Good day, and welcome to the MGP Ingredients First Quarter 2020 Financial Results Conference Call. [Operator's Instructions] I would now like to turn the conference over to Mike Hudson. Please go ahead, sir.

Thank you. I'm Mike Houston with Lambert Global, MGP's Investor Relations firm. And joining me are members of their management team, including David Bratcher, Chief Executive Officer and President; 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. 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 report filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during the call, except as required by law. Additionally, this call will contain reference to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures is 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 would like to turn the call over to MGP's Chief Executive Officer and President, David Bratcher. David?

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 March 31, 2024, provide updates on key financial performance metrics and discuss the progress we have made towards our strategic plan. At the end of the call, we will open the line for Q&A. I am pleased with the results we posted this quarter and the progress we have made towards our long-term strategic plan. On a pro forma basis, when factoring in the Atchison distillery closure, our defiling Solutions segment achieved sales growth when looking at our business today compared to a prior year period without the adjusted distiller results. We also had solid sales growth in Ingredient Solutions in our Premium Plus brands within branded spirits. All in all, this quarter was in line with our financial expectations as described during our previous earnings call. Other highlights for the quarter include the promotion of Amel Pasagic to the Chief Commercial Officer role, the commissioning of our newly built textured lead protein facility and several incredible brand initiatives, each of which we will talk about on the call today. Starting with the promotion of Amal to his snowy created role, he will continue to leverage the business intelligence and predictive data insights he developed as CIO and apply them across all 3 business segments. Amel's wealth of experience and his unique strategic view of our business will be critical in driving the next phase of growth for MGP. We are excited about the insights we will bring to our business and as our commercial leader. Turning to our Distilling Solutions segment. We are pleased to have completed the Atchison distillery closure in December of 2023, which led to a record quarterly segment…

Thanks, David. For the first quarter of 2024, consolidated sales decreased 15% compared to the prior year period to $170.6 million due to the Atchison distillery closure. Excluding the impact of the Atchison distillery in both periods, consolidated sales were in line with the prior year period. Also impacting consolidated sales during the quarter, branded sales were down 3% driven primarily by the temporary shutdown of the Luxury distillery of Barstow, Kentucky to complete the distillation expansion as well as expected declines in our mid and value branded spirits price tiers. As expected, gross profit decreased 10% to $62.8 million, representing 36.8% of sales. This decrease was primarily due to lower sales of mid and value price tier brands as a result of the distributor realignment in 2023, lower sales of allocated single barrel printing plus brand spirits offerings in Q1 as planned, the temporary shutdown of our Luxco distillery of Arslan, Kentucky and the incremental costs incurred in Ingredient Solutions related to the drying of the waste start streams ready for commercial sale as well as our new extrusion manufacturing facility. Excluding the impact of the Atchison distillery in the current period, gross margin was 37.3%. Advertising and promotion expenses for the first quarter increased $1 million to $8.7 million, primarily driven by increased advertising and promotion investment in support of our Premium Plus portfolio of brands. Brand sports-related A&P totaled $7.8 million for the quarter, represented 15.5% of segment sales. This remains consistent with our premiumization strategy. We will continue to invest in marketing spend against our higher-margin premium plus price tier brands. Operating income for the first quarter decreased 30% to $28.9 million. Adjusted operating income decreased 19% to $33.6 million. Net income for the first quarter decreased 34% to $20.6 million, while adjusted net income decreased…

Thanks, Brandon. We are pleased with our positioning to achieve our 2020 objectives. Demand for our products in each of the 3 segments remain strong, and we believe our plans will continue to position the business for long-term success. Despite some reported softening within the branded spirits industry, we feel very optimistic about the long-term health of this industry and are encouraged by the continued growth of the Premium Plus category across the industry. Our strategy is to build a portfolio of branded spirits to increase our points of distribution, accelerating our sales velocity within those points of distribution through effective marketing, expanding our product offerings through innovation and closing a meaningful margin accretive M&A transactions. In closing, I would like to restate what I said last quarter and that we are committed to evolving our company into a dedicated branded spirits company with desirable brands across the price point universe with a special focus on premium plus and higher-margin offerings as well as continuing to supply our market-leading premium American whiskey in bulk to both craft and multinational entities. We believe this is the optimal way to provide desired returns to our shareholders. 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's Instructions] The first question comes from Gerald Pascarelli from Belport Securities.

On your brown goods business within distilling Solutions, just -- I guess this is a housekeeping question, but the down 3, I know you said on a consolidated basis, the quarter kind of came in, in line with your expectations. Was the low single-digit decline in brown goods in line with your expectation? And then as we look forward, do you continue to expect brown goods to outpace category growth? And then maybe just some commentary on if there's been any change of tone from your customers regarding the demand for Newfield this year? Any color there would be helpful.

The quarter was in line with our expectations in our prepared remarks. We mentioned -- or reminded everyone of the closure of the Luxco distillery as we prepared for its expansion and coming online in April. And so we were unable to sell new distillate out of that facility in the quarter. If you take that out of Q1 last year and you look at the brown goods growth year-over-year, it's actually up with that mine. So it was in line with our expectations. We do continue to expect brown goods to grow over the course of the year. And as far as tone underlying from our customers, as we reiterated, we saw the vast majority of our sales committed. We're working very closely with our customers to make sure that we can execute and produce as they need it. And so we reiterated our outlook this morning with that line.

Yes, I would add that as you think about what Brandon and I said last quarter, we have really good visibility into the rest of the year because of the strategy that we put in place at the steel solutions. So as you continue on, I mean we haven't heard or seen or felt anything that's any different than what we had previously stated.

Perfect. Next question is just on branded spirits. When we look at your gross margin in that segment, which continues to expand nicely, and we compare that to your profit before tax margin, there's a fairly meaningful delta there, not just this quarter, but even historically speaking. So I guess like understanding right now that you're in the process of building out your portfolio and the need to invest, I guess, longer term, can you talk about if there are opportunities or measures you could take to improve that profit before tax margin to maybe better align with finished goods peers? It does seem like that would offer a pretty big notable upside to earnings over time. So any color there would be great.

Yes. And great question. So it did -- the prorata for branded spirits was low in the quarter. I'll remind you that a big reason for that is going to be the contingent liability that hits the SG&A on the branded spirit side related to the Beneli acquisition. So that was $4.1 million in the period. So that is going to be dragging down. But you're exactly right, over time as we continue to execute on our strategy, specifically the higher-margin premium plus brands, we expect to gain leverage from that on both the SG&A infrastructure we have in place as well as our A&P investment. So again, just as a reminder, a lot of our brands in premiums are younger in their life cycle, more emergent and regional in nature. And as we continue to invest in raising that awareness with the consumer, we expect that to pay off over time.

And Gerald, I'd add, we said last quarter and said again this quarter, we aspire to evolve to be a brand to spirits company. And as such, we fully expect that compared to our peer group, we need to have a margin set that's comparable. And this is why we work the strategy that we work. So we -- as we continue to evolve and focus on what's meaningful, that's the plan. We should have that accretion ongoing.

The next question comes from Marc Torrente from Wells Fargo.

Just a couple here. On the guidance from here, Q1 obviously had some headwinds to work through, which you called out at the start of the year. There's some modest upside in the quarter versus expectations. Guidance was maintained. Maybe just some comments on your increased level of comfort on the guide now and how you see the quarterly progression implied through the rest of the year?

Yes, Mark, thanks for the question. Yes, we shared a lot on the last quarterly call in anticipation of this just because there were some things to navigate. We wanted to message that as clearly as possible to you and the rest of the investor community. But yes, as you mentioned, Q1 played out exactly how we thought it might, maybe even slightly better in some ways. And our view for Q2 through Q4 are entirely consistent with what we shared on the Q4 call. We expect branded spirit sales to pick up as the year goes on, primarily in Premium Plus, which is typical for our industry. On the tilling Solutions side, as David mentioned, Luxco come online in April. So we can utilize that facility and the expansion we've gotten there on new deli sales. We also have our customer commitments ramping up for brown goods. And then finally, even within Ingredient Solutions, we've got a Proterra facility that just opened and we're really excited for. But we don't necessarily have the sales immediately now to offset and absorb a lot of those costs. As the year goes on and as we further commercialize that facility and that asset, those costs will be absorbed. And over time, probably as we can to next year, that facility and our product line will become more and more accretive to that segment.

I think as we look at our guidance numbers and think about our business moving forward, from now from 90 days ago, Brandon, and I still feel very comfortable with the guidance and the expectations that we established. Our total team is focused on that, and we are moving in that direction.

Okay. Great. And then just a few on brown goods demand. Volumes held up pretty well in the quarter. We saw pricing was down 11%. How did the mix of new versus age trends throughout the quarter? How much of that pricing is due to that underlying mix shift that you conveyed? How much of that is due to actual pricing? And then margins for the total segment also held in quite well, even with assumed lower mix. Maybe just how you see volumes versus pricing and margins evolving through the rest of the year.

Yes. Good question. So we can start off with volumes. We expect volumes to increase as we did in Q1, but throughout the rest of the year. And the reason -- the main reason for that is because of the success we've had in obtaining new distillate commitments. As far as price, yes, price/mix was down, but that was driven by mix, and that's why we shared about kind of our mix evolution within Distilling solutions on our last quarterly call. So new distillate sales were very strong in the quarter as anticipated. And then our aged sales also came in as anticipated. But the reason why the margin set held steady in that low 40s as we shared it might, is because of the pricing we've been able to get in new distillate. Even though it's a larger proportion of our total sales, the price in the gross margin contribution is greater this year and in future years. We anticipate that has been in the past.

The next question comes from Sean McGowan from ROTH MKM.

A question on margins, but just one on Ingredient Solutions. Can you talk about what some of the puts and takes are going on there? And how should we look at what we saw in the quarter as indicative of what the rest of the year might bring?

Yes. So yes, as you noted, Sean, gross margins for ingredients were in the teens, mid-upper teens in the quarter and really 3 main drivers. The first one is the beef starch intercompany credit. The segment used to receive when the assistillery was operational is no longer there. And so that's going to be an ongoing item. That's going to be a natural headwind to the margin set of the segment. But the other 2 items we view as more transitory. The first one being the incremental costs that we're incurring to dry and ready that start stream for commercial sale. We expect that to continue being a headwind for the course of this year. But once we get the mini fuel plant distillery up and running, then we expect that to be largely offset and then, in fact, maybe have some positive gross profit to come with it at that point in time. And then the third and final thing, which we also believe is more transitory is are the incremental start-up costs associated with the ProTerra facility. As I already noted, we expect as time goes on and we commercialize that asset to have the revenue and the gross profit to absorb those costs. So again, as we get more into 2025, we expect the margins to be reflective of that. So that being said, we do view Q1 as a low watermark for gross margins for the segment. We expect the segment to finish the year probably as we've said last call, in the mid-20s gross margin-wise. But then as we get into next year for a lot of those things I mentioned to start benefiting the segment once again.

Okay. And I don't think I heard you talk as you usually do about some of the input cost headwinds. Is that because there's been some stabilization there? Or you just kind of cut it out for brevity.

Yes. So some stabilization. Another main reason is the closer of the Atchison distillery. As you'll recall, the product lines that we sold primarily out of their industrial-grade alcohol white goods and fuel are much, much more susceptible to even modest swings in underlying input commodity costs. So with the closure of that facility, corn and the related basis went from being our #1 raw material that we purchase. -- to fourth or fifth. And with that, a lot of that risk with it. However, wheat flower for our Green Solutions segment, which is now our largest input that we buy commodity-wise, was up about 2% in the quarter, whereas Rye natural gas were both down year-over-year. I will remind you that a lot of our pricing on our brown goods, especially for new distillate is model priced for what's committed and contracted. So pricing for that will move up and down with those underlying commodities so that we're able to lock in our margin.

The next question comes from Bill Chappel from Truist Securities.

Just first question on the branded spirits side, you'll face an easier comparison, certainly in the second quarter with the kind of the destocking distributors last year. Kind of maybe any update on where the distributor inventory levels sit? Are you continuing to see pressure there? Or is that for at least MGP and maybe for the industry, is that largely kind of path at this stage?

I'm not going to speculate then for the industry because you do get kind of mixed views on that from what other report. I can tell you, in our business, yes, it's stabilized. We've worked really hard with our distributors and understanding the inventory levels and managing those levels within to meet customer demand. So destocking for us at a distributor level is not a core as you know.

So you see that as a favorable comp as we -- because the majority of the destocking was this time last year, is that correct?

It's a favorable comp, yes, sorry. Yes.

Perfect. And then just also maybe a little clarification on the branded growth this year. I know you had talked about rationalizing a few brands. I didn't know if you quantified what that impacted in the quarter or what that would impact for the full year? Just kind of an idea of how the brands are growing, excluding that rationalization.

Yes. So the mid and value decline in the quarter was primarily driven by the R&DC distributor change and subsequent load-in of the mid- and value brands in Q1 of last year. So that's really what drove the majority of the declines in mid and value in the quarter. We expect to have easier comps for those 2 product lines as the year plays out. And as we shared on our last call, because of the rationalization, the rationalization, the prices we're taking on some of our mid- and value brands as well as the load-in. We expect a lot of that has largely offset the gains we expect to continue to make growth-wise in Premium Plus. So we still expect our branded spirits growth for the year to be flattish to low single digits, but we do expect to continue to get gross margin expansion as the year goes on.

Yes, Bill, this is perfectly with your other question. I mean at this point last year, we were making a large wholesaler change, and you prep them in inventory. So on a comparative basis, over time, we've been able to not only successfully make that change, but get that inventory managed to the right level as well.

Great. And sneaking one more. Dave, why do you think you haven't made another acquisition since Penelope almost a year, maybe quantify just the number of opportunities you're seeing? Is it price? Or is it just really looking for the right fit?

It's really looking for the right fit, Bill. There are things, obviously, with some of the headwinds we've seen in the overall industry, I think there are some people that would normally be on the larger scale multinational sellers sitting tight for the moment for all the reasons that you know of. But we're starting to see some movement. But the real reason is, is we want to do it the right way. We want to make sure that we're finding something that goes into our portfolio that's margin accretive, and that helps us evolve to that brand and spirits company. So to do that, we have been disciplined, very disciplined in our cost, but I have very, very high confidence that we're going to be able to do some things in the near future.

The next question comes from Ben Klieve from Lake Street Capital Markets.

Just one quick one for me on the brown goods side. You talked about the vast majority of volume is committed for the balance of this year. Probably earnings call, you talked about how your sales force is looking into bookings into 2025. Wondering if you can provide any updates on kind of the longer-term sales funnel coming out of brown goods looking into '25.

Yes. Ben, this is Brandon. I'll start. So that's something we've highlighted about what we like about the new distillate business is that is that those sales and those contracts are multiyear in nature. So we do already have some visibility into 2025. We'll probably quantify that better for you as the year goes on just as we did last year. But what I will say is with EML's leadership and some other efforts we've been making, we're looking to the U.S. as we always do, but we're also getting more and more optimistic about opportunity for our brown goods outside the U.S. So as the year goes on, we expect to provide updates along the way.

Yes. I would add that Brandon mentioned Amel, but that really is the key focus of what Amel's really thriving on right now is the distilled solutions business, doing everything that we've already said to you to what we're going to do and then all the opportunities in brands. His role here, taking on just the commercial aspect of that is really giving us the platform to properly execute and do the things that we've been talking about, and that is continue to do what we do in the U.S., look at things internationally and how do we continue to maximize the business.

I'll get back in queue. The next question comes from Mitchell Pinheiro from Sturdivant & Co.

Just a couple of questions. In the branded spirits business, are you seeing, I guess, consumer behavior, are you seeing trade down? I know you talked -- we talked premiumization, but are we seeing -- in other categories, you're seeing the consumer get a little tighter in spending. And I'm just curious what you're seeing or what you anticipate for the remainder of the year?

Yes, I'll take that. We -- obviously, we continue to stay focused on the premium plus. Within the Premium Plus and you look at the price tiers within that, yes, by category, by product, you do see some shifting and maybe from Ultra to premium or vice versa. We still see and believe and it shows in the data that, that premium plus category is still the focus area across the industry. It's where the opportunity lies to grow our business. I do believe, as you said, that as consumer inflation and economic conditions change, People do respond, okay? And they may make that a little different decision. But here's what's great about our branded business is that we have total representation across those price points in all the main categories. So in summary, yes, I think it's fair to say consumer pricing may shift a little, but I still and the data supports, it's still a premium plus market.

Do you still have -- do you have levers like that you can pull should things get maybe a little tighter? Or is sort of what your plans are in place and they're kind of firm and not much variability there?

Yes. One of the best levers we have as a company, and we feel is a little bit unique to us is points of distribution. And we feel like in the states we're in, in the United States, there's a lot of runway there for us to continue to expand our brands out on the shelf, not only on the shelfs in the chains and retailers that we're in, but also ones altogether. So that's what our focus is. We talked about it on previous calls, and we're going to continue to spend a lot of time executing there.

I think what Brandon said is right on because at the end of the day, our growth in that section is about pod expansion first and foremost. As we expand our pods, you'll see the increase, you'll see the margin accretion append you'll see the sales happen. As you expand those pods though, we do through our marketing efforts and what I've said in the script, we really do focus on velocity, which is a marketing piece of it. So you have to go and we are, at this moment, continuing to expand our business on a pod driven basis and then back it up with the market needs to get it pulled through.

Okay. And then I guess last question on Branded is in your view, David, from your -- your long history in the business, it seems, at least from my view, and I'm curious in your view, there is a huge influx of just new brands, new age classifications, new toasted and all sorts of stuff, it almost to the point where the proliferation seems overkill and also maybe hurting the category. Do you think we're over branded in the branded spirits business up and down the category? Or do you expect any kind of pullback in brands? Or you think the set is going to stay kind of firm?

Well, in 30 years of doing this, what I can tell you what you're seeing in the use American is as an example, that's where you're focused. There are a lot of SKUs. I could go all the way back to the bucket as we go to yourself now. There's still a lot of oc on the shelves. You see that now in American whiskey, -- you're going to see that on tequila. That's kind of the history of the industry, which if you think about it in business fundamentals, not a bad thing, it means that suppliers like ourselves are shifting to where that consumer demand is. But the challenge is, is keeping up with that consumer. That is the challenge at the end of the day. That's why when we talk about our business and our branded spirits business, yes, we're a leader in American whiskey, but we can't sit on that all the time. You have to have offerings and you have to be able to go across not only the price point and the portfolios because like you said, there are a lot of fast followers out there. When people see categories growth, it's a natural tendency for people to go in and bring more SKUs in it. What we do is what you try to do is we go in and we establish dominance on that particular try to be the brand of choice. But don't take our eye off the ball to the other categories either.

The next question comes from Robert Moskow from Cowen.

For the question wanted to ask about the gross margin dilution in distilling Solutions, I guess, down 100 basis points on a pro forma basis. Is that because of the mix shift? Is that the main driver of that?

It is. And so if you look at the pro forma for 2023 for this telling Solutions, the gross margins for last year would have been right around 45%. We showed this on our last call, but happy to share it again. The mix shift is going to result in slightly lower margins. We expect it to be in the low 40s for the segment going forward, which is higher than I think a lot of people may have anticipated just because of the pricing we've been able to get on new distillates. So there is a little bit of a headwind there, Rob. But it's still a very, very nice margin for the segment, and it's one that we feel is sustainable as we go forward.

Okay. Got it. And then I guess the follow-up to that is in that you have price mix down 11%, and it really is that mix impact. But I don't remember you quantifying how much of that 11% was mix. Like can you quantify how much price was up excluding that factor?

We're not giving any specific numbers. Each pricing was up in new distillate pricing. If you look at it a customer-by-customer basis was also up. We did have one of our larger relatively lower-priced multinational customers in the quarter by a lot. So they brought the average price down for new distillate. But like I said, on a customer-by-customer basis, we're very pleased with the pricing, and we expect the same to continue as we go forward.

[Operator's Instructions] We have a follow-up question from Sean McGowan from ROTH MKM.

I know this gets added back for the adjusted EBITDA and adjusted net income. But how do we -- is there a way to know what that contingent liability is going to be? And how long will that be hanging out on the income statement?

Yes. That's going to be out there through 2025. So December 2025 is when the earn-out is officially concluded with the Penelope transaction. So we expected -- it's a goofy one, all met from an accounting standpoint. A lot of Monte-Carlo simulation is revisited as you every quarter. It's been plus or minus $4 million, exceeding in the last couple of quarters. And we expect it just to continue to ramp up as the brand continues to perform in line with our expectations, similarly each quarter until we get to the end of 2025. Now that number, it changes because of volatility in the market because of interest rates or forecasts or actuals. So there's something -- some inputs that we provide. That helps conclude what that number is in a given quarter, but there's also some external volatility measures as an example, that also impact that. So I wish to give you a more clear answer, Sean, but hopefully, that color helps a little bit in your model.

It does. But I just want to be clear on 2 things. One, is it eventually going to be cash? And second, is it the kind of thing like the better it is, the more -- the better we should feel about it because that means that they're outperforming.

That's exactly right. It will be a cash outflow by the end of 2025 or sooner if they hit their metrics sooner is the way it's drawn up. It can be as much as approximately $110 million. And you're exactly right. It's definitely something as that number gets bigger, it's a positive for the brand. That means it's performing in line or better than our expectations.

This concludes the question-and-answer session. I would now like to turn the conference back over to David Bratcher for any closing remarks.

Thank you for your interest in our company and for joining us today for our first quarter earnings call. We 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. Goodbye.