00:05 Good day and welcome to the MGP Ingredients Third Quarter twenty twenty one Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. 00:39 I would now like to turn the conference over to Mike Houston, Investor Relations. Please go ahead.

00:47 Thank you. I'm Mike Houston with Lambert and 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. 01:04 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. 01:57 At this time, I would like to turn the call over to MGP's President and Chief Executive Officer, Dave Colo. Dave?

02:04 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. 02:21 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 thirty two point five percent primarily driven by brown goods sales growth of thirty three point four percent from last year, which was due to both higher aged whiskey and new distillate sales. 02:49 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. 03:22 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 the revenue and gross profit for our Ingredient Solutions segment. Each of our business segment showed topline growth over the prior year. And as a result, our consolidated sales and profitability for the quarter achieved record levels. 03:56 Looking at each segment individually, we posted another record quarter in our Distillery Products segment with sales finishing the quarter up fifteen percent to ninety one million dollars, while gross profit improved to twenty seven million dollars…

08:52 Thanks, Dave. For the quarter, consolidated sales increased seventy one point five percent to one hundred and seventy six point six million dollars as a result of strong growth in each of the business segments. Consolidated gross profit increased one hundred and forty six percent to fifty seven point one million dollars, representing thirty two point three percent of consolidated sales, due to record gross profit in each of our segments. 09:17 During the third quarter, we recorded a six point four million dollars partial settlement from our insurance carrier related to the dryer problem that's in 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 expected 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. 09:55 Corporate selling, general and administrative expenses for the quarter were twenty four point two million dollars as compared to nine point five million dollars in the third quarter of twenty twenty. Primarily driven by the assumption of Luxco SG&A expenses. Consolidated operating income increased one hundred and forty one percent, thirty two point nine million dollars compared to thirteen point seven million dollars during the prior year quarter. Adjusted operating income increased one hundred and forty three percent to thirty three point two million dollars. Our corporate effective tax rate was twenty four point five percent in the current quarter compared to twenty one point six percent in the…

12:56 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. 13:29 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 one hundred and fifty nine point nine million dollars at cost. The eight point five million dollars 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 customer’s needs. 14:06 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. 14:38 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. 14:54 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. 15:15 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 amongst growing spirits categories and priced years. Our three business segments are uniquely aligned with strong consumer trends, which we believe will create long-term and sustainable shareholder value. 15:50 Operator, we are now ready to begin the question-and-answer portion of the call.

16:00 We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mitch Pinheiro of Sturdivant. Please go ahead. Mitch, you are now online.

16:55 Hello, can you hear me?

16:57 Hey Mitch.

16:59 Sorry about that. Have you talked about the Luxco pro-forma growth quarter over -- last year's quarter versus this year's quarter?

17:13 Yes, Mitch, this is Brandon. Thanks for the question. So, sales -- topline sales for the second quarter in a row since we've owned Luxco has now been north of sixty million dollars in each quarter and gross profit has been roughly north of twenty million dollars 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 twenty twenty at about fifty million dollars a quarter in net sales and about nineteen million dollars 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.

18:03 Okay, so it's running roughly on the sales side -- roughly at twenty percent year-over-year, is that -- roughly in that range.

18:13 Yes, that's right, I mean the [QV] (ph) as you can imagine included some adjustments, especially related to COVID, so on QV basis, yes, about twenty percent from that and from our expectations.

18:27 And, relative to where we were this quarter when you talk sort of expectations coming into this quarter, you beat expectations on Luxco, what drove the better than expected results there?

18:42 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 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.

19:04 Okay. And, then the 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 that's going to be in a meaningful inflation, and I'm not sure about bottles and things like that. But, how do we think about it, can you put a growth rate around your cost next year and how you may approach offsetting that?

19:43 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 and how we price, and we've got a pretty disciplined risk-management process for sure in our distilled 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. 20:17 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.

20:42 Okay, thank you. I will get back in the queue.

20:45 Thanks, Mitch.

20:46 Thanks, Mitch.

20:49 Our next question comes from Bill Chappell with Truist Securities. Please go ahead.

20:55 Thanks. Good morning.

20:57 Good morning, Bill.

20:58 Good morning, Bill.

20:59 Hey, 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's 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?

21:41 Yes, Bill, I think it's what's -- 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 too. So, I think that's probably the signal that we see it, it gives us the most confidence that this business is becoming more stable, more repeatable, a little bit more predictable. 22:09 So, in past quarters, we've talked that we thought we're seeing a spike in demand in this particular -- in aged in particular as a result of COVID. I still think that has 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 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 in -- 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 twenty twenty two.

22:53 That's good to hear. And then moving to Luxco, I mean, kind of on Mitch's question this business has grown I think for the most part kind of low-single digits due to it's got a more value vent, more kind of white spirits focus over the past few years, but I think you're saying it's growing twenty percent over the past year and then certainly some help from COVID conditions and what have you. 23:25 So, I mean, how do I look at that as, is that a tough comparison, is this kind of one time and 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 twenty percent but growth at a higher level is sustainable?

23:52 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 spirit. So, that work and effort is definitely paying off and we're seeing it come through in the results.

24:28 Got it. That's good to hear. And then with regards 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, is -- 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?

25:00 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, 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 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.

25:43 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?

25:55 Yes, when we made the acquisition on April one, we were in sixteen or seventeen states with our legacy MGP brands if you will, and as we sit here today we're now in forty four 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.

26:34 Great. And then last one from me, just on the Industrial Alcohol piece, I think by now you pretty much have locked in your contracts in 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 drop dramatically and that could be a drag to earnings next year, is that a fair assessment or maybe it's not at this point with Luxco acquisition big enough where it matters as much as it used to?

27:10 Yes, I mean, definitely with Luxco as the overall profitability of the company, but as we've been discussing on literally I think for 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.

28:01 Just to be clear, it's not dropping below historical levels because of the glut it's just getting back to normal.

28:06 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.

28:21 Okay.

28:21 Not the margins we've been seeing in this fiscal year but back to the prior levels.

28:29 Got it. That's all I had. Thanks so much.

28:33 Thanks Bill.

28:34 Thanks, Bill.

28:38 This concludes the question-and-answer session. I would like to turn the conference back over to Dave Colo for any closing remarks.

28:46 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.

28:56 The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.