Good morning and welcome to the MGP Ingredients Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mike Houston. Please go ahead.

Thank you. I'm Mike Houston, with Lambert & Co., 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 up to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of 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 would like to turn the call over to MGP's President and Chief Executive Officer, Dave Colo. Dave?

Thank you, 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 second 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 54.2%, primarily driven by brown goods sales growth of 72.8% 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 Luxco acquisition remains on track, including achievement of the synergy expectations we shared earlier in the year. This additional platform is already improving our gross profit and cash flow generation profile and provides long-term growth opportunities for the company. We also recently announced three key leadership changes: David Bratcher was elevated to Chief Operating Officer; Amel Pasagic was appointed Chief Information Officer; and Erika Lapish joined as Vice President, Human Resources. David, Amel, and Erika are proven leaders and further strengthen our capability of executing our long-term strategies. We experienced record results across each of our business segments this quarter, including the solid sales growth of aged whiskey, better-than-anticipated growth for our branded spirits segment, strong sales for our white beverage products, as well as record 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…

Thanks, Dave. For the quarter, consolidated sales increased 89% to $174.9 million as a result of strong growth in each of the business segments. Consolidated gross profit increased 175% to $56.8 million, representing 32.5% of consolidated sales, due to record gross profit in each of the reporting segments. Non-GAAP gross profit increased 187% to $59.4 million, representing 33.9% of consolidated sales. As noted in our last earnings call, we experienced a fire at the Atchison facility during the fourth quarter of last year, which damaged feed drying equipment and caused a temporary loss of production time. During the second quarter, we recorded a $6.2 million partial settlement from our insurance carrier. We are working to construct a replacement drying system that is anticipated to be operational in the fourth quarter of this year. Until the replacement system is operational, however, we anticipate this will continue to affect gross profit results. We expect a portion, if not all, of these losses will be offset by our business interruption insurance coverage, similar to the past three 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 $29.2 million, as compared to $9.4 million in the second quarter of 2020, primarily driven by the assumption of Luxco SG&A expenses, as well as one-time acquisition-related costs. Consolidated operating income increased 144% to $27.7 million, compared to $11.3 million during the prior year quarter. Non-GAAP operating income increased 205% to $36.9 million. Our corporate effective tax rate was 24.2% in the current quarter, compared to an effective tax rate of 23.1% in the prior year quarter, due to higher pre-tax income, which lessened the proportionate effects of tax…

Thanks, Brandon. Now, I would like to touch on some additional initiatives that support our long-term strategic plan. Although we delivered strong results for the quarter and year-to-date, we continue to monitor and manage three primary headwinds for 2021. The first headwind relates to uncertainty surrounding a potential COVID resurgence, including the impact it may have on our business. The second headwind relates to increased commodity costs, namely higher corn and wheat costs. As a reminder, we employ an extensive risk management program that includes purchasing the corresponding grain at the same time we contract volume and pricing for our products. However, for various reasons, we do not contract 100% of our sales. And as a result, we cannot provide assurance that we will always be able to price through increases in commodity cost to our customers in the open market. And lastly, similar to many other businesses, we continue to experience disruptions in our supply chain, including various packaging supplies, ingredients and transportation availability issues. While these supply chain issues are likely the result of the global disruption caused by the COVID-19 pandemic, it is unclear how long these delays and issues will persist. However, 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 headwinds into our full-year guidance and continue to closely monitor each of these potential headwinds. We will provide additional updates on future calls. 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 $151.4 million, at cost. Excluding the addition of Luxco's aging inventory, MGP-owned inventory levels, at cost, are similar to last quarter as a result of putting…

Thank you. [Operator Instructions] And the first question will be from Mitch Pinheiro, with Sturdivant. Please go ahead with your question.

Thanks, good morning.

Good morning, Mitch.

So, just, kind of first one the, aged whiskey sales, very strong in the quarter, and what's interesting is – so, you said that the barreled distillate that you put away was similar to the last quarter. So, I was just trying to put that together. Is this – so you had really strong sales, but you had anticipated that? Is that why the legacy MGP barrels didn't grow much in the quarter? Am I getting that right?

Yes Mitch, this is Dave. I mean, what we're trying to do, as you know, is maintain our legacy, if you will, MGP-owned inventory at levels that we feel are adequate to support future growth in the business of both; in this particular case, our customers' needs and our brands' needs. And what we were able to do is make sure that with the increased sales we had this quarter, we were able to put away enough whiskey to maintain our inventory levels at the same level they were at the end of last quarter. Does that make sense?

Yes, it does. And then just staying on the barreled distillate inventories for a second, is the Luxco portion in balance toward these? Are we going to see any near-term fluctuation in that?

The Luxco portion is exclusively to support our whiskey, American Whiskey, brands within the portfolio. And at this point, we believe that the amount of inventory we have is adequate to support the growth of those brands. Over time, as we anticipate those brands to grow, we'll make the appropriate decisions to put away the proper amount of whiskey to support that growth as well into the future.

Okay. Staying on Luxco, could you just talk about the categories, ultra-premium, premium, value, et cetera, and the growth rates and any dynamics that are worth calling out in this quarter?

Yeah, I think we continue to see – I think we've spoken before about we're focusing on some key brands within the portfolio, primarily American Whiskey brands, as well as tequila brands. And we're very pleased with the growth that we're seeing in both of those categories, which would be in the premium to ultra-premium part of the portfolio. So, the marketing efforts and the focus we're putting with the distributors and at the retail level and the consumers is paying off on those brands. So, we're very pleased with that. And as you would expect, our expectations on the, kind of mid and value tiers of our portfolio are that those would grow in-line with the overall category rates for those particular price-positioned brands.

Was there any – is this quarter from a seasonal aspect, is there anything unusual about second quarter for Luxco relative to what we should look for in the third and fourth quarters?

Yeah. I think part of what we called out in the script, Mitch, was that we're starting to see – we saw some pretty strong sales into on-premise as on-premise accounts start to more fully open, if you will. So, I'd say that's driven some, a little bit more growth maybe than we anticipated. We do expect that to continue throughout the balance of the year as the on-premise channel inventory loading continues. The only risk we see to that is what we called out as a potential headwind, is if COVID, the resurgence of COVID, heats up and on-premise locations start to close down or limit the amount of consumers they can allow in. We do think that that could potentially impact it. But if that doesn't occur, we think that we should continue to see some on-premise strength throughout the balance of the year.

Okay. And just one more question, moving on to the Ingredient Solutions side. It was really tremendous growth in the quarter. Just trying to figure out, 30%, 40% type of sales growth has got to be beyond the category growth. Is there some – how should we think about a growth rate in the next 6 months to 12 months for this business? Is it going to stay at this kind of high level or is there more of a category or segment growth that we should be thinking about?

I think the growth in Ingredients this quarter, one thing to take into consideration, Mitch, is last year in Q2 we had a cyber security event hit the company, and it impacted our ability to produce our ingredients for about 10 days in Q2. So that impacted our sales last year in Q2. So, we're cycling up against that, which inflates the numbers a bit. So, I would not anticipate these types of 38%, 40% growth rates. It's not a sustainable number quarter-after-quarter in Ingredients. It'd be more in line with, kind of what we've talked about on some previous calls that we do think this business is going to continue to grow, but it's certainly not going to be at those growth rates over the long haul.

Okay, thank you. I’ll get back in the queue.

Alright, thanks Mitch.

[Operator Instructions] The next question will be from Alex Fuhrman, with Craig-Hallum. Please go ahead.

Hey guys, thanks for taking my question and congratulations on another really strong quarter here. I would also love to get a little bit more color on what you said there about inventory. Obviously, Luxco is kind of skewing the math there, but it sounds like, at least in the second quarter, if I'm understanding you correctly, you're saying that you put away roughly as much as you sold out of your aged inventory. So, kind of reaching a sort of equilibrium there. Just kind of trying to understand, if that's the case, then why isn't what you just reported in Q2 a repeatable feat? Because it seems like the guidance for the year, which is very impressive either way, no matter how you slice it, but it seems like your raised full-year guidance is implying profitability in Q3 and Q4 that's about half of what you just reported for Q2. So, just trying to understand that better, you know could we see, if demand for aged remains robust, could this be, kind of a new run rate as you do a better job of selling that aged product?

Yes. Alex, I think the key thing to keep in mind is, and we called it out in the prepared remarks, I think Brandon spoke to it, is the reason we said these were unprecedented sales is you've got to keep in mind what we've been selling, and this is, I believe, the fifth or sixth quarter in a row now where we've had very significant aged whiskey sales, is that at some point, right, you're selling out of your older vintages. So, the whiskeys that were put away in 2015, 2016, 2017, as an example, there was limited defined amounts of that whiskey that was put away. So, as we've had these strong quarters, a lot of that whiskey is either sold through at this point or the amount of inventory of those vintages is significantly reduced. So that's why we're saying it's not practical to sustain that level of growth quarter after quarter after quarter. So, that's the first part. The second part is, we do, though, every quarter we get to decide how much whiskey we're going to put away based on our read of the market dynamics and what we think the future growth of the category is going to be. So, in Q2, we did lay down appropriate amounts of whiskey to maintain, if you will, our MGP-owned inventory levels at levels very similar to last quarter.

Okay. That is definitely helpful there. Anything in particular that you were selling a lot of? I mean, it sounds like you were selling the older stuff out of your inventory. I mean, in terms of mash bills, was there anything that was in particularly high demand that maybe you have a little bit of a [indiscernible] in your assortment?

I think it's been pretty consistent. The demand for the different types of mash bills we saw this quarter versus the last several. So, you know, and that provides us good insight on what to lay down for the future as well. But there wasn't any one particular mash bill, Alex, that really drove this performance. It was really more, kind of what I would call our typical mash bill mix that we've been selling over the last several quarters.

Okay. That makes sense. And then just, kind of lastly on the topic of inventory, I mean, it sounds like from your prepared remarks that your thinking for now is Luxco's juice is going to go into Luxco's brands and MGP's inventory can do what it's been doing. But obviously, that is quite a portfolio of whiskey that you got with the Luxco acquisition. Are there perhaps opportunities to optimize maybe something that Luxco had that there's a bigger bulk market for than maybe they would have thought or maybe something you have that there's greater demand into one of their brands? Just curious if, over time, there's going to be more opportunities to optimize that $100-plus million portfolio of inventory.

I mean that's our – kind of what we get charged to do, is to figure out the best and highest use that drives the greatest margin return on that inventory. However, here's the good news. With the Luxco inventory, 100% of that at this point we think we're going to have strong enough demand on our American Whiskey, Kentucky-based whiskey brands to utilize that inventory. And again, that's going to be the highest use and margin for the inventory, is to sell it as a brand, versus bulk sales. So, that's our intention at this point, and we'll continue to put away Kentucky whiskey to support the growth profile of those brands that we see over the next several years.

That’s great. Thank you guys very much.

Thanks Alex.

Thanks Alex.

Ladies and gentlemen, 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 call. We look forward to speaking with you again after the third quarter. Thank you.

And thank you sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.