Good day, and welcome to the MGP Ingredients First Quarter 2022 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.

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 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. On this call, we will begin with an overview of our performance for the quarter ended March 31, 2022, 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. We are off to another strong start to the year with record results for each of our 3 business segments. We are very pleased with our continued momentum this quarter and believe the underlying macro consumer trends that are supporting each of our business segments remain strong. Consolidated sales for the year increased 80.2%, while gross profit increased 122% to a record $71.8 million, representing 36.8% of consolidated sales. Reported operating income increased 144%, while adjusted operating income increased 124%. We are very pleased with the sustained momentum across each of our segments this quarter. The demand for aged whiskey and new distillate continues to be a growth driver with a 44.4% increase in brown goods sales for the quarter within our Distilling Solutions segment, which was previously known as our Distillery Products segment. We recently changed the name of this reporting segment to better reflect the products and services we provide to our customers. Our premium, super premium and ultra-premium offerings contributed to the encouraging results for the Branded Spirits segment, continued growth in our higher priced American whiskey brands were key contributors to our strong gross profit results for the quarter, which represented 44.5% of segment sales. Ingredient Solutions segment sales also benefited from strong demand and improved product mix, yielding record gross profits, representing 29% of segment sales. Looking at each segment in greater detail. We achieved another record quarter in our Distilling Solutions segment, with sales…

Thanks Dave. For the first quarter of 2022, consolidated sales increased 80.2% to $195.2 million as a result of strong growth in each of the reporting segments. Gross profit increased 122% to $71.8 million due to record performance by all 3 segments. Gross margin increased by 700 basis points, 36.8%. Corporate selling, general and administrative expenses for the quarter, inclusive of advertising and promotion expenses, increased $10 million to $21.8 million as compared to the first quarter 2021, primarily driven by the assumption of Luxco's SG&A expenses. Operating income for the first quarter increased 144% to $50.1 million, primarily due to the increase in sales and gross profits previously discussed. Adjusted operating income increased 124% to $50.1 million. Our corporate effective tax rate for the first quarter of 2022 was 23% and remained unchanged from the year ago period. Net income for the first quarter increased 142% to $37.4 million. Basic and diluted earnings per share increased to $1.69 per share from $0.90 per share, while adjusted EPS increased to $1.69 per share from $1.01 per share. Adjusted EBITDA for the quarter was $55.4 million, a 115% increase from the year ago period, driven by the solid performance of all 3 business segments. Corn, wheat flour and natural gas are 3 of our largest commodity expenses and each have seen upward prices over the last several quarters. As we shared in February, we entered the 2022 fiscal year with the majority of commodities purchased against contracted volumes. 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. Our objective, as always, is to price through as much commodity input inflation as possible. However, for various reasons, we do not contract 100% of our sales. For…

Thanks Brandon. This quarter marked another milestone for record results across each of our business segments, as well as a strong foundation for future growth. A critical element to building on that foundation for growth is our recently announced 3 expansionary projects. As a reminder, the first is an expansion of our Lux Row Distillers facility in Bardstown, Kentucky, which will allow the distillery to operate 24 hours per day and increase capacity by 75%. Second is the construction of a new barrel warehouse facility in Williamstown, Kentucky; and third is our texturized protein extrusion facility in Atchison, Kansas. We have also received Board approval on 2 new projects that are in support of the continued demand we're experiencing for our brands and our customers' brands, which will include an additional warehouse in Kentucky and further expansion at our Lux Row Distillers in Bardstown. With the increased demand we have been experiencing for our new distillate, aged whiskey and ultra-premium spirits brands as well as texturized protein products, these investments position us well for continued sustainable growth across the organization. As Brandon mentioned, our inventory of aging whiskey increased $6 million from the fourth quarter to $180.1 million at the end of the first quarter. 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. While we anticipate volatility in the broader economy to persist in the near-term, we remain confident in our team's capabilities and strong market position, as well as the value each of our segments bring to our global customer base. We believe the underlying macro consumer trends that are supporting each of our business segments remain strong, and we expect these trends…

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

So I don't know if you mentioned this, but -- so you did talk about new distillate sales being strong in the quarter. How does that balance out with age? Was it roughly the same growth rates? Or did one grow faster than another?

Yes. Great question, Mitch. Thanks for that. We actually saw well in the double-digit growth for both new distillate and our age sales in the quarter. So while age is definitely still expanding as we've seen in previous quarters, new distillate has definitely joined the rates as well with its performance in Q1.

I mean -- and how much -- I mean how much visibility did you have into the quarter? Like was there a -- where you surprised with new distillate sales at all? Or I mean, I know you don't get 100% visibility with customers. But can you talk about like what might have changed and added to the strength.

Yes. It's really -- we're seeing it from top to bottom from all of our customer classes, whether it's craft to regional to national to multinational. There's really just -- we've talked about just the general tightness we're seeing for age, but we're now starting to see that even more so for new distillate capacity as well. And as a lot of our customers have more and more success and get better capitalized, they're able to put down more earlier than maybe they were in prior years.

Okay. As relative to guidance for the next 3 quarters and as it relates to brown goods, I mean how should we think about this? Are we going to -- obviously, these growth rates can't continue or you'll eventually run out of product to sell. So where -- should we be thinking about this in sort of like, again, like a balanced type of growth between aged and new distillate in the remaining quarters?

Yes, you're right. For the quarter, new distillate and aged sales combined were up north of 44%. That's not anything that we would suggest you or anyone else models out ongoingly, right? So what we've consistently said is over the long-term, we're going to fall more in line with the overall growth of the category. And as we look at the remainder of the year, we do not anticipate the same level of growth in subsequent quarters for our brown goods for that reason. So that's how we're thinking about it. There's just a lot of growth coming into the -- or a lot of demand coming into the year and a lot of customers of ours that were in need of aged barrels and new distillate for their businesses.

Okay. And just one more question, I'll get back in the queue. On the Ingredient Solutions business, number one, how much of the growth or what was the dollar amount affected last year due to your shutdown? And then second, the gross margin was terrific at 29%. I don't think I've seen it that high. It was close, I guess, last year at point. Is that the right margin to think about going forward this year?

Yes. So yes, to answer the first part of your question, Mitch. It was about a 400 basis point impact just on the natural gas curtailment during Q1 of last year. There may have been some other minor issues that happened to, to further dampen it. But the gross margin percent in Q1 of last year was 20.7%, whereas this year, obviously, we printed a 29% gross margin percent. We've been pretty consistent. We think that mid to upper 20s is what this business is capable of doing. We saw it in Q2 and Q3 of last year, and we saw it in a number of quarters and the year before that. So as we look forward, we continue to see that capability and that potential in this business just due to the way the business has mixed up to more specialty products and expanded margins over time.

The next question comes from Bill Chappell with Truist Securities.

With regards to the outlook, clearly, your first quarter results were well ahead of at least the Street expectations, and it appears that they were maybe ahead of your initial expectations. Has there been any major offset for the remainder of the year that you're seeing? Anything that's popped up? I mean you've said you're fairly well hedged on green. I think the -- your kind of outlook for white goods and industrial was already baked into your initial guidance, unless I'm wrong. So is there anything else we're missing that is cropped up as we look for the next few quarters?

Yes. Thanks Bill. Yes, it was a very strong quarter as you can clearly see. But as we've always maintained, our is a 4-quarter business, and we don't want to get in the habit of being over reactive to any certain quarter, especially the first quarter of a year. But that being said, there are 3 things we're really thinking about as we look at the remainder of the year. First of all, on the commercial front, and we've already talked about this with Mitch, we don't expect to repeat in brown goods sales performance of 44% in subsequent quarters. Secondly, we experienced in Q1 very strong pipeline shipments for our super premium and ultra-premium American whiskey brands. While this is something we're going to continue to assess, we don't anticipate this recurring at that clip throughout the remainder of the year. We're going to see how depletions come through in Q2 through 4 and see how distributors look to refill their pipeline. So those are the 2 items we're watching on the commercial front. On the inflation front, there are real headwinds in commodities. And so despite inflation in Q1 that we've seen stock pricing, for the most part, has kept up as -- within our expectations. But there are parts of our business that we called out. So for example, there's certain customers for white goods and industrial that do not contract. So they will be purchasing in the spot market. And then we also called out, Bill, that fuel and distillers grain and related coproducts, which represented about a little over $12 million in sales in Q1 alone. That's all done on the spot market. So what we're watching as we go finish up the remainder of the year, are those prices in the stock market maintained the level needed as it relates to the underlying commodity input prices.

Okay. I understand. In terms of kind of looking at the brown spirits, both new and aged, Dave, can you get me explain kind of the customer behavior that's driving this demand? I mean I assume -- or it's understood that there's kind of a global and U.S. shortage of brown goods. And so I didn't know is that increasing the customers that are looking at your aged inventory? Is it -- or is it just the existing customers are more willing to load up early on? And then for the new, do you have customers that say we're going to be short for a long period of time, let's go and accelerate our new purchases right now because we don't want to be short 4 years from now? I mean how -- explain to was kind of the behavior that's driving it now that we are kind of a net short environment?

Yes, Bill, I think everything you just said is kind of playing out. So we continue to see very strong demand on aged from what I would say our existing customers historically as well as some new customers coming into the market. And we've said on the last couple of calls that we think aged inventory, in particular, is extremely tight at this point in time. So that dynamic is playing out. On the new distillate side, again, we're seeing very strong demand, as Brandon mentioned. And again, with existing customers, but also new customers wanting new distillate to lay down. And what we're doing as a result, right, is on our new distillate business historically, a fairly significant portion of that has been contracted. We're encouraging customers to contract even more of our new distillate capacity going forward to protect their brands. And then we're also, on the aged side of the business, encouraging customers to contract aged whiskey as well, which, as you well know, historically, that's been a very difficult feat to accomplish, but we are seeing more receptivity from customers to age -- to contract age, brown as well. It's not a significant portion of our business yet, but it appears to be growing as we're in this current environment.

Got it. And then 2 more, just on the kind of consumer takeaway of brown in general, I mean is the sense that there's not going to be any fallback post pandemic that brown kind of took maybe a leap in share of overall spirits over the past 2 years, and that's kind of going to stay at this level. And that's why you're seeing so much new and aged demand?

Yes, I think that's a big part of it. I mean, if you look at the share data, the premium plus brands, if you will, the higher priced American whiskey brands are driving all of the growth. And a big part of our customer base participates in the premium plus categories with their specific brands. And we're seeing the same thing in our Branded Spirits portfolio. We're seeing the growth, and you saw the gross margin performance in Branded Spirits for the quarter, that as well was primarily driven by excellent sales of our premium plus American whiskey brands.

Got it. And last one for me. Just on the Luxco, I might have missed it if you said. The pro forma growth for the quarter year-over-year of the branded portfolio? And then were there any -- was it all steady? Was it brown did really well? And white -- any more color just kind of on the performance of -- because it is 100-plus brands.

Yes. We didn't disclose pro forma performance, Bill, on the business, but without having an even at my fingertips at this moment. But it was definitely a very strong quarter for Branded Spirits gross margins in the north of 44% for the quarter after being in the mid to upper 30s in the 3 quarters last year. So we're really seeing a strong pool for our super premium and ultra-premium American whiskey brands, and that showed in the margin profile that we saw in the quarter.

The next question comes from Ben Klieve with Lake Street Capital Markets.

Congratulations on a really great quarter. A few questions for me. First of all, on the performance during the quarter. I'm wondering if you can talk about kind of the cadence throughout the quarter. Did a lot of that really excessive growth or access growth, was that kind of seen on a flatline basis throughout the quarter? Or did you maybe see growth spike at the start of the year and then begin to tail off towards the end of the quarter heading into Q2?

Yes. I think if you look at each business, I mean I'll start with ingredients. Our ingredients business was very consistent throughout the quarter. We continue to see excellent demand, Ben, in that business, and it was very darn consistent each month in the quarter. And we expect to see that same kind of performance for the balance of the year in ingredients. In our brown distillery products business, our white goods are pretty consistent month-to-month. And brown goods is where we can see some deviation month-to-month. I'd say new distillate is pretty consistent month-to-month. And then we can see peaks and valleys in brown goods. So that's how I would describe the quarter for Distilling Solutions. And then in brands, it's typically a pretty consistent revenue pattern month-to-month, although as Brandon said, in Q1, we had some really strong shipments in a couple of our American whiskey brands that I would view potentially as kind of refilling the pipeline that drove some pretty strong demand. But even in that business overall, the revenue is fairly consistent month-to-month and quarter-to-quarter.

Got it. Got it. That's helpful. And I don't recall if you touched on this explicitly or just implicitly around kind of refilling the pipeline and the driver of that around exports specifically. And so my question is, to what degree do you think the EU tariff lifting on December 31, really provided a tailwind in the quarter. And if it did provide a tailwind in the quarter, was that seem kind of uniformly across both the Branded Spirits and the Distillery segment? Or did one segment see that more materially than the other?

Yes. The tariff -- lifting of the tariffs had an immaterial impact on us. We don't have a large part of our revenue that ships internationally, whether it's in our Distilling Solutions segment or Branded Spirits. Now we think there's good upside long-term, but the tariff -- reduction in tariffs or the suspension of the tariffs really had a minimal impact in the quarter.

Okay. Then I guess a quick follow-up question to that. I mean for -- within the Distillery segment specifically, do you -- would you have visibility of shipping product in that group to domestic customers and know that, that was going to end up in international markets? Or is that something that you guys just don't really have visibility of.

Yes. I mean we don't have clear visibility to that. But we -- the assumption is that if we're shipping product to a branded customer in the U.S. and then they're exporting that brand internationally, then obviously, some of that liquids ending up in international markets, but we don't know which percent of their brands going internationally versus staying domestic.

Okay.

Yes. And just to add to that, we have been developing our international reach on Distilling Solutions. So that's going to include developing a customer base that's base, for example, Western Europe or parts of Asia. So we have greater visibility there. But as far as what brand it specifically going into to Dave's point, yes, that's something we just don't have access to.

Okay. All right. Fair enough. And last one for me, and I'll get back in queue. On the ingredient side, I feel kind of like a broken record here, but the growth rate has just been exceptional in this quarter. And I'm curious if you can provide any context around if there's excess growth seen from any new customers, any new categories or expanded broad product categories? Or again, was that just growth really seen kind of uniformly?

Yes. The latter, pretty much uniform growth with primarily existing customers, Ben. So again, as we talked about in the past, the product lines that we have in this business, they're plant-based, high-protein, high-quality starches, excellent fibers. They're in strong demand in our customers' products that we're selling into continue to grow nicely. So that's what you're seeing as the primary drivers in the increased revenue in this business.

Got it. Well, congratulations on just the really excellent quarter across all 3 groups.

This concludes our question-and-answer session. I would like to turn the conference back over to Dave Colo, President and Chief Executive Officer.

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

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