Good morning, and welcome to the MGP Ingredients First Quarter 2020 Results Conference Call. 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, Danielle. Good morning, everyone, and thank you for joining the MGP Ingredients conference call and webcast to discuss the company's financial results for the first quarter 2020. I'm Mike Houston with Lambert & Co., MGP's Investor Relations firm, and joining me today are members of their management team, including Gus Griffin, Chief Executive Officer; Dave Colo, President and Chief Operating 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 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 website, www.mgpingredients.com. At this time, I'd like to turn the call over to MGP's Chief Executive Officer, Gus Griffin. Gus?

Thank you, Mike. And thank you all for joining us. At the conclusion of our call in February, none of us could have imagined how our world was going to change in just a few short months. On the call this morning, we will provide details of our performance for the first quarter as usual, but we’ll also spend some time in our comments discussing items, which we believe will be of interest to you in the wake of the COVID-19 pandemic. Before we turn to the results for this quarter, I'd like to welcome Dave Colo to the call this morning, as our recently appointed President and Chief Operating Officer. Following my retirement in May, Dave will assume the role of CEO. I feel very fortunate to have had the opportunity to lead such a talented, passionate, and collaborative organization. I also appreciate the strong ongoing support of our Board. I've worked closely with Dave since he joined the Board in 2015, and I am confident he will be a terrific successor in leading MGP. As a Director on our Board, Dave played a critical role in supporting the company's growth over the past several years, and we are very excited to have him on the executive leadership team. Now, I will turn to the results for the first quarter. We are very pleased with the results this quarter, with consolidated sales increasing 11.2% and gross profit increasing 39.3%. These results reflect strong customer demand in both business segments, and improved effectiveness in our tactical execution. Our results for this quarter reflect growth in premium beverage brown goods sales, as well as significant year-over-year increases in sales of our specialty wheat starches and proteins. Looking at each segment individually, in our Distillery Products segment, sales finished the quarter up…

Thanks, Gus. For the quarter, consolidated sales increased 11.2% to $99.1 million, reflecting a 7.3% increase in the Distillery Product segment, and a 31.4% increase in the Ingredient Solutions segment. Consolidated gross profit increased 39.3% to $23.2 million, due to increased gross profit in both the Distillery Products and Ingredient Solutions segments. Consolidated gross margin increased by 470 basis points to 23.4% of sales, up from 18.7% in the prior year quarter. Corporate selling, general, and administrative expenses totaled $9.5 million for the first quarter 2020, representing an increase of 16.6% compared to the first quarter of 2019, primarily due to increased incentive compensation expense, inclusive of certain incremental costs incurred relating to the transition at the CEO position. Consolidated operating income increased 61% to $13.7 million, due to increased gross profit in both the Distillery Products and Ingredient Solutions segments, partially offset by increased corporate selling, general, and administrative expenses. Non-GAAP operating income increased 67.9% to $14.3 million, exclusive of CEO transition costs. Our corporate effective tax rate was 24.7% in the current quarter, compared to a tax benefit of 17.7% in the prior year quarter that resulted from a sizable vesting of share-based awards. Consolidated net income for the quarter increased slightly to $9.8 million, while earnings per share remained flat from the prior year period at $0.57 per share. EPS was affected by improved operating results and partially offset by a prior-year period tax benefit, resulting from the vested share-based awards. MGP's balance sheet and access to capital remains strong. We remain well capitalized and threw down additional funds on our revolving credit facility during the quarter to maintain a conservative cash position and have sufficient liquidity in the event the pandemic directly impacted operations. As such, we ended the quarter with a debt balance of $96.1…

Thanks, Brandon. Now, I would like to touch on some additional initiatives that support our long-term strategic plan, but first, address our outlook for the balance of the year. While we are off to a strong start to the year with ample access to capital and encouraging customer demand, our financial results for the balance of the year could be impacted by the COVID-19 virus. Given the uncertainty this pandemic has caused for nearly every industry across the world, it is impossible to predict with any level of precision the pandemic's cumulative impact on our future financial results. For these reasons, we are withdrawing our previous 2020 guidance, and we'll reassess this position based on the visibility of the macroeconomic recovery. Our balance sheet and access to capital continue to be strong, while we seek to optimize cash management during this pandemic. Although our long-term capital allocation strategy may experience little change, we seek to maintain a conservative cash position, as outlined by Brandon earlier. By renewing our credit facility and expanding our borrowing capacity earlier this year, we have enhanced our access to capital with attractive pricing and terms. As we navigate the effects of this pandemic, we will remain focused on prudent capital management, which is why we have elected to curtail stock repurchases while maintaining our quarterly dividend. The management team, in close collaboration with the board, has the ability to initiate the buyback program or adjust quarterly dividends as circumstances warrant. The American whiskey category continues to experience strong growth and we will continue to invest to support that growth. The demand and pricing in line with our expectations demonstrate the health of this category. If you'll recall from our communications last quarter, we continue to have a significant share and scale advantage and plan to…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ben Klieve of National Securities Corporation. Please go ahead.

All right, thanks for taking my questions. First, a couple of questions on the ingredient side. I'm wondering, first of all, if you could kind of break into the growth numbers that you saw in the first quarter. To what degree were there any lumpy one-time sales in there or maybe accelerated buying at the end of the quarter in advance of anticipated volume from consumer goods companies? How can we look at the results from that quarter in that segment in the context of the COVID-19 era?

Hi Ben, it is Dave. I will take that. So, I think as you heard on the call, our Ingredients business has continued to demonstrate good growth. I think it's primarily driven by the fact that we have a well-positioned portfolio both on the wheat protein and the wheat starch side. I think what you're seeing is kind of a continuation of strong consumer demand as consumers continue to migrate to a healthier diet and with our plant-based protein in the Ingredient sector, we really didn't see any anomalies, if you will in Q1 in that business. I think we're just seeing good strong underlying consumer trends with a well-positioned portfolio to support those trends.

Got It. That's great. Then sticking to that segment, to what degree do you see the consumer goods companies adjusting their R&D process in the area of social distancing? I mean, are you seeing delays, are you seeing complete shutdowns from that process or is that continuing relatively uninterrupted? What are you guys seeing on your end?

Yes, I mean, for the most part relative to the Ingredients, it's relatively been uninterrupted at this point. Although we are seeing some impact in the Foodservice channel primarily related to customers that serve. If you think about sporting event stadiums, entertainment venues of that nature and the products they produce to support those venues, we have seen a slight slowdown in some of those product lines. But for the most part, our portfolio is positioned against breads, pastas, snacks and obviously, those continue to be on trend and in great demand even during this pandemic.

Got it. Perfect. Turning over to the distillery segment you commented a couple of times on the improvement from the export market. I'm wondering if you can comment on a couple of things there. First of all, to what degree did you see kind of a broad macro improvement in the export market versus maybe just kind of uniquely strong execution from your team?

Yes, I think we are that kind of a new part of the organization for us trying to penetrate export sales and our comments were relative to the fact that we started to see some pretty good traction with customer interest and engagement during the first half of the quarter. The last half of the quarter has been impacted by COVID-19 in the fact that substantially, all travel has been shut down. So, it's been difficult to continue the engagement with the customers. It requires travel primarily into the U.S. or our team to go international but the comments were really specific to the work that has been done to date, started by paying some dividends in Q1 but we do see that being delayed until the pandemic clears and we're able to get back more active engagement with our customer.

Got it. Last one from me and then I'll get back in queue. Did you comment on you may be hitting the pause button, if you will, on pursuit of M&A activity, which certainly is understandable in the current environment? My question around that is to what degree do you look at the M&A market right now, especially on the branded Spirits side and see a meaningful decrease in valuations or is it too early to know that yet? I mean what are you seeing in that space right now as the world has evolved over the last six weeks?

Yes, I think there has been a significant slowdown in M&A activity globally, if you see, and if you're looking at Spirits Brands of our company, it's an interesting thing with the COVID impact and with the off-premise sales spiking, I'm sure some companies can view that actually as an opportunity to position themselves from an increased valuation perspective. So, I think we need to let this pandemic play out to really understand the impact on M&A activity and how it will or will not affect valuations of company.

This is Brandon. Just to add to that for a second, I think, to be clear and clarify, we put a pause or curtailed the share repurchase program during Q1. Our comments are on M&A, or is that we are necessarily pausing them at this point in time, but we did say is that we acknowledge that this environment is not generally conducive to M&A as Dave just mentioned, but that we will continue to assess opportunities to strengthen our position in growing markets in concert with our financial position in the upcoming quarters.

Got it. Okay. Thanks, Brandon. Very good. I think that does it for me. Thanks for taking my questions and I'll get back in queue here.

Thanks, Ben.

The next question comes from Bill Chappell of SunTrust. Please go ahead.

Thanks, good morning. I am going to ask probably more than two and less than 50 questions. Let's start with the aged inventory. There is more color around the sales this quarter. Was there a postponement from fourth quarter to this quarter? You talked about lower pricing year-over-year. Is that part of the plan to have lower than 3 times pricing and then maybe, is this a start of things to come? Do you feel like we're now getting the process moving forward, where you have more regular sales of aged?

Thanks, Bill. It's Dave. I think part of the sales we saw in Q1 were some carry-over that we expected in Q4. For the price in question, we had a very strong pricing quarter that we were sitting over a year ago, but our pricing this quarter is still in line with our for aged. As we go forward, as I commented in the prepared remarks, our approach with aged, with brown goods, in general, is that we want to make sure that we're in a position to grow our volume share and do that – the market-based pricing so that the end result is we maximize or optimize – excuse me – our profit in our brown goods sector. So I think you'll see us continue to talk in those terms and make sure that we're in a position where we're optimizing the profitability of the inventory that we have.

So just to make sure I understand, I mean, do you – you can make another probability of selling it above cost. That's all I'm just trying to understand. Do you think that aged – there is steady demand as we go through this year, the prices you're talking about.

Yes, I think our pricing in Q1 was certainly in line with the historical way we talked about it, 3 times, if you will. And we do see continued demand for both new distillate and aged whiskey going forward. I think what we're saying is we just want to make sure as we go forward that we're optimizing the profitability of the entire portfolio and not so focused on 3 times, per se, but making sure we're in line with market-based pricing as we move forward.

Okay. And then just last one on the whiskey. I mean, I know there have been some talking at the people for some international sales, particularly Asia. Have you seen any changes there in terms of demand for the aged?

Yes, I think it's – If you look at Europe, Asia, etcetera, I think there is still demand. It's been put on pause with the accounts that we've been pursuing simply because of the pandemic. As this passes and we understand more the macroeconomic impact of the pandemic, that will help us in line of sight to those – if the potential still exists, which we believe it will, and how quickly we can restore discussions with international customers.

Okay. And then switching to industrial alcohol. I mean, can you just give us some more color on how that business works, how it worked in the quarter? When I say that, the question I get is you make ethyl alcohol, we hear of ethanol players or Exxon or others kind of moving into this. And at the same point, you're saying you're uniquely positioned within the market. You're, obviously, expanding operations in Indiana as well as Kansas to meet the demand. I understand when Gus says we're not looking for near-term financial gain, you're not looking to price gouge. But at the same point, it would seem, it's pretty dramatic changes to that business over the next few months, so more color on both how you're uniquely positioned, how it works, in terms of kind of pricing and demand and new customers and stuff like that? A tutorial would be helpful.

Sure. So I think you know, I think when Gus made the comments we're uniquely positioned, we've been in industrial alcohol marketer and producer for a long, long time. It was really kind of the foundation of the company in its beginning and we know the market, we know the industry extremely well. The way, traditionally it works we contract the majority of our volume in the fall for the coming calendar year, our fiscal year, if you will. And then there is some volume that's left, it's sold on the spot market, but the majority of it is contracted. So our – any pricing spike that you would have anticipated as a result of this increased demand in Q1 from the pandemic, we already had the majority of that volume price, if you will. I think going forward, what we've historically said is the margins in industrial alcohol are very slim and there is a structural issue in the category. And what I mean by that is there is a lot of ethanol. There is oversupply of ethanol in the country right now that's been ongoing probably for the last two to three years. There has been an oversupply of industrial alcohol as well. And something structurally there would have to change before margins can be restored and either industrial or ethanol, for that matter. What's going on right now in the – with oil prices so low and nobody is driving anywhere because of the pandemic, the demand for ethanol is really been impacted negatively. So there is a number of ethanol facilities that are closed. What we always watch out for in that environment is making sure our understanding, if some of that ethanol capacity gets converted into industrial alcohol capacity. It requires a capital investment to do that, but that – there's certainly nothing stopping them from doing that other than the sheer economics of it. So, I guess what I'm trying to say is that there is a short-term blip in demand for industrial due to the pandemic. We're going to watch closely to see, post-pandemic, if the usage of industrial increases because of changes in behavior. Obviously, people more sensitive to viruses, et cetera, that could drive consumer behavior changes, that could increase demand for industrial. But at this point though, I think it's too early to tell how this is going to play out long-term.

So just trying to understand with the contract of – and I understand long term over the next few years, but I'm just trying to understand, with the way it's contracted out, does that mean – when would you start to see the benefits of the near-term spiking demand; was that this quarter or is that next quarter or is that at all? Are you kind of trying to step away from this and not try to build up too much?

Yes, I mean we were on our Industrial Complex, if you will, pretty much at capacity. So I think what we've tried to do to support our customers as their needs have increased during the first quarter here, is we've tried to optimize that output as much as we can. So we started the quarter, call it the first two-thirds of the quarter and we really didn't see an impact from the pandemic. It was really the last third of the quarter where we started seeing increased demand for industrial to make hand sanitizer. We did as much as we could to put as much volume through our Industrial Complex, if you will, to meet customers' needs. But as far – if this is going to continue, we think that we're continuing to see strong demand as we sit here today. It's hard to predict how long that's going to continue. From a pricing perspective, any spot purchases that occur for the next few months, there may be a benefit in pricing just because of the demand, but in the near term, I think we do anticipate seeing increased demand. The impact of that on pricing, as I said earlier, when the majority of our volume's contracted, so we're not going to see a real benefit from that and there is potential for the spot market pricing to increase.

Got it. And so last on this, are you adding new customers or is it just you're – just trying to understand. Are you just basically saying we are going to support our existing customers at pretty similar prices and any excess capacity is just going to go to them and so it's a level kind of increase or improvement over the next few months or you looking at outset new customers?

Yes. We have long-standing customer relationships, so, obviously, we're taking care of them first and including trying to support the additional needs they have. In scenarios like this, obviously, new customer opportunities exist because people start calling you versus you having to call them, so we also are evaluating new customers. But we'll continue that process as we go forward.

Got it. So one last question. Remind me, just on uniquely positioned, what do you – right now what you're doing differently versus just ethanol players?

Yes. Bill, this is Brandon. And so by uniquely positioned, going back to Dave's earlier comments that we've been doing this a long time. And we already have a standing customer base that's designed to as efficiently and quickly as possible get this type of product out to the market where it's needed the most and that's where we've been – and that's where we've been for more than 75 years. And having those relationships with those existing customer puts us in the unique position to really help respond to this pandemic in the most efficient way possible. Just to give you an example, on that, Bill, so one of our industrial customers, for example, is producing more than a million bottles of hand sanitizer per day for the response. MGP supplies, a majority of the alcohol of that customer. So just by going through our existing networks, we're able to uniquely add value and – to the overall effort in response to the pandemic.

Got it. Thanks so much.

Thank you.

Thank you.

The next question comes from Alex Fuhrman of Craig-Hallum. Please, go ahead.

Great, thanks very much for taking my question. I thought it was interesting, the acquisition that you made during the quarter. Can you talk a little bit more about the thought that went into that and what kind of an opportunity that could be to expand your gin business. And then just thinking more broadly about your portfolio of brands, obviously, a small part of your business right now, can you talk about how the current environment has impacted your expansion plans for your brands? And does that – does this change the execution of your branded strategy at all?

Yes. Alex, this is Brandon and I'll take a start at that. So yes, we're very excited for the acquisition of Green Hat Gin. It's currently, as you know, located or sold in the Maryland, DC and Virginia and we see this as a great opportunity as the largest distilled gin manufacturer in the United States throughout a premium, super-premium, very well-positioned brand to our portfolio. It's an effort that I think you probably know, we've been talking about potentially adding a gin for some time now and we're very happy to see it come to fruition. In terms of our overall effort in the branded space, like everybody else, we're not immune to a lot of the challenges that are out there, it's very difficult to launch new markets or to put a whole lot of new efforts in when you can't do live tastings and you can't visit retailers and distributors and so on. So like a lot of our peers, what we are doing is we're doing a lot of things virtually. We're trying to really keep our social media presence very prominent with our consumers and really trying to focus in on that effort until things normalize.

That's really helpful. Thank you and wishing you all the best at MGP and, Gus, wishing you well in the next chapter of your life here.

Thanks, Alex. I appreciate it.

This concludes our Q&A session. I would like to turn the conference back over to David Colo for closing remarks.

Thank you for your interest in our company and for joining us today for our first quarter call. We are certainly pleased with the results this quarter and the continued progress we've made towards implementing our long-term strategic plan. I'm excited for the opportunity to lead this company forward and build on the momentum, culture and solid operating results achieved. I look forward to talking with you again after the second quarter.

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