Good day and welcome to the MGP Ingredients Fourth Quarter and Full Year 2019 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mike Houston. Please go ahead, sir.

Thank you, Chuck. Good morning, everyone, and thank you for joining the MGP Ingredients conference call and webcast to discuss the company's financial results for the fourth quarter and full year 2019. I'm Mike Houston with Lambert, MGP's investor relations firm. And joining me today are members of their management team, including Gus Griffin, President and Chief Executive Officer; and Brandon Gall, Vice President of Finance and Chief Financial Officer. We will begin the call with management's prepared remarks and then open up the call to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of sales, operating income, gross margin and effective tax rate as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during the call. If 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 President and Chief Executive Officer, Gus Griffin. Gus?

Thank you, Mike, and thank you all for joining us. On this call, we will provide an overview of our results, updates on key financial performance metrics and a discussion of progress against our strategy. Then we'll take your questions. Now turning to results. As previously communicated, we fell significantly short of our guidance due to us being unsuccessful in transacting a large portion of the aged whiskey sales we had forecast for the fourth quarter. As a result, consolidated sales for the year decreased 3.5%, gross profit decreased 8.5% and operating income declined 5.8%. We are certainly disappointed in our results, both for the quarter and the year. However, we do not believe these results reflect significant changes in key consumer trends affecting the categories in which we compete or significant changes in our competitive position within those categories. While we remain very confident about the long-term potential of our business, we also realize we must continually refine the effectiveness of our tactical execution and the pace of our strategic implementation. We believe we have learnings from this year that will help us in both these areas. Looking at each segment individually. In our Distillery Products segment, fourth quarter sales decreased 15.1%, reflecting a 20.9% decrease in sales of premium beverage alcohol during the fourth quarter primarily due to lower new distillate and aged whiskey sales. Full year sales of premium beverage alcohol were down 9.8%, with sales of both new distillate and aged whiskey down for the full year. Over the past several years, our growth in sales of brown goods has outpaced the broader market. This was due in part to the subset of the market we serve growing faster than the overall market. While the consumer trends for overall American whiskey remains robust, we now believe…

Thanks, Gus. For the quarter, consolidated sales decreased 11.8% to $92.5 million reflecting a decline in Distillery Products segment sales, which was partially offset by an increase in Ingredient Solutions segment sales. Gross profit decreased 15.8% to $21.6 million due to lower Distillery Products segment gross profits, partially offset by an increase in Ingredient Solutions segment gross profits. Gross margin decreased by 110 basis points to 23.3%. For the year, consolidated sales decreased 3.5% to $362.7 million as a result of a decline in Distillery Products segment sales, partially offset by Ingredient Solutions segment sales growth. Gross profit decreased 8.5% to $76.5 million driven by lower Distillery Products and Ingredient Solutions segment gross profits. Gross margin decreased by 110 basis points to 21.1% for 2019. Corporate selling, general and administrative expenses for the quarter decreased $3.7 million or 41% to $5.3 million as compared to the fourth quarter 2018, primarily driven by lower incentive compensation expense. For the full year, corporate SG&A expenses of $29.3 million declined by $4.2 million or 12.4% from 2018 due to lower incentive compensation expense, partially offset by increased costs related to the settlement of certain legal matters. Operating income for the quarter decreased 2.2% to $16.3 million due to lower sales and gross profit, partially offset by lower SG&A expenses. For the full year, operating income decreased 5.8% to $47.2 million due to lower sales and gross profit, partially offset by reductions in SG&A expenses. Our corporate effective tax rate for the fourth quarter of 2019 was 18.5% compared with 27.4% a year ago. For the full year, the corporate effective tax rate was 15.6% compared with 23.9% in 2018. The lower effective tax rate was the result of several favorable discrete items such as the vesting of sizable share-based awards granted in prior…

Thanks, Brandon. 2019 marked the fifth year of implementing our long-term strategic plan, which has delivered substantial improvements to our financial results and built a strong foundation for future growth. A critical part of that foundation was positioning MGP to benefit from the robust growth of the American whiskey category. Two key components of this effort have been our multiyear warehouse expansion program and our inventory of aging whiskey. As Brandon mentioned earlier, both of these programs continue on track and have us well positioned. Another critical part of that foundation is building and strengthening our organization to be able to support future growth. We made significant progress on our operational excellence strategy. Though faced with challenges during the year, all of our production facilities had a strong year, delivering the quality, quantity and consistency of product we needed to meet our customers' needs. Each of our production facilities once again achieved the highest possible score of grade AA from the BRC Global Standards for Food Safety, further strengthening our reputation for quality. We also continue to expand our enhanced comprehensive employee-driven safety program, Safety Up, throughout our organization. People are a key piece of a strong foundation, and we made several key additions to both our organization and Board this past year. Next month, we will begin our planned orderly transition of the CEO role. Our strategic plan also defines successive phases of growth and the drivers of that growth. Each of those phases has occurred as anticipated until this past year. We expected increased sales of aged whiskey to be both the key growth driver of 2019 and to provide incremental growth for the next few years. Due to its volatile sales cycle and our reduced forecast for predictable annual volume growth in the U.S., we plan to…

[Operator Instructions]. And our first question will come from Alex Fuhrman of Craig-Hallum Capital Group.

I wanted to ask about the aged whiskey transactions that failed to materialize in the fourth quarter. Can you give us a little bit more color on the nature of those transactions and in terms of how many customers there were, why they were not transacted and what types of customers they might have been, whether it be smaller craft brands or larger multinationals?

Yes. Thanks, Alex. A couple of points I'd like to clarify there. First of all, 2019 was our first year of selling four year-old products. So we're really starting on a new venture there. Obviously, we learned some things along the way. When we - at the end of the third quarter, we've stated very confidently that we thought we were going to transact the required number of sales to hit our guidance for the full year. We said it was less than a dozen. Some of them - most of them were established customers. We were very confident we were further along in the transaction process and so forth. We learned some hard lessons in December. Some of the issues we've had in the past, funding came up, delays, people pushing off, things that we thought they were certainly going to - do happen. We had 1 sale just evaporate. Sometimes, we sell to a company who sells to somebody else. Some of the smaller customers might like to deal only with 1 supplier. So in essence, it's a customer of a customer. And we had one that just evaporated, so we don't know what - since it was a customer of a customer, was that really a viable sale to begin with? We certainly thought so. And then we've had people - we had people put off because they'd found other temporary solutions. I can't get too much into specifics because several of those customers that didn't transact, we have ongoing business relationships with them, and so we can't go into too much more detail than that. I think the key takeaway from that was we realized that there's continual things that we can't control, and so that we are not going to include things that are unpredictable in our forecast.

Okay. That makes a lot of sense. And then just turning to new fill for a minute. It sounds like, if I heard you correctly, that new distillate sales were also down in the fourth quarter, but it's your expectation that, that segment will return to growth in 2020, if I heard that all correctly. Can you give us a sense of just why the new fill sales would have been down in the fourth quarter? And what gives you confidence that, that segment will return to growth?

One of the larger impacts on our new distillate sales during 2019 was certain customers working through excess inventory. And as we've said before, even some of these contracts - these customers who had contracts had always been ordering above their contractual requirement and they simply drop down to their contractual requirement because they found themselves in a temporary situation where they had excess inventory. And really, the only thing they can do is back off on their ordering a little bit. So that doesn't show up too much in the marketplace, but for us, it shows up as a rather big drop. So we think we're getting towards the end of that. We hope we're getting towards the end of that. And so I think it's important to look at the underlying trend of our new distillate sales as opposed to year-to-year drops and recoveries. But we do think our new distillate sales will grow in 2020 as we rebound from that softness of '19, again, one are the primary drivers being that - people working through the excess inventory.

And our next question will come from Bill Chappell with SunTrust.

I want to go back to the new distillate. I'm just trying to understand, one, why it took until December before you realized, that the company realized that things were following it? Because we heard numerous different kind of explanations of why new distillate was down throughout the year now and the filing in the fourth quarter, it seems that it's in-sourcing and competition. And so why did you not see that? Do you not have any forecasting abilities internally? And with that in mind, what should give us confidence that you think it's going to rebound this year? I mean it didn't seem like you caught it until December of last year. Why should we get comfortable that it's going to rebound this year?

Yes. And Bill, this is Brandon. The December realization was really all around aged. And as Gus already spoke through, that's when a lot of the transactions either took place or failed to transact. Even on the call in Q3, when asked about new distillate in Q4, our response at the time was we expect total brown to be up for the year based almost completely on the performance of aged in the fourth quarter. So the fact that new distillate was soft to down in Q4 did not surprise us. It was just a continuation of the rightsizing that we had seen already up to that point in the year. What's different is, as we go into 2020, we have had conversations with our customers. There are some that we have ratcheted back and then there are some that have communicated that they are going to ramp up for various reasons. And that's what gives us confidence going into the year. We also do have a large portion of our new distillate sales that are under contract, and - but there are sales that we still have to go out and get. But all those things put together does give us the confidence that after a down year, that a lot of those customers who hit the pause button are looking to get back in.

But just to be clear. You were confident this time last year that it would grow. And so based on conversations and commitments, and that didn't happen. So is there anything different from this time last year?

Are you talking new distillate?

New distillate.

Yes. I think this time last year, we were very confident. And as the year went through, we began to realize the impact of those customers working through the excess inventory. We also, over the last part of the year and certainly through January with our analysis, got a better handle on the - as opposed to the overall market, what the subset that we actually target is. And again, I think it's important for everybody to understand, it's not just craft and it's not just rye. We supply all tiers, all segments. So it's a much bigger - it's a much broader category than I think most people realize. As Brandon said, we - so going into the fourth quarter, the missed guidance was aged. We talked third in - excuse me, second and third quarter, we talked about the excess inventory. We said we weren't - we didn't give any confidence that, that was going to grow during the year. And then what probably exaggerated the optics was the fourth quarter of 2018 was a particularly big quarter for us for new distillate. So the quarter-to-quarter comparison looks particularly bad. But - so versus - to your question, versus where we were last year, during the year of 2019, the people working through excess inventories, customers working through excess inventories came to light, we were aware of that, trying to figure out how to project that. So we certainly have a better handle on that and we have a better handle on the growth rate of the underlying subset that we addressed than we did at this point last year.

And I've got some questions on aged, but I want to stick again on new distillate. The other thing you said in the release is you don't believe your competitive position has changed. And so I'm just trying to understand, if - as you've said in the past, you're the lowest cost player because you have the scale advantage and you have such quality. Then why aren't you winning more than your fair share of new business out there? Why are other upstarts taking that business from you? I'm not talking about losing existing customers. But why aren't you winning more new customers?

Yes. Great question. And I'm glad you were specific about that because, again, we don't - it's not we're losing customers, we're not winning as many new customers as we would like. And we are putting our focus, increasing our focus towards gaining volume share. I don't think we were - we may have been a little bit late to realize that this has turned into more of a share fight, and we weren't leveraging our advantages to the full - as we will going forward. It's really a change in our understanding and our position and focus. And now we're going to focus much more on making sure that we are being very competitive in the marketplace to make sure we gain volume share.

And then on the aged side, so I just want to clarify, is there an expectation of any fully aged sales in your 2020 guidance? And if so, how do I get confident that, that will happen?

Yes. Yes. Again, in 2019, there were sales of fully aged, too. So I think it's important to people to understand that we have sold 4-year-old. We will 4-year-old and we will continue to sell 4-year-old going forward. Obviously, we have 2015 leftover. In the third quarter, we said if all these sales come through that we had projected for the fourth quarter of 2019, we wouldn't have much, if any, 2015 leftover. Obviously, those sales didn't come through as forecast, so we do have 2015 leftover. So we have not only 4-year-old, we also have some 5-year-old. We are taking a very - I guess learning from our experience. We are making sure that we are basing things on what we feel is most predictable and not getting - not overly - being overly confident in what we're projecting for aged. So we've said we think it will increase modestly, and most of that increase coming from export, being powered by increase in export. You've heard us talk about us increasing our investment, our manpower investment in export, and we think that will begin to bear fruit this year. And so we're taking a, I think, a very cautious approach to volumetric increases, annual volumetric increases in the U.S. market. Again, not saying they won't happen, but are acknowledging they aren't predictable, and we want to make sure that our forecast is we can reduce the volatility as much as possible.

And then I might have missed it. Did you put away aged inventory in the fourth quarter? And are there plans to put away a meaningful amount in 2020?

Yes. So because - remember, that inventory number is a net number, right, what we put away versus what we sold. And the simple fact that we didn't sell as much as we had forecasted for, for the fourth quarter meant we ended up with a higher net put away. So that was - that net put away, that increase in the fourth quarter was higher than we had anticipated, higher than we had forecast simply because we didn't transact the sales that we had planned. We have said that we were approaching equilibrium for aged sales in the U.S. So we think we're getting pretty close there. Again, a part of that is due to us reducing - our forecast for aged sales into the U.S. market are reducing, and that's important. It's reducing our forecast versus our prior forecast. So we still think the demand is there. What you've heard us talked in the past about expecting pretty much standard incremental increases every year in sales of our aged - the quantity of aged we sell. And we're reducing that forecast. But we do think we will sell more export, which would require a put away. We were going to put away some new mash bills. And we're also always going to continue to put away whiskey to support the long-term growth of our own brands.

Last one for me. So I'm just trying to understand. I mean we went through the past year, and you even said customers were kind of playing off of your guidance and trend and negotiating tools. You have the valuation of the stock where it is right now and you have no debt. Why does it make sense to be a public company, to be honest? I mean why not - because it seems like you have more than enough capital to - and assets that the valuation doesn't make as much sense. So I'm just trying to understand why it does.

I think that really goes back to uses of capital. And we believe in our long-term strategy. The phases of growth that we have laid out starting in 2015 have all played out pretty much as anticipated, except for this last phase of growth with aged where we thought it was going to give us both more growth and a longer bump of incremental growth. We feel very strongly in the next phase of growth of our own brands. And we think that - accelerating that, the implementation of that phase is really - will pay off for investors and our long-term growth, and that's where we think we'll - one of the primary uses of funds.

This concludes our question-and-answer session. I would like to turn the conference back over to Gus Griffin, Chief Executive Officer, for any closing remarks. Please go ahead, sir.

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

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