Good morning, and welcome to the MGP Ingredients Second Quarter 2023 Earnings 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 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.mgpingredients.com. At this time, I'd like to turn the call over to MGP's President and Chief Executive Officer, Dave Colo. Dave?

Thank you, Mike, and thanks, everyone, for joining the call today. On this call, we will begin with an overview of our performance for the quarter ended June 30, 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 1, 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 accretive 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…

Thanks, Dave. For the second quarter of 2023, consolidated sales increased 7% compared to the prior year period to $209 million. Gross profit increased 29% to $76.3 million, representing 36.5% of sales. Advertising and promotion expenses for the second quarter increased 42% to $8.6 million as compared to $6.1 million in the prior year period. Of this amount, $7.9 million was invested toward our Premium Plus branded spirits, which represented 13.7% of total branded Spirits segment sales in the quarter. The year-over-year increase is consistent with our premiumization strategy, and we plan to continue to increase the marketing spend on our higher-margin premium plus price tier brands. Corporate selling, general and administrative expenses for the quarter increased $5.7 million to $23.5 million as compared to the second quarter of 2022. Operating income for the second quarter increased 25% to $44.1 million due primarily to the previously mentioned increase in consolidated gross profit. Excluding business acquisition costs associated with Penelope, adjusted operating income increased 29% to $45.6 million. Our corporate effective tax rate for the second quarter of 2023 was 25.3% compared with 22.4% from the year ago period. The increase in our corporate effective tax rate was primarily due to higher income before income taxes and lower tax credits. Net income for the second quarter increased 26% to $32 million, while adjusted net income increased 31% to $33.1 million. Basic and diluted earnings per common share increased to $1.44 per share from $1.15 per share. Adjusted basic and diluted earnings per common share increased to $1.49 per share from $1.15 per share. Adjusted EBITDA for the quarter was $51.2 million, an increase of 28% compared to the year ago period. The increase was primarily driven by the strong performance of all three business segments. Now an update on commodities. Corn,…

Thanks, Brandon. We are pleased with the strong performance this quarter. Demand for our products in each of the three segments remain strong, and we believe our actions will continue to position the business for long-term success. To account for our strong first half performance, along with the recent acquisition of Penelope Bourbon, we are updating our full year fiscal 2023 guidance to the following. We continue to expect sales to be in the range of $815 million to $835 million. Adjusted EBITDA is now expected to be in the range of $187 million to $192 million, reflecting an increase of approximately $9 million to the low and high end of the guidance range we provided last quarter. Adjusted basic earnings per common share has been revised upward and is now expected to be in the range of $5.35 to $5.50 per share, with basic weighted average shares outstanding expected to be approximately $22.1 million at year-end. The acquisition of the Penelope American whiskey brand on June 1 and the announcement in July to close our Atchison, Kansas distillery and exits of white goods and industrial alcohol product lines produced at that location by January 2024, marked two key strategic decisions for the Company. The Penelope acquisition is in line with our stated strategy to grow our branded spirits portfolio by acquiring brands that have strong growth trends and expect to be gross margin accretive to our business. The closure of the Atchison Kansas distillery and exit of the associated industrial and white goods products produced at that facility by January 2024, supports our overall gross margin expansion efforts by rationalizing product lines that are no longer economically viable and have provided a drag on consolidated gross margins. Going forward, we remain committed to leveraging the solid foundation we have established over the years with the ongoing objective of delivering sustainable long-term value for our stockholders. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

[Operator Instructions] The first question comes from Gerald Pascarelli with Wedbush.

So just to start on kind of some of your previous commentary. Obviously, your announcement to close the distillery in Kansas. You acquired Penelope urban over the course of the quarter. You've been clear that you want to drive margin-accretive growth, but should we view some of these recent actions as the Company may be getting a little more aggressive to drive this growth than you've been in the past? And specifically, should we maybe expect more kind of similar acquisitions to the Penelope acquisition that you announced a couple of months ago over the near term? Is that fair just in terms of what you're looking to acquire? And specifically, will it be in [Indiscernible].

Yes. Thanks, Gerald. The decision to close the Atchison distillery, let's start there. We've been talking about the negative impact that white goods and industrial had on our business for the last, really, two years. And we -- one of the reasons we could not really exit that business was that we had to figure out a way to decouple the distillery from the ingredients facility due to the fact that the distillery receives the waste start stream that's generated from the ingredients facility. And what we've been able to do figure out basically over the last 12 months is a solution to allow us to decouple which is that triggered the decision to go ahead and close the batches and distillery. So I'd say that's pretty consistent with what we've been talking about, but we had to come up with an engineered solution in order to make that happen, which we've now done. And we're always looking for ways to improve our margin profile in the business. And this is certainly a positive step in that direction. So I'd say it is an aggressive move, but we have it well thought out, and we have very good solutions that we'll be putting in place between now and the end of the year to allow that decoupling to occur. On the acquisition front, Penelope is right in the bull's eye of the type of brands that we would like to acquire. It's obviously an American whiskey brand, which continues to be American whiskey, one of the highest growth categories in all of spirits. It's been a high-growth brand in the ultra-premium and premium plus price points, if you will. So it's definitely a brand that we've been talking about that fits the profile of how we want to grow our premium plus segment of our business and brands. And absolutely, as we go forward, we continue to evaluate brands such as Penelope or brands in the American whiskey category, tequila category that meet the criteria of high-growth brands, margin accretive to the overall portfolio and that we feel has future upside in growth. So I don't know that it's a signal we're being more aggressive versus just consistent with what we've been stating our strategy is.

One more, and then I'll pass it on. This is just a housekeeping question. When we look out to 2024, just based on your commentary on being able to still produce -- potentially produce white goods at your other distillery. Should we I guess, simply speaking, are you planning on still producing white goods in 2024? Or is that unclear and up for evaluation at this point?

Yes. So we shared this morning, Gerald, that year-to-date, if you exclude the asset distillery white goods production in the Lawrenceburg, Indiana distillery was about $6.9 million worth of sales. We do this just for select customers. And this will likely continue, but a couple of things to note. It's not going to be significant. We don't expect, for example, all the volume and asset swing over to Lawrenceburg, right? So we don't expect it to be significant. It will be for just in select circumstances. And another thing to note because the amount of volume we're doing in Lawrenceburg is relatively much smaller than Atchison, we're able to use a different process, whereby the actual gross margin on that -- on those sales is actually positive. So just a couple of things worth noting.

The next question comes from Vivien Azer with Cowen & Company.

So I wanted to start on the guidance. Obviously, very nice to see the positive revision on the bottom line. But given that guidance now incorporates Penelope, I'm wondering if you can comment on the decision to hold the top line. Obviously, the range is reasonably wide. But are there any offsets that are worth calling out relative to the initial plan when you establish guidance in February around the underlying business where maybe you've gotten a little bit less constructive and Penelope is the offset allowing you to hold the top line?

Yes. And yes, so the guidance we issued this morning, the raise does reflect continued strong underlying trends we're seeing in our business and continuing to see. From a sales perspective, Ivan, our guide implies a year-over-year back half increase of 6%. And at the midpoint, which is very consistent with what we saw in the first half. Penelope is factored into our back half in the rest of the year guide. But our sales guide leaving an unchanged also reflects the uncertainty of the Atchison distillery closure is having as we look to transition plans with our customers in the back half. One other thing worth noting, Vivien, is it's emblematic of our continued success. We're having and margining up our business as it implies year-over-year EBITDA margin expansion, which is the continued direction that we're looking to take our business.

Certainly, and the improvement in the adjusted EBITDA margin is certainly nice to see. For my follow-up question, please. You noted that you've made some very good headway in terms of securing commitments in 2024. Can you offer any more incremental color on that new versus age and how the timing would benchmark relative to prior years?

Yes. So as Dave shared earlier, the majority of our expected brown goods sales next year are committed at this point. And that goes across all spectrums. So that's multinational and craft customers, for example, Vivien, and it's also new distillate and aged -- at this point in time, because we do contract out multiple years for new distillate, it probably skews more towards the new distillate side in the multinational customer type, as you'd expect, but it is representative of our whole customer set and portfolio.

The next question comes from Sean McGowan with ROTH MKM.

First question is on the decline in the segments under Premium Plus the value in mid. How much of that is due to you managing it down versus just reduced demand? I like some color on that, if you could.

Yes, Sean, the -- if you'll recall in the first quarter, we had outsized gains in our mid and value brands revenue, and that was due to the distributor realignment initiative that we announced in the first quarter. And I think what we're seeing is in the second quarter, obviously, we didn't have that onetime gain, and we did speak to that last quarter that we weren't expecting to continue to see growth in mid value once we got past the initial pipeline fill, if you will, associated with the distributor realignment. We are not actively managing down our mid-value brands. We're letting them basically follow a natural course of what's going on in the broader market around mid- and value brands. So it's not an active process we're pursuing to manage those down.

And then my follow-up is on the gross margin improvement, which continues to be pretty strong. How much of that -- can you quantify, Brandon, how much of the gross margin improvement, maybe particularly within Premium Plus, how much of that is price versus other factors?

Yes. It's definitely price and mix as we continue to naturally gravitate more and more of our portfolio to the premium plus price points, you're going to get that natural lift, Sean. And as we've discussed, that looking at not necessarily the top line of the entire brand and spirits segment, but looking at the growth of the Premium Plus sales is really indicative of where we're looking to take this portfolio long term because if we're successful there, you're going to see that natural margin lift as we saw in the quarter.

The next question comes from Marc Torrente with Wells Fargo.

Just a few here. On Penelope, there are limited financial disclosures with the initial release. Could you provide any more sizing growth expectations, margin profile, synergy expectations, et cetera? And then any additional detail on the earn-out provision from here?

Yes. I'll start. With that one, thanks, Marc. Yes, so the information we provided and disclosed Penelope was admittedly a little bit limited. We did that on purpose for competitive reasons. They are a customer of ours, and there may be additional similar type deals we look at in the future, and we wanted to disclose only as much as we thought necessary on that front. And this is a very margin-accretive brand. It's also, as already noted, an existing customer of ours. So a lot of the inventory they do have is at their cost, which was what we sold to them. And that's now transferred over. And as we work through that over the -- in the coming quarters and even years, in some cases, we do expect to gain those synergies on the cost side. And then as we roll out to additional markets and also gain points of distribution in the markets we're in, we expect to see further tailwinds there as well, Marc.

And then you touched on [Indiscernible] the recent actions that you guys have undertaken [Indiscernible] in any way for more immediate deals. Are you more focused on paying down the debt here? And then is Europe still a priority for you guys?

Yes. So this is not prohibitive for us to continue looking at assessing additional deals. Our leverage ratio is very manageable. It's under 2x on a net basis. So our facility and debt arrangements definitely give us the dry powder available if we do see something that makes a lot of sense for this business. And yes, as we discussed, Marc, brands like Penelope here domestically, make a lot of sense for us and where we're trying to take the brand spirits portfolio. But we also do see, to your point, and continue to see white space outside the United States. 97% of our sales are in North America. And so we see great opportunity to expand that and take our portfolio elsewhere over time.

And then just one more for me. Ingredient Solutions, will this now be completely separated from an operational standpoint? And how are you guys thinking about this business going forward?

Yes. Once we complete the decoupling process by the end of the year, Marc, the two facilities will be decoupled. We still think very highly of our ingredients business, and we'll continue to operate and grow that part of our business. It's probably been one of our most consistent performers and year after year growing top line, expanding gross margins and contributing to the bottom line. So at this point, we view that as a key part of the business going forward.

The next question comes from Bill Chappell with Truist Securities.

First, just trying to understand the modeling for the back half as you exit the white goods business, and I understand on a pro forma basis, they're not adding a whole lot of earnings per se. But I'm just trying to underseas customers walk away over these next four, five months, I imagine that facility, which is running 24/7, 365 is underutilized, lower and lower, it does kind of generate some reverse operating leverage. I think that's the way it works. So I don't know how you're modeling it or how that's accounted for into your guidance or how -- or if you're just kind of excluding that and assuming it was a normalized business to get to the numbers. Just any color there would be great.

Yes. So first, we're committed to honoring our customer relationships and commitments throughout the end of the year, Bill. So we're really not looking to fully close the facility until January 2024. That being said, transition plans happen with customers. These are customers that, in a lot of cases, have been customers for not just years but decades. So we are fully committed to helping them transition in an orderly process. However, that being said, we don't know at this point what that's going to look like. So as you'll recall, we did moderate back our throughput at that facility at the beginning of the year to really take out what we felt like were some of the more volatile type of sales that we are making on the margin. And so we have moderated it back so far in the first six months of the year, that's going to continue. But as for how the rest of the business is going to go, the -- some of that is contemplated in our guide. And we'll give you another update as -- or more updates as the year goes on as we report earnings.

But I mean, it's safe to say that they're operating at probably some incremental losses in the back half that's factored into your guidance.

They very much could be, Bill.

And then Dave, as you look -- I know it's a low-margin business that you're walking away from, but it is still profitable or accretive to some extent at EPS, especially [Indiscernible] how do you look at in terms of the Company's earnings power or earnings growth over the next few years? Do you feel like you can easily replace that with other parts of the business to continue growth? Do you feel like next year is a big step down in terms of EPS growth as you walk away from part of the business. Any thoughts there?

Yes. No, I think it will actually help our ability to grow our margins, improve our margin profile and our EPS growth over the years, Bill, because basically, if you look at the pro forma financials that Brandon spoke to, in 2022, I think we had $140 million in revenue with zero gross profit. Once you factor in the netting out of the waste starts credit that goes back to ingredients to offset the loss on the quite good industrial product lines. And then the same thing year-to-date this year, -- we're basically on a net basis. We have all the revenue that's coming from white goods and industrial is generating, again, on a net basis, taking into account the credit going back to an ingredient, no gross margin whatsoever. So it actually should help us going forward to expand gross our gross margin profile and to grow EPS.

And then one last one for me. Just trying to understand the Penelope impact, and I'm not sure if you disclosed that, like, is there a rough number we're including into this year or next year or as we're looking next year? Or is that to be determined?

Yes. We haven't disclosed that yet, Bill, for the reasons we've discussed and it is contemplated in. It's obviously a very gross margin accretive deal for our branded spirits segment, and we also expect it to be immediately accretive to our consolidated earnings per share. So that hasn't changed. The little bit of color we did share was that we closed the deal on June 1. So there was a month of performance of Penelope in Q2. Premium Plus sales were up year-over-year 29%, but we wouldn't be sure to add that even if you exclude Penelope in the quarter, our premium plus sales were up north of 20%. So the rest of the portfolio is really performing as well. But as the year and years after go on, we expect Penelope to add more and more to it.

Sorry, I'm meant to ask it in a different way. I think you've said Penelope in 30 states. Can you -- I mean, that seems to imply that it's pretty widely distributed. Is there any other metrics you have just to kind of give us an idea of how that compares to like Yellowstone or other -- some of your other [Luxco] brands?

Yes. And so there's more states to go to your point, but it's a very young brand. It's one that's growing very, very fastly. And in the states we're in, I think where you're going, Bill, is points of distribution, and we see a lot of runway there as well, just given it in a lot of the markets in those 30 markets you just mentioned, they've only been in there and in some cases, months, just up to a couple of few years. So we see not only from a market perspective, but also from an account perspective, a lot of runway. As far as quantifying how it compares to maybe the rest of our portfolio or [Indiscernible] not prepared to do that at this point. But we'll take that into consideration moving forward.

The next question comes from Mitch Pinheiro with Sturdivant.

Just follow-up. So Penelope had one month of sales in the quarter. Was there -- did it have any impact on your finished goods or barreled distillate figures for the end of the quarter?

Yes, Mitch. Good point. So our barreled inventory are put away increase in the quarter about $24 million. More than half of that was just organic due to a lot of our efforts to put away to match for future demand, but also, it's due to our continuous improvement efforts as we've been seeing, especially out of our Lawrenceburg, Indiana facility. But the remainder of that, so just under $10 million of that number is due to Penelope barrels that were part of the acquisition that came across and are now being reflected on our balance sheet.

And is any finished goods there as well or?

Yes. There's definitely an increase in our finished goods. So that came as part of the acquisition as well as you'd imagine. So there was an increase there.

And then just a question on the branded spirits. So obviously, the 28% price mix in the quarter. Volumes were down, and they realize it's in the mid- and the value segments. But what does the volume look like in your Premium Plus categories? Is it flat? Are consumers accepting these significant price increases without any problems. Can you talk about that a little bit?

Yes. The volume actually was up for Premium Plus as well in the quarter. So on all fronts, it was a very, very strong quarter for our Premium Plus branded spirits price car segment. And we -- the momentum really seemed to come out of the back half of the quarter two. And when you couple the momentum we have there and the relationship with RNDC that we entered into in the first quarter with Penelope acquisition, and that was announced earlier in Q2. We really feel like we're in a -- we're really well positioned, Mitch, to really deliver a strong back half.

Mitch, what I would add to what Brandon said is the other thing we spoke of on our Q1 call relative to brands was we felt there was excess inventory in the market at the distributor level. And I'm sure you've been reading about the destocking occurring in spirits in general. So we feel like we pretty much cycled through that. And as we got to kind of mid to back half of the second quarter, we started seeing shipments pick up again, specifically in our Premium Plus brands. So I think overall, the price points we have on those brands, we're starting to see the shipments pick back up, which is a great sign because it continues to show a consumer pull on those key brands as well as we feel like we've kind of worked through the overstock issues that we were battling through in the first quarter.

And then just one last question on the Ingredient Solutions. So the volume there was also down 1%. And I'm just curious how that fits with the longer-term trends of whether it's plant-based alternatives or higher fiber. If you could just talk about that a little bit. I'd appreciate it.

Yes. So Dave just entered destocking on the branded spirits side coming into the year on our food ingredient side, a lot of our customers are large distributors here in the United States. And entering the year, they were a little heavy on their inventory as well. So Q1 and even a little bit into the beginning of Q2, the purchase patterns were a little lighter than we had expected. However, Mitch has picked up as that's been more or less rightsized from an inventory standpoint. So it was a great quarter for the segment, and we expect a strong back half to the year for Ingredient Solutions.

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

Thank you for your interest in our company and for joining us today for our second quarter earnings call. We look forward to talking with you again after the third quarter.

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