Good day and welcome to the MGP Ingredients Fourth Quarter and Full Year 2021 Financial Results Call. [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 am 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 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 thanks everyone for joining the call today. We appreciate your interest in MGP Ingredients and hope that you and your families have a safe and healthy 2022. On this call, we will begin with an overview of our performance for the quarter and fiscal year ended December 31, 2021, provide updates on key financial performance metrics and discuss the progress we have made against our strategy. At the end of the call, we will open the line for Q&A. By all accounts, 2021 represented a remarkable year for our company. As we executed against our strategy, the strength and value of our business model were on full display, improved effectiveness in our tactical execution allowed MGP to deliver our most profitable year in company history. The determination and continued focus from our team to meet increased customer demand for our products, while achieving strong financial performance resulted in record results across each of our segments this year. We are also very pleased with the continued success of the integration efforts of the Luxco acquisition achieved by the organization. The team has done an impressive job the past few quarters, allowing us to benefit from the strengths of the combined organizations and the creation of a one-company high-performance culture. The demand for new distillate and aged whiskey remain strong. We continue to optimize our expansive family of brands to meet the shift in consumer demand while positioning us to achieve incremental growth. In addition, the determination of our team to improve throughput and profitability in our Ingredient Solutions segment drove an increase in gross profit for the year. Consolidated sales for the year increased 58.5%, while gross profit increased 101% to a record $199 million, representing 31.7% of consolidated sales. Reported operating income increased a 133% while…

Thanks, Dave. For the quarter, consolidated sales increased 65.3% to $166.8 million as a result of strong growth in each of the reporting segments. Gross profit increased 66.3% to $52.8 million due to improved segment gross profit performance by the Distillery Products and Branded Spirits segments. Gross margin increased by 20 basis points to 31.6%. For the year, consolidated sales increased 58.5% to $626.7 million due to the additional brands acquired as part of the Luxco transaction as well as strong growth in new distillate and aged whiskey sales and bolstered further by solid double-digit growth in our specialty wheat starches and proteins. Gross profit increased 101% to a record $199 million, driven by increased gross profit performance in all segments and significant outperformance in Distillery Products and Branded Spirits. Gross margin increased by 670 basis points to 31.7% for 2021. As some of you may recall, during the fourth quarter of 2020, we experienced a fire at the Atchison facility, damaging feed drying equipment and causing a temporary loss of production time. During the most recent fourth quarter, we received the final settlement from our insurance carrier, $16.3 million of which was for the damaged dryer. We completed construction of a replacement drying system, which became operational during the fourth quarter. During 2021, the remaining settlement balance of $23.6 million was related to the business interruptions we experienced. This business interruption portion of the settlement was recorded as a reduction of cost of sales. And the insurance recoveries for the replacement of the damaged dryer were recorded as a separate line item on the income statement. Corporate selling, general and administrative expenses for the fourth quarter, inclusive of advertising and promotion expenses, increased to $23.8 million, primarily driven by the assumption of Luxco SG&A expenses, which were partially offset…

Thanks, Brandon. This year marked an inflection point of implementing our long-term strategic plan, which has delivered substantial improvements to our financial results and built a strong foundation for future growth. The 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 inventory of aging whiskey and accelerating our branded initiative. As Brandon mentioned, our inventory of aging whiskey increased $14.2 million from the third quarter to $174.1 million at the end of 2021. We remain supportive of our library of various mash bills and vintages and expect they will continue to meaningfully contribute to increased levels of gross profit and cash flow for the company moving forward. The recent Luxco acquisition was a significant step to accelerating our branded initiative. Our teams have done a fantastic job to expedite the integration of the two businesses, allowing us to begin to benefit from the successes of the combined business. The strategic transaction significantly expands our product line in the higher value Branded Spirit sector and increases our sales and distribution capabilities across all 50 states and has meaningfully improved MGP’s gross margin and cash flow generation profile. We recently announced three new expansionary projects, totaling approximately $33 million that will occur over the next 2 years and enable us to keep up with the continued strong demand we are experiencing in each of the three business segments. The first is a $4 million expansion of our Lux Row distillers’ facility in Bardstown, Kentucky, which is where we hosted our Analyst Day last November. This expansion is slated for completion in late 2022 and will allow the distillery to operate 24 hours per day and increase capacity by 75%. The second project is…

Thank you. [Operator Instructions] Our first question comes from Vivien Azer from Cowen. Please go ahead.

Hi, good morning. Thank you.

Good morning, Vivien.

Good morning.

So I wanted to dive into the comment around your outlook for aged whiskey. I fully appreciate that forecasting any kind of normalization in growth is quite challenging to be sure and the growth looks very healthy. I was wondering if there are kind of any secondary metrics that you guys might keep your eye on like the number of brand trademarks that are getting filed and is there a mismatch versus kind of the inventory that’s getting laid down via TTB? Any kind of secondary metrics that might help you guys navigate that growth going forward? Thanks.

Yes, Vivien, I think some of the things that we look out for just in general is really the dynamics that are going on with our own customer base as well as the new customers that we are able to attract and we continue to see very strong demand both in new distillate and aged whiskey with existing customers as well as new customers continuing to be a great opportunity for us. And we also look at the growth by the craft brands, the national brands and the multinational brands as a proxy and we continue to see very good leading indicators there about strong demand signals.

Great. That’s super encouraging. And just one quick follow-up on that, from an aging perspective, are you seeing – just given the gross margin benefit that you guys get from aged whiskey? Are you seeing a desire or appetite for even longer aged products, some large peers are either reintroducing age statements or introducing age statements on certain products for the first time. So, it seems like that is a clear trend in American whiskey? Thank you.

Yes, we would agree with that. I think there is a lot of demand for older aged whiskey. The reality of it is there is not a lot of it around, but that influences our put away or lay-down decisions on how much whiskey we laid down each year as we try to project out future demand by both mash bill and age requirements. But I think you are right, Vivien. I think there is a general tendency to try to age up the whiskey and the brands that are on the market.

That’s great. Thanks so much.

Thank you.

The next question comes from Bill Chappell from Truist Securities. Please go ahead.

Thanks. Good morning.

Good morning, Bill.

Hey, Bill.

Just want to follow-up on Vivien’s question. I mean the put away this quarter was bigger than we have seen in the past barring the kind of the merger. And typically, you don’t put away as much when grain prices are high. You take advantage of lower grain prices, natural gas prices. So it seems like there are lot of indicators to what you are seeing. So – was it just directly that the market is very tight and it’s going to be tight for quite some time on inventory? And so this is the time and we’ll probably see something similar in the next couple of quarters?

Yes. No, Bill, we are definitely seeing strong demand for aged whiskey. And the way we have to run our operations, etcetera, we try to look out over the next 2 to 3 years to determine how much we need to lay it down in a particular year. And we try to do that as evenly as we can throughout the year and that’s tied also operationally. You can’t throttle back, put away one quarter and accelerate the next quarter, because typically you don’t have the distillation capacity for those type of high swings. So, we try to level it out the best we can throughout the year and quarter-to-quarter to lay down the whiskey we are anticipating we are going to need for future sales.

Okay. And then in terms of looking at the Luxco brands, they certainly are ending the year with strong momentum, especially the tequila and some of the bourbon brands or whiskey brands. How are you looking at that for 2022 in terms of just consumption? I mean, it’s very tough for us to understand how inflated or what the inflation was during the pandemic? Certainly, you had tougher comps or the industry had tougher comps in ‘21, but are you expecting the momentum to continue throughout the year or do you – how do you see it playing out just on the top line perspective?

Yes. I think for our American whiskey and tequila brands in particular, we are coming into this year. We exited last year with good momentum. We see that momentum continuing as we enter 2022. And we think that we’re going to continue to see very strong consumer demand for our American whiskey brands as well as our tequila brands. And that’s where we’re spending the majority of our marketing dollars and we are doing that, because we think it’s a longer term sustainable business and something that’s got a pretty significant runway ahead of it.

And Bill, the only thing I’d add to that from a top line perspective is we are seeing a change in mix in our sales. So while we are picking up greater and greater volumes of the premium and ultra premium brands that we have, there may be some offset down in more on the standard in value levels to where it may not be as robust of a total top line growth in Branded Spirits, but the gross profit and margins should continue to expand and improve.

And is there any thought on culling some of those, what I think 110 brands to have a little greater focus or is it just allocation of marketing dollars?

Yes. I mean, we constantly look at the portfolio and are there things that we should be optimizing, etcetera. But the approach we are taking now is really focusing on the brands that we think warrant the investments based on the consumer trends that we are seeing, but never say never, we are always opportunistic in our portfolio. So, something we continuously evaluate.

Got it. And then switching over to the White Goods, it’s a little bit harder for us to understand kind of what that will do between vodka and gin and industrial? But I am assuming with lower pricing and your decision to kind of walk away from some of that business that the industrial alcohol business sales, while it doesn’t really impact earnings will be down 20%, 30%. Is that a fair number? I was just trying to get kind of what a true growth looks like on your kind of your focus areas?

Yes, that’s a great question, Bill and thanks for asking it. So, what we are seeing and we talked about this a little bit is we are seeing a rise in commodity input prices, but due to the dynamic that’s out there, we are unable to raise price consistent with those increases. So, what – directionally speaking, what you are going to see this year is likely more flattish top line with increased costs is how that will play out and gross margins as a result will come in. We mentioned 700 basis points on the call just now. And just to give you a perspective, both Industrial Alcohol and White Goods combined for about $138 million in total sales in 2021.

Got it. Got it. And then last one for me, just – on the CapEx plans, I guess the one that’s the most – seems the most noteworthy is the warehouse capacity you are adding in Kentucky. I mean, I was under the impression that kind of $100 million – maybe $150 million you spent over the past 4, 5 years gave you enough in the backyard of Lawrenceburg to tie you over for a long period of time. So, is that more Luxco or is that more even the legacy core business, there is just that much demand you see over the next few years where you need that space?

Yes. This – the new warehousing that we spoke to on the call here is related to our bulk spirits business. So, it is driven by again the increased demand that we are seeing, Bill, both for new distillate and aged whiskey. So, it’s – we took a couple of year hiatus on expanding warehousing. But as we have seen these pretty significant increases in the growth in our whiskey business is what’s driving the need for this additional expansion.

And just to add to that, Bill, the prior expansion was completed in the third quarter of 2020 and the total price tag on that was just under $50 million. So, today’s point, we are going to incrementally invest as needed, which is why the $12 million is as low as it is relative to the last expansion.

Got it. Thanks so much.

Thanks, Bill.

The next question comes from Ben Klieve from Lake Street Capital. Please go ahead.

Alright. Thanks for taking my questions. First, I have a follow-up question to the previous caller regarding the comments on the White Good outlook. Brandon, I believe you said something to the effect that you expect the top line number for White Goods collectively to be relatively flat. But wondering if you can break down the beverage grade to the industrial contribution, that industrial contribution, do you think that’s going to be tailing off to the degree that it did last year or do you expect the industrial business to be to have kind of found the sweet spot here from a top line perspective?

Yes. Unfortunately, due to the dynamic we are seeing from both the moderating demand side and also the increased supply side, we are seeing the combined impact affecting both Industrial and White Goods pricing this year. So, it’s not one or the other. We are seeing them move directionally in the same direction back to historical averages in terms of gross margin.

Okay. Fair enough. Thank you. Then couple of other questions. One – couple on the ingredients side, the facility expansion for the ProTerra line, from a functionality perspective, is this going to be something that allows you to produce the entirety of that product line in-house or is that going to be specifically for wheat? And then how nimble will that facility be for potentially integrating other crops down the road into that product line?

Yes, Ben. The intent is to be able to produce wheat-based texturized proteins as well as pea-based or other forms of plant-based proteins. So, it’s going to have quite a bit of flexibility and allow us good innovation opportunities across multiple plant-based proteins.

Got it. Got it. Okay. Thank you. And then actually, just one other one for me on the kind of both the Branded Spirit and Distillery segments, with the tariff lifting here early this year amid challenging time to say the least for international transportation, I am wondering how you kind of see the export business during the year? Do you think these variables are going to kind of offset each other or do you think the effect of one will be more pronounced than the other?

Yes. I think the tariffs being removed on part of that business, I think will definitely help over time. So, I think the demand will trump the logistical issues in the long run, Ben. But short-term, there is definitely still congestion in the port, there is container availability issues all the things that you see and read about. But I think overall in the long run the demand for American whiskey internationally we view as still a high growth opportunity for us.

Okay. Very good. I appreciate you taking the questions. I will get back in queue.

Alright. Thanks, Ben.

Our next question comes from Mitch Pinheiro from Sturdivant. Please go ahead.

Yes, hey, good morning. So, how much of your brown goods demand is sort of contracted where you have visibility versus just getting purchase orders weekly. How much visibility do you have there?

Yes, Mitch. The – we have talked about this in the past and on aged brown whiskey sales, historically, it’s been very difficult to contract that business and it’s been predominantly spot business. In new distillate, we have much more success there on contracting the sales in that particular business. What’s happening here in the last year as these high demand dynamics have been playing out and whiskey availability has gotten more scarce, it’s allowed us to have more meaningful conversations with our customers on trying to contract aged whiskey and further discussions about contracting a more significant book of our new distillate volumes. So I’d say the – I am not going to disclose specific percentages on how much is contracted, but I can tell you that directionally, we are in a better position today and going forward on having the ability to contract aged whiskey as well as trying to increase the percent of our new distillate that’s under contract.

And how about – I mean, one of the things obviously with coming out of the pandemic or through the pandemic is the out of stocks in a lot of really good American whiskeys. You go into the stores and it’s – I am shocked at the lack of availability. And so there is a tendency obviously to – if you see something available, you are going to buy a couple of bottles of whatever you see and just going into the household inventory. And is there anyway, have you ever – have you seen, talked to customers about whether – how much household inventories have increased versus true consumption of the whiskey?

Yes, pantry loading is a tough thing to understand, Mitch, because it’s very obviously difficult to get that type of information. But what I can tell you is the out of stocks on some of these high demand bourbons, whiskey products etcetera is real. And it’s – I think it’s a reflection of the tight supply of aged whiskey that’s available whether it’s our customers or whether it’s some of the multinationals that are in the business or nationals, etcetera, I think it’s a pretty broad-based issue. And how that impacts us is it definitely influences how much whiskey we lay down to age out for future sales. But yes, I just think it’s a reflection of the very strong demand that we’re seeing in the American whiskey category.

Well, okay. And then on the Ingredient Solutions business, the gross margin was down this quarter year-over-year? And what drove that – and is that – what should we be thinking? What kind of – what’s the margin profile of that business in 2022 relative to last year?

Yes. Thanks for that question. The sales growth in Q4 was, again, very robust, north of 15% again, driven by the strong demand for our specialty wheat proteins and starches. We did see a reduction in the quarter, in our Ingredient Solutions segment in gross margins related to planned maintenance and repairs that are not expected to recur in future periods. So with that dynamic in Q4 and then we also had a disruption in Q1, those two quarters together did bring down the full year margin profile for Ingredient Solutions. However, our view is that Q2 and Q3 of this year, which is mid to upper 20% gross margins is more in line with the long-run capability of this segment.

Okay. And then as you take some of that production in-house and from the third party, I realize you have patents and IP around this, but what happens to your third-party partners capacity? Is that – does that pose any sort of competitive risk?

Yes. The part of the issue there is our third-party suppliers actually have constrained capacity. So it’s one of the factors that’s leading us to build our own facility. So I don’t think it’s going to be a situation, Mitch, where as we bring capacity in-house that there is going to be excess capacity on their market. But also we continue to envision the need to continue to utilize our third-party co-manufacturers because we think that we can grow this business over time beyond even the expansion that we announced to bring this capacity in-house.

Okay. And then just one final question is, when I look at your EBITDA margin guidance, sort of the range, roughly 21% to 23%. Is that – is the mix – the low end, high end is the – are the factors between that, the – basically your product mix, is that what drives the range?

Yes, that’s exactly right. And really, we spent a little bit of time already talking about the dynamic in Industrial Alcohol and White Goods, and what that decline is going to do year-over-year. And so we wanted to be sure to not only call that out as we have the last four or five quarters. But also, I’ll give you an approximate 700 basis point decline. So you can kind of see that interplay from a product mix standpoint and what’s driving not only the EBITDA margins, but also the gross profit margins of our business.

Okay. Alright, well, thank you for the questions.

Thanks, Mitch.

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 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.