability to reconfirm our guidance.

Okay, that’s helpful. And then just kind of looking at the last three years, I mean, assuming you hit those numbers, Q4 revenue as a percentage of annual sales will have gone from about 25% in 2017 to about 28% last year to probably more than 30% this year. Is – given that, that’s such a big shift, I mean, is there something about just the nature of customer purchasing that, that would lead us to believe that, that trend will continue, or at least continue to be that, that Q4 is the most important quarter?

Well, I think it’s – we said that we were – this is a new – us adding structure to an unstructured market and taking this level of inventory – aged whiskey inventory to the market with something nobody ever done. So certainly, we got off to a little slower start than some people thought we would. We weren’t sure how this would fall out in terms of a quarterly basis. And now in the third quarter, we saw sales more reflective of our – how we thought it would go once when we started making this investment. So we see a diverse mix of customers with very similar needs. They need it because they want to launch brands, they need it because they need to fill holes in their inventory and they need it because they want to support their growth aspirations for brands they’ve acquired. So we’re seeing very similar needs that have always been there. It is just the – simply the timing of our customers’ demand to fill those needs. At this time seems to be skewing to the back-half of this year. I don’t know if that is any indication that year after year after year, it will continue to be the back-half. I think it is more – that it just happens to be a coincidence that the customers – diverse customers with similar needs all are feeling that need now. And I also think, as our sales of aged had picked up, it has certainly heightened our customers’ sensitivity to the scarcity of this very valuable inventory.

Okay, that’s really helpful, Gus. Thanks for that. And then just lastly, if I could ask about the big increase in barrel distillate inventory here in the quarter. I mean, it looks like that’s really the most you’ve ever put away in any single quarter, since you’ve been with the company. I mean, just kind of get a sense of how much of that is targeted investment to be selling three, four, five years down the road versus maybe just some of the new distillate sales you were hoping to get in the third quarter didn’t materialize, and so, they’re just technically on your balance sheet in September?

Alex, we sit down at the beginning of the year and think about how much we want to put away strategically, a lot of things impact the actual quarterly put away. You’ve heard us talk in the past about what mash bills we’re running. We put away sort of our core standard mash bills. So we’re depending on what we’re running that can impact it. And then certainly, what you’re seeing is a net number. So depending on sales versus the actual number of barrels we put away impacts that net number you’re seeing. We, again, we’ve said we’re going to grow it through 2019. We feel very good about the level of inventory we’re putting away to support future growth. So I wouldn’t read anything into our quarterly number, I would read it into our long-term intentions.

Okay, that makes sense. Thanks very much.

Thank you. [Operator Instructions] 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 for your interest in our company and for joining us today for our third quarter call. We continue to make progress towards implementing our long-term strategic plan and remain confident that it will provide us the resources we need to deliver growth in 2019 and beyond. We look forward to talking with you again after the fourth quarter.

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