Mgp Ingredients Inc (MGPI) Q3 2021 Earnings Call Transcript

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Mgp Ingredients Inc (MGPI -1.50%)
Q3 2021 Earnings Call
Nov 3, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the MGP Ingredients Third Quarter 2021 Financial Results Conference Call. [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.

Mike Houston -- Managing Director

Thank you. I'm Mike Houston with Lambert & Company, 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 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. 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 would like to turn the call over to MGP's President and Chief Executive Officer, Dave Colo. Dave?

David J. Colo -- Chief Executive Officer, President and Director

Thanks, 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 will take your questions. Turning to the results for the third quarter. The record consolidated quarterly results reflect the progress our team has made toward executing our long-term strategic plan. Sales of premium beverage alcohol increased 32.5%, primarily driven by brown goods sales growth of 33.4% from last year, which was due to both higher aged whiskey and new distillate sales. The American Whiskey category remains robust, and we continue to optimize our significant share and scale advantage to grow the business. Integration of our recently completed acquisition of Luxco remains on track, including achievement of the synergy expectations we shared earlier in the year. As evidenced in our recent results, this additional platform is improving our gross profit and cash flow generation profile, and provides long-term growth opportunities for the company. We experienced record results across each of our business segments this quarter, including record sales growth of aged whiskey and strong sales for our white beverage products as well as better than anticipated growth for our Branded Spirits segment and solid results in both revenue and gross profit for our Ingredient Solutions segment. Each of our business segments showed top line growth over the prior year. And as a result, our consolidated sales and profitability for the quarter achieved record levels. Looking at each segment individually, we posted another record quarter in our Distillery Products segment, with sales finishing the quarter up 15% to $91 million, while gross profit improved to $27 million or 29.6% of segment sales. We are very pleased with the record performance of our aged whiskey sales this quarter, representing solid revenue growth as compared to the prior year period from a diverse group of customers.

This growth in aged whiskey reflects strong pricing, margins and demand as the macro consumer trends supporting the ongoing growth of the American Whiskey category remains solid. Our diverse aging whiskey library, along with a seasoned sales team, and our ability to support brands growth regardless of its size, offers a sustained position of strength over time. White goods sales also posted solid growth of 30.7% from the prior year period, primarily due to improved prices and volume. The growth this quarter partially reflected volume shifts away from industrial alcohol and toward our white goods premium beverage products. As for industrial alcohol products this quarter, sales decreased 24% as expected. The decline in industrial alcohol sales was primarily attributed to reduced third-party sales of industrial alcohol produced by ICP, our former joint venture partner. We have also seen additional supply enter the market during the year, and we anticipate margins for both industrial alcohol and white goods products will return to lower historical levels as demand for industrial alcohol also moderates over the next several quarters. Also of note, sales of dried distillers grains, or DDG, decreased 34.4%, primarily due to the need to convert from selling dried to wet distillers grains byproducts due to the dryer incident in Q4 of last year.

We expect continued comparative declines in revenue for our distillers grains this year until the dryer system installation is complete, which we anticipate occurring in the fourth quarter of this year. Revenue from warehouse services increased 15.5%, reflecting in part, growth in the number of customer barrels aging in our whiskey warehouses and other services we provide. Turning to Branded Spirits, results continue to exceed our expectations this quarter. Sales totaled $61.6 million, primarily due to the Luxco acquisition. Gross profit increased to $23.2 million or 37.7% of segment sales. Ongoing consumer demand for our brands has been a major catalyst for growth, which was reflected in the strong performance by our American Whiskey and Tequila brands as well as the continued return of on-premise demand. We remain focused on improving our portfolio profitability by optimizing gross profits and margins as well as the marketing mix across all of our brands. Turning to Ingredient Solutions, sales grew 12.5% to $24 million, while gross profit increased to a record $6.9 million, representing 28.7% of segment sales. This reflects another solid increase in gross profit as compared to the prior year period. Specialty wheat starch sales grew 5.4% this quarter, while our specialty wheat protein sales grew 11.4%, both primarily driven by increased volume. We feel very good about the robust project pipeline for these products as well as our recently rebranded ProTerra line of textured proteins and remain confident that they will drive long-term growth for this segment. We believe our diverse customer base and product offering continue to be aligned with strong consumer trends and remain encouraged by the robust gross margins as a result of our strategy to focus production and sales mix on our highest margin products. Overall, each of our business segments continue to benefit from favorable consumer trends, providing additional confidence in our long-term strategy. This concludes my initial remarks. Let me now turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Thanks, Dave. For the quarter, consolidated sales increased 71.5% to $176.6 million as a result of strong growth in each of the business segments. Consolidated gross profit increased 146% to $57.1 million, representing 32.3% of consolidated sales due to record gross profit in each of our segments. During the third quarter, we recorded a $6.4 million partial settlement from our insurance carrier related to the dryer fire that took place at the Atchison facility during the fourth quarter of last year. We are on track to start up a replacement drying system in November and expect it to be fully functional later in the quarter. We anticipate a portion, if not all, of the gross profit impacts incurred during the downtime will be offset by our business interruption insurance coverage, similar to the past four quarters. The timing of any insurance recovery, despite best efforts, is outside of our control and may not occur in the same period as the recognized loss. Corporate selling, general and administrative expenses for the quarter were $24.2 million as compared to $9.5 million in the third quarter of 2020, primarily driven by the assumption of Luxco SG&A expenses. Consolidated operating income increased 141% to $32.9 million compared to $13.7 million during the prior year quarter. Adjusted operating income increased 143% to $33.2 million. Our corporate effective tax rate was 24.5% in the current quarter compared to 21.6% in the prior year quarter due to higher pre-tax income, which lessened the proportionate effects of the tax credits received. Net income for the third quarter increased 128% to $23.7 million and earnings per share increased to $1.08 per share as compared to $0.61 per share in the prior year period.

Adjusted EPS for the third quarter increased to $1.09 per share from $0.61 per share in the third quarter of 2020. These increases from prior year were primarily due to the record results in all three of our segments. Adjusted EBITDA increased to $38.4 million from $17.1 million, representing a 124% increase from the prior year period. The strong fundamental cash generating capability of our business yielded $23.3 million in the third quarter, which demonstrates our ability to provide positive operating cash flows even as we invest for growth. We anticipate capital expenditures for the year to total $51.5 million, primarily due to the approximately $31 million in total costs related to the dryer replacement. We anticipate between $15 million and $20 million of that total will be funded through insurance proceeds. Our balance sheet and access to capital continue to be strong, allowing us to continue to invest to grow and drive long term shareholder value. As such, we ended the quarter with a debt balance of $247.7 million and a cash balance of $16.2 million. We are offering the following increased consolidated guidance for fiscal 2021. Sales are projected to be in the range of $570 million to $615 million. Adjusted EBITDA is expected to be in the range of $125 million to $135 million. And adjusted earnings per share are forecasted to be $3.75 to $4.05 per share with weighted average shares outstanding expected to be approximately $20.7 million at year end. Recently, the Board authorized the third quarter dividend in the amount of $0.12 per share, which is payable on December three to stockholders of record as of November 19. The Board continues to view dividends as an important way to share the success of the company for shareholders. Let me now turn things back over to Dave for concluding remarks.

David J. Colo -- Chief Executive Officer, President and Director

Thanks, Brandon. Now I would like to touch on some additional initiatives that support our long term strategic plan. We are very pleased with the strong results delivered year to date despite the increased commodity and energy costs and supply chain disruptions. Demand for our products remains robust, and we believe our business continues to be well positioned to mitigate these challenges through the balance of the year. We have factored each of these into our full year guidance and continue to closely monitor their potential impact. Turning now to our aged whiskey sales strategy. With the addition of Luxco's aging whiskey, our total aging whiskey inventory amount now sits at $159.9 million at cost. The $8.5 million increase versus the prior quarter supports our anticipated Branded Spirits growth and increased demand from our Distillery Products customers. Our long-term objective remains unchanged. We will continue to target adequate inventory levels to support the growth of our own brands and our Distillery Products customers' needs. Our customers continue to experience strong demand for their brands. Premium beverage sales within our Distillery Products segment remains robust, due primarily to favorable aged pricing, with demand coming from brands, both large and small.

We also experienced an uptick in our on-premise channel sales during the quarter for our Branded Spirits. We expect this to continue through the end of the calendar year as more establishments open to full capacity and reload their inventory. We are very pleased with the performance of our ultra premium and premium brands this quarter, which include our American Whiskey and Tequila brands. Our results speak to the accelerated integration and collaboration by everyone on the team. Before we open up the call for questions, I would like to reiterate our confidence in the long-term strategic plan. We are very pleased with the continued solid results this quarter by each of our reporting segments. We remain committed to the execution of our plan, further building on the momentum from last quarter and the year. The Distillery Products business is well positioned as a total solutions provider with enhanced capabilities, while our Ingredient Solutions segment continues to optimize customer, market and channel opportunities to drive additional profitability. And lastly, Branded Spirits continues its focus on brands that are positioned among growing spirits categories and price tiers. Our three business segments are uniquely aligned with strong consumer trends, which we believe will create long-term and sustainable shareholder value. Operator, we are now ready to begin the question and answer portion of the call.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Mitch Pinheiro with Sturdivant.

Mitch Pinheiro -- Sturdivant -- Analyst

Can you talk about the Luxco pro forma growth quarter over, last year's quarter versus this year's quarter?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes. Mitch, this is Brandon. Thanks for the question. So sales, top line sales for the second quarter in a row since we've owned Luxco has now been north of $60 million in each quarter and gross profit has been roughly north of $20 million in each quarter as well. In our quality of earnings analysis we did on diligence, we basically had their run rate using an LTM October number of 2020 at about $50 million a quarter in net sales and about $90 million per quarter in gross profit. So as you can see in each of the quarters that since we closed the transaction, the Branded Spirits segment has outperformed those expectations.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. So it's running roughly on a sales side, roughly up 20% year over year. Is that, I mean, roughly in that range?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes, that's right. I mean the QB, as you can imagine, included some adjustments, especially relating to COVID. So on a QB basis, yes, above 20% from that and from our expectations.

Mitch Pinheiro -- Sturdivant -- Analyst

And relative to where we were last quarter when you talked sort of expectations coming into this quarter, you beat expectations on Luxco. What drove the better than expected results there?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes, Mitch, I think it's primarily coming from our ultra premium and premium brands, the American Whiskey brand as well as the Tequila brands are doing very well. And as we've said in our prepared remarks, we're also picking up on-premise demand; it's starting to come back. So those would be the three primary factors driving the performance.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. And then input cost inflation, how, I know it's obviously factored into 4Q guidance. But as you look into next year, is there, it looks like there's going to be meaningful inflation. And I'm not sure about bottles and things like that. But how do we think about, can you put a growth rate around your cost next year and how you may approach offsetting that?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes. Mitch, I think as we've discussed before, our approach is we try to pass-through as much as the commodity and input inflation as possible in how we price. And we've got a pretty disciplined risk management process, for sure in our Distillery Products segment as well as our Ingredient Solutions segments where as we sell our products, we hedge the input cost position where we can. And through that approach, we try to pass through as much of the input inflation as possible. So I think we've been very successful with that approach over the past several years in the company, and we anticipate being successful next year as well. But we're in the process now, as you can imagine, of contracting next year. So we'll take all that into account as we provide guidance for next year on the Q4 earnings call.

Operator

Our next question comes from Bill Chappell with Truist Securities.

Bill Chappell -- Truist Securities -- Analyst

Just a few questions on kind of sustainability of these very strong results. I mean, let's start with the aged inventory. I think we've known for a long period of time that this could be a solid contributor to top and bottom line growth as you start to monetize the aged inventory. And I guess the question is now that you've, it has provided some upside over the past two, three quarters. Is this sustainable? I mean, or is this kind of a one time or two time or three time type thing? Or do you have a model in place where you feel like year in, year out, this can continue to be a solid kind of base or foundation for earnings?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes, Bill, I think is what we're seeing playing out over time here is that our customer base continues to increase quarter after quarter as far as who we're selling both aged and new distillate products to. So I think that's probably the signal that we see that gives us the most confidence that this business is becoming more stable, more repeatable, a little bit more predictable. So in past quarters, we talked that we thought we were seeing a spike in demand in this particular, in age, in particular, as a result of COVID. I still think that was contributed to some of the success we've seen. But each quarter, we also continue to pick up additional customers across all customer types. And I think to us, that's probably the best indicator of the demand for these products, a little bit adding more to the stability and predictability of these product lines. So I guess, and the short answer is we do think that this is a sustainable part of our business, and we have very good momentum as we go into 2022.

Bill Chappell -- Truist Securities -- Analyst

No, that's great to hear. And then moving to Luxco, I mean kind of on Mitch's question, I mean, this business has grown, I think, for the most part kind of low single digits due to it's kind of more value bent, more kind of white spirits focus over the past few years. But I think you're saying it's growing 20% over the past year and then certainly some help from COVID conditions and what have you. So I mean, how do I look at that? Is that a tough comparison? Is this kind of one time in boost for things? Or has the portfolio really changed where the performance of some of the more premium players is more than offsetting the value or the white spirits type names? And so this is not necessarily 20%, but growth at a higher level is sustainable.

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes, Bill, I think you summarized it perfectly. That's exactly what's been happening with the Luxco portfolio over the last four to five years. We've been transitioning away from just being a pure play volume player as a company and focusing more on the ultra-premium and premium brands, in particular, American Whiskey brands and Tequila brands, which, as you know, are the two highest growth categories within spirits. So that work and effort is definitely paying off, and we're seeing it come through in the results.

Bill Chappell -- Truist Securities -- Analyst

Got it. That's good to hear. And then with regard to Luxco, I mean now that it's integrated, I guess, are you seeing, it seemed like it was always in part done because it would give you a foundation to then go out and add other brands to the portfolio now that you have the sales force, you have the distribution. I assume that's still part of the game plan, especially now that you seem to be generating more cash than per se, you know what to do with.

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes. No, M&A is definitely part of the future plan for the company, Bill, and particularly in Branded Spirits. We feel really good about where we're at. The team is executing extremely well. The integration has gone very well. It's actually on track, if not ahead of plan on what we assumed could happen here. So everything looks really good. We are active in the M&A space. So if we find some deals that we think makes sense for us, we're definitely going to pursue those. So yes, we still view that as an important part of the purpose of the Luxco acquisition.

Bill Chappell -- Truist Securities -- Analyst

Got it. And just within there, for your own whiskey brands that you had before the Luxco deal, are those now in national distribution? Or would that happen in the near term?

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes. When we made the acquisition on April 1, we were in 16 or 17 states with our legacy MGP brands, if you will. And as we sit here today, we're now in 44 states. So we've accelerated the national rollout of our urban and whiskey brands, which is obviously a huge benefit that came with the Luxco acquisition and their national distribution capabilities. So we're actually ahead of where we thought we would be on the expanded distribution in those brands, but that's going extremely well for us.

Bill Chappell -- Truist Securities -- Analyst

Great. And then last one for me, just on the industrial alcohol piece, I think by now you pretty much have locked in your contracts and the pricing for next year. So you have some visibility. I guess the thought would be that with the glut of industrial alcohol over the past year that the prices would drop dramatically, margins would drop dramatically, and that could be a drag to earnings next year, is that a fair assessment? And maybe it's not, at this point with Luxco acquisition, big enough where it matters as much as it used to.

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes. I mean, definitely with Luxco, they add to the overall profitability of the company. But as we've been discussing on literally, I think, the last four quarters, what we thought was going to happen in the industrial and white goods market has, in fact, happened and that is this additional capacity came on to the market. We thought that the margins would return to historical levels. And as we're in the contracting season right now for next year, that's exactly what we're seeing, Bill. The pricing is staying relatively high, but that's a factor of the fact that corn costs are up significantly, but the margin is returning back to historical levels. So it's playing out pretty much exactly how we thought it was going to play out.

Bill Chappell -- Truist Securities -- Analyst

But just to be clear, it's not dropping below historical levels because of the glut, it's just getting back to normal.

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Yes. I mean, we're seeing, we're not completely through the contracting season yet, so we've got some more work to do there. But the margins that we're seeing at this point are in line with historical margins. That's the margins we've been seeing in this fiscal year, but back to prior levels.

Operator

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

David J. Colo -- Chief Executive Officer, President and Director

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

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Mike Houston -- Managing Director

David J. Colo -- Chief Executive Officer, President and Director

Brandon M. Gall -- Vice President of Finance and Chief Financial Officer

Mitch Pinheiro -- Sturdivant -- Analyst

Bill Chappell -- Truist Securities -- Analyst

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