MGP Ingredients, Inc. (NASDAQ:MGPI) Q2 2022 Results Conference Call August 4, 2022 10:00 AM ET
Company Participants
Mike Houston – Lambert & Company
David Colo – President, CEO
Brandon Gall – VP of Finance, CFO
Conference Call Participants
Ben Klieve – Lake Street Capital Markets
Mitch Pinheiro – Sturdivant
Sean McGowan – ROTH Capital Partners
Vivien Azer – Cowen
William Chappell – Truist Securities
Operator
Good morning, everyone, and welcome to the MGP Ingredients Second Quarter 2022 Financial Results Conference Call. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded.
At this time, I’d like to turn the floor over to Mike Houston of Lambert. Sir, please go ahead.
Mike Houston
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’ll 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. Additionally, this call will contain reference to certain non-GAAP measures which we believe are useful in evaluating the company’s performance.
A reconciliation of these measures to the most directly comparable GAAP measures are included in today’s earnings release and supplemental information furnished to the SEC under Form 8-K. 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?
David Colo
Thank you, Mike, and thanks to everyone for joining the call today. On this call, we will begin with an overview of our performance for the quarter ended June 30, 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. Turning to a review of our performance during the second quarter. We made meaningful progress towards executing our long-term strategic plan and remain encouraged by the demand for our products across all business segments.
Consolidated sales for the quarter increased 11% to $195 million. Gross profit increased 4% to $59.2 million representing 30.4% of sales. Reported operating income increased 28% to $35.3 million. In our distilling solutions segment we continue to experience strong demand for new distillate and aged whiskey. This momentum continues to contribute favorably to top line growth with a 29% increase in brown goods sales for the quarter versus the prior year quarter. As for our branded spirits segment, consumer demand for our premium plus brands which includes premium, super premium and ultra-premium spirits brands such as Yellowstone, Remus and El Mayor also remained strong and continues to drive gross margin expansion.
Our ingredient solutions segment continues to execute at a high level and during the quarter achieved record results. Further optimization of the segment product mix to align with consumer demand trends resulted in a 21% increase to segment sales compared to the prior year period. Looking at each segment in greater detail. We posted another strong quarter in our distilling solutions segment with sales increasing 19% to $107.1 million. Gross profit for the quarter decreased to $29.8 million or 27.8% of segment sales. The decline in gross profit can be attributed primarily to the impact of increased commodity and natural gas costs and additional supply entering the markets for our industrial alcohol and white goods offerings.
These factors were consistent with our expectations for the quarter. We continue to benefit from strong demand in each of our customer categories for brown goods. Our diverse aged whiskey library coupled with the seasoned sales and customer service team and the team’s high level of execution continues to support the segment’s growth trajectory and has enabled us to maintain strong pricing and margins. Sales of new distillate also posted strong growth during the second quarter. This growth was attributed to an increase in demand compared to the prior year quarter. Our significant market share and scale advantage continues to position us well to support ongoing growth in the American whiskey category.
As discussed during our call last quarter demand for aged whiskey continues to be very strong. We will continue to be strategic with our aged whiskey sales to enable us to meet expected customer needs for the balance of this year as well as position us to meet anticipated customer needs in the coming years. Turning to white goods, sales decreased 4% versus the prior year quarter. The decline was primarily due to lower volumes for our white goods premium beverage products. Similar to last quarter our industrial alcohol product sales decreased 13%.
The decline in industrial sales was in part attributed to reduced third-party sales volume of industrial alcohol produced by ICP, our former joint venture partner. Consistent with last quarter, we expect margins for both industrial alcohol and white goods products to remain at levels in the low single digits and in some cases to incur negative gross margins. This is a result of additional supply entering the market and its anticipated impact on profitability as well as increased input costs primarily corn and natural gas costs. We continue to focus on migrating away from industrial alcohol and toward our white goods premium beverage products whose customers historically are longer term in nature and pricing is less susceptible to wide swings.
Turning to branded spirits, sales totaled $58.6 million for the quarter, a decline of 3% versus the prior year quarter. While our premium plus brands performed well, we experienced a decline in sales driven by lower volumes in the mid and value price points categories. Even with a slight decline in sales versus the prior year quarter gross profit increased to $21 million or 35.8% of segment sales. The increase in gross margin can be attributed to the favorable performance of our higher-margin brands and to a required non-recurring accounting step-up in the prior year period.
The branded spirits segment remains focused on improving our portfolio profitability by optimizing margin through expansion and innovation in the premium plus price categories. We remain committed to successfully executing our premiumization strategy and we’ll continue to invest in marketing support to achieve sustainable and profitable growth for our brands in this category. Evidence of our commitment can be seen on larger media buys resulting in television commercials, increased social media presences and the use of key influencers to drive brand awareness for our premium plus brands. Our strategy is simple: grow profitability through leveraging the expansion of our premium plus brand portfolio with particular focus on tequila and American whiskey both which continue to expand around the globe.
Turning to ingredient solutions, sales for the quarter increased 21% to a record $29.3 million. Similar to last quarter, the increase in sales was primarily due to higher average selling prices of specialty wheat starches and proteins. We are pleased with the progress we have achieved in this segment to date. We are confident that our extensive project pipeline for these products along with further optimization of the segment product mix to meet our customers’ needs will drive long-term growth for this segment.
An example of this will be seen in the second half of this year as we launch our ProTerra brand into a new channel of distribution, selling to colleges and universities for their use in their venues as a plant-based meat alternative. Before I turn the call over to Brandon, I want to reiterate how encouraged we are by our diverse customer base and our product offerings continuing to align with consumer trends. Our robust gross margins and ability to execute against our long-term strategy continue to provide us with the momentum required to achieve our fiscal 2022 goals. This concludes my initial remarks. Let me now turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?
Brandon Gall
Thanks, Dave. For the second quarter 2022, consolidated sales increased 11% to $195 million as a result of sales growth in the distilling solutions and ingredient solutions segments. Gross profit increased 4% to $59.2 million. Gross margin decreased 30.4%. As Dave mentioned earlier, we remained committed to making investments in marketing as part of our premiumization strategy. As such, our advertising and promotion expenses for the second quarter of 2022 increased $2.7 million to $6.1 million as compared to the second quarter 2021 primarily driven by incremental investment in the ultra premium, super premium and premium price here in our branded spirits segment.
Corporate selling, general and administrative expenses for the second quarter of 2022 decreased $7.9 million to $17.9 million as compared to the second quarter of 2021 primarily due to the onetime acquisition costs in 2021 related to the Luxco acquisition that did not recur in 2022. Operating income for the second quarter increased 28% to $35.3 million primarily due to the increase in sales and gross profits and as previously discussed, the reduction in SG&A. Adjusted operating income decreased 4% from $36.9 million due to the increased investment in advertising and promotion in support of our brand spirits segment.
Our corporate effective tax rate for the second quarter of 2022 was 22.4% compared with 24.2% from the year ago period, resulting from favorable tax benefits concerning our capital spend and foreign operations. Net income for the second quarter increased 26% to $25.4 million. Basic and diluted earnings per share increased to $1.15 per share from $0.91 per share. Basic and diluted adjusted EPS decreased to $1.15 per share from $1.27 per share. Adjusted EBITDA for the quarter was $40.1 million a 5% decrease from the year ago period, driven primarily by increased advertising and promotion expenses for our premium plus tier spirits brands as well as increased combined costs specific to industrial and white goods alcohol and the price elasticity resulting from the additional supply that has entered these markets.
Additionally, relative to the prior year quarter our input cost for corn increased 54%. Wheat flour increased 23% and natural gas increased 74%. Although the average selling price for industrial alcohol and white goods increased for the quarter it was not enough to offset the higher input costs. Previously, we expected to see an approximate 700 basis point decline in year-over-year gross margin percent for our white goods and industrial alcohol products on a combined basis in 2022.
Given these recent market dynamics, we now believe this decline could approach 1,100 basis points for the full year. That said, we remain committed to pricing through these increases where possible and our full year consolidated guidance contemplates these inflationary headwinds. Year-to-date cash flow from operations totaled $43 million reflecting the consistent and strong cash generating capability of our business. Strong free cash flows further highlight the value and execution of our long-term strategy providing MGP with adequate support for M&A and our expansionary projects. MGP’s balance sheet also remains strong allowing us to continue to invest to grow. We remain well capitalized with debt totaling $232 million and a strong cash position of $37.4 million.
During the quarter our investment in inventory of aging whiskey increased by $4.9 million to $184.9 million at cost. This net increase was driven by increased put away during the quarter. Matching whiskey put away with growing future distilling solutions and branded spirits segment sales is one of our priorities and long-term strategies. We announced last quarter that we expect approximately $47.2 million in capital expenditures during 2022 which represents an approximate $10 million increase above the forecast we provided during the fourth quarter 2021 earnings call.
We continue to prioritize investments that enhance our operational capabilities and have identified opportunities to accelerate ongoing projects. These opportunities include the construction of the textured protein facility in Atchison, Kansas as well as new opportunities that will strengthen our competitive position in the markets we serve. Each of these projects remains on track. The Board authorized a quarterly dividend in the amount of $0.12 per share which is payable on September 2 to stockholders of record as of August 19.
The Board continues to view dividends as an important way to show the success of the company with shareholders. We continue to believe our capital allocation strategy focused on organic and acquisitive growth aligns well with our long-term strategy. Leveraging this approach, we are able to better position the business to benefit from underlying consumer trends. We will continue to pursue M&A and conduct expansionary projects to accelerate growth and increase our capabilities and product offerings. And now let me turn things back over to Dave for concluding remarks.
David Colo
Thanks Brandon. We are very pleased with the strong results delivered year-to-date despite the increased commodity and energy costs. Demand for our products remain strong and we believe our business continues to be well positioned to mitigate these challenges through the balance of the year. While we anticipate volatility in the broader economy to persist in the near term we remain encouraged by our diverse customer base and product offerings and believe they continue to align with consumer trends. We believe our team’s capabilities, strong market position, robust gross margins and ability to execute against our long-term strategy will provide us with momentum to achieve our fiscal 2022 goals.
We will be deliberate in all actions we take in navigating the balance of the year including continuing to further realign our production and sales mix with focus on increasing our highest-margin products, supported with increased investment in advertising and promotion to support continued growth in our premium plus tier spirits brands. For these reasons as well as our strong first half performance, we are increasing our financial outlook for the fiscal year ended December 31, 2022. Our revised outlook for the full fiscal 2022 year assumes the following: sales projected to be in the range of $745 million to $765 million compared to our previous range of $690 million to $715 million; adjusted EBITDA to be in the range of $156 million to $163 million compared to our previous range of $150 million to $157 million and basic adjusted earnings per common share in the range of $4.41 to $4.65 compared to our previous range of $4.15 to $4.35.
We are confident that each of our business segments remains well positioned against strong macro consumer trends and we continue to believe that our strategy will drive long-term sustainable growth. As we progress our ESG initiative, we recently disclosed our environmental and sustainability policy statement and our waste information for the first quarter as well as our energy management and greenhouse gas disclosures for the first half of the year. These disclosures can be found on our company website under the Social Responsibility section.
We remain on track to disclose the company’s wider usage information through the third quarter and to release our environmental sustainability report for calendar year 2022 in early 2023. We are also working with a third party to [indiscernible] a holistic assessment of the company’s ESG program to ensure we have an effective and optimized approach to our ES journey going forward. We are committed to refining the effectiveness of our tactical execution and we will continue to leverage the strong foundation we have established over the years with the objective to deliver sustainable long-term value for our shareholders. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.
Question-and-Answer Session
Operator
Our first question today comes from Sean McGowan from ROTH Capital Partners.
Sean McGowan
General question about consumer behavior. Do you think in the face of general inflation, particularly in certain categories that consumers are likely to be trading up in their alcohol choices or kind of being more conservative? Your performance in the quarter suggests no slowdown in that premiumization. But I was just wondering what your outlook says.
David Colo
Thanks, Sean. I think your read right through the second quarter of this year. Actually, if you look at what we call our premium plus price tier brands, they actually grew close to 12% in revenue for the quarter. So we really haven’t seen to date any trade down by consumers in their spirits choices. I think if inflation continues to stay high like it has in the 8% to 10% range longer term that may change. But everything we’ve seen to date and even the research that is published in our industry suggests that consumers are maintaining their position of kind of being dedicated to the brands they consume in the premium plus price tiers.
Sean McGowan
Can you update us on what your expected effective tax rate would be for the year?
Brandon Gall
We expect that to be in the 24% range for the remainder of the year.
Operator
And our next question comes from Vivien Azer from Cowen.
Vivien Azer
My first question is on brown spirits within distillery products. I was wondering if you could give any incremental color on the shape of the quarter from an ordering perspective. I mean there’s just been so much volatility in terms of consumer inflation. I’m wondering how your customers are responding to that intra-quarter.
David Colo
Vivien, we continue to see very strong demand in our brown goods both aged whiskey and new distillate. And I think we published our results for brown goods were up 29% in revenue for the quarter. So still very strong demand and we’re really in a position where we’re kind of having to govern or moderate our aged whiskey sales in particular for the balance of the year to make sure that we have adequate inventories to support future years’ growth. But we’ve seen really no letup in demand for both aged and new distillate through the quarter.
Vivien Azer
But just a follow-up on that, was there incremental demand in June because that’s when gas prices started to roll over?
David Colo
Yes. I mean in the brown goods business, what we tend to do is we look at it on a full year basis and really don’t get too hung up on month-to-month changes in sales. But we’ve really seen no pullback in demand related to what’s going on with the current inflationary environment.
Vivien Azer
And then my unrelated follow-up please, just on margin. So obviously, the midpoint of your adjusted EBITDA margin comes down. You’ve explained the incremental gross margin headwind going from 700 to 1,100 basis points. Brandon, anything else to call out in there?
Brandon Gall
Just a couple of things there, Vivien. It’s about an incremental $5 million above what we thought was going to happen at the beginning of the year. And a lot of that pressure at this point we’re seeing all those can take place throughout the course of the year, probably a little bit more loaded into Q2 and Q3 relative to Q1 and Q4. So that’s some additional context for you, Vivien.
Operator
And our next question comes from Mitch Pinheiro from Sturdivant.
Mitch Pinheiro
Want to follow up when it comes to sort of when you look at price mix in the quarter for the premium beverage alcohol being down, I guess 5%. How does that sort of what, which? Is that just a mix of new and aged distillate? Or is there anything else is list pricing down at all?
Brandon Gall
So premium beverage alcohol for the quarter just to be clear was actually up 19%. Within that is white goods and brown goods. Brown goods were actually at 29%, as Dave already mentioned. And white goods was off about 4% just due to lower volumes in the quarter. So overall from a premium beverage alcohol standpoint and especially from a brown good standpoint, we are still seeing continued strength in demand throughout the quarter.
Mitch Pinheiro
I saw price mix being down 5% in the Q. Maybe I misread that so I apologize.
Brandon Gall
The volume was down 5%. Price/mix was actually up 24%.
Mitch Pinheiro
I had that backwards in my notes. And then have you guys seen any I mean out-of-stocks affect in the branded spirits segment? Out of stocks have any impact on your sales?
David Colo
Not really, Mitch. I mean we have benefited a little bit in some of our value brands because some of our competitors have had out-of-stock issues in some of their products. And we’ve been able to go in and fill some of those gaps. But our team has done a really good job managing the supply chain issues and some of the constraints that you’re probably well aware of in the industry. And we’ve had no really material impact on our business related to shortages.
Operator
Our next question comes from Will Chappell from Truist Securities.
William Chappell
I’ll just start on the guidance. Certainly, appreciate the beat and the raise. But kind of looking at the math it kind of calls for 35%, 40% of your earnings to come in the back half of the year which traditionally the business is more equal weighted and if not anything more fourth quarter weighted just with timing of orders for [indiscernible] and new distillates. So is there something different in your business where that would be the case? Or are we just kind of looking at general conservatism until the orders come in?
Brandon Gall
And you hit it on the head by bringing up brown goods and order patterns because as we’ve always said and you said just now, the visibility as to the timing quarter-to-quarter is not always great but look at us in the whole year. Q1 for brown goods was an exceptionally strong quarter from a sales perspective. And that’s really kind of as we look at the full year it’s going to be naturally weighted a little bit more toward that. And that’s how we see the rest of the year playing out.
William Chappell
And then a couple on white goods. I mean do you feel like we’re at a stable area from that? I understand there’s still supply in industrial but in terms of [indiscernible] do you feel like the market is fairly stable and you have some visibility going forward? Or could it get worse? Just trying to understand how that plays out.
David Colo
I think at this point Brandon read off, I think corn is up 54% versus the prior year quarter, natural gas is up 74%. As you probably well know, commodity prices have started to come off a bit corn so much natural gas. But we feel like in the revised guidance we’ve provided that we’ve taken into account the best of our ability anyway. How those impact the profitability of white goods for the balance of the year. So we think we’ve got that baked into the guidance.
William Chappell
And then turning to Lux. Before you bought the business or acquired the brands, it was I think growing low single digits, flattish to low single digits. Obviously ticked up pretty nicely to high single to double digits over the past few quarters and now dropped to kind of negative 3% this quarter. I know you’re not going to give us a segment guidance but I mean what’s the general range do you think we’re kind of going back to that low single-digit overall business with the value brands kind of bringing down some of the premium brands? Could it be better? Could it be worse? Just trying to understand how I should be looking at that going forward.
Brandon Gall
So in November at our Investor Day, we shared that we expect this segment to grow in line with total distilled spirits. And which is in that 1% to 3% in total historically. And that’s how we continue to view it. And given our portfolio is very well balanced and pretty well representative of overall total distilled spirits. However, that being said our focus is not necessarily in the top line but more on the gross margin line and the brand contribution line. So that’s why we’re focusing our efforts on the premium plus price tiers. And the 11.8% growth that those 3 tiers collectively contributed in the second quarter we thought was a great sign for the portfolio.
David Colo
The only other thing I’d add is we did in Q2 cycle over some channel reload if you will and Q2 last year associated with the on-premise kind of reboot. So I don’t know that I overread the quarter from that just because of the channel reload if you will, from the prior year quarter.
William Chappell
I think you touched on a little bit in the past couple of quarters but talking about continuous improvement program and what it’s done for the ingredient business. I mean it’s a pretty obviously meaningful margin improvement. But maybe you could talk a little bit more about where we are in that program and then what you think you can do for the distilled spirits business particularly in Indiana, if you apply the same kind of practices. That would be great, thanks.
David Colo
We’ve made tremendous progress with our continuous efforts, improvement efforts in the ingredients business. It’s a big reason that you see one, the ability to increase capacity and throughput in that facility to support the strong sales growth that we’re seeing. But also it’s helped our cost structure which has also helped drive gross margin improvement. And we’re taking those same concepts and starting to roll them out to our distillery locations with actually Lawrenceburg, Indiana distillery being the next focus because we need to improve the throughput of that distillery to support our demand growth.
But in general, you’ll see us to be very pragmatic in how we roll that out. Our plans are to roll it out across all of our different sites. And as you well know, Bill, that pays dividends. It helps us increase our gross margin percentages over time and we then have optionality on how to reinvest those additional gross profit dollars either let it drop to the bottom line or reinvest in the brands as an example. So we’re committed to that process. We’ve recently promoted an individual that was instrumental in helping us with the ingredients, continuous improvement efforts, put them into a company-wide role to lead continuous improvement. So it will continue to pay dividends for us in’the long run.
Operator
And our next question comes from Ben Klieve from Lake Street Capital Markets.
Ben Klieve
First one regarding the branded spirits segment. Some really solid year-over-year numbers but I’m trying to get a better sense of the kind of sequential trends here from the first to the second quarter. As you noted, that the premium plus categories had a very good year-over-year performance. But it looks like they declined a bit sequentially to partially offset growth in other categories. I’m just wondering if you can talk about kind of what you’ve seen in this segment here year-to-date. And both from a volume perspective and a margin perspective as it looks like the Q1 gross margins in that segment were very, very strong and saw a bit of a decline here in the second quarter.
David Colo
We spoke about this on the last call. Q1 in branded spirits we had a very, very strong quarter on American whiskey shipments primarily related to our Yellowstone brand which is growing very, very nicely. And what happened is the wholesalers underestimated the demand that we experienced in Q4 of last year. So their inventories were pretty much depleted. So we replenished wholesaler inventories in Q1 and that’s what really drove that high gross margin you saw in the branded spirits segment for the quarter. And that explains the increase and then the sequential decline in gross margin coming from Q1 to Q2. It’s primarily related to that strong pipeline refill, if you will, on Yellowstone. We continue to see though, good performance in our American whiskey and super premium tequila brands. So everything is pretty much on track with what we expected through the first 2 quarters.
Ben Klieve
And then a follow-up question on moving over to the ingredient segment. The ProTerra launch that you talked about in the university category. Wondering if you can just kind of provide a bit of context on this. Is this a wonton kind of a trial basis? Has it already been tried launch is going to be more widespread? And what regions are going to be targeted for the initial launch? Any additional color there would be really helpful.
David Colo
The ProTerra product were, if you will, the kind of the channel we’re focusing on initially is colleges and universities. We’ve sold it into a number of universities across the U.S. So it’s not specific to any particular geographic region. And it’s been well received. And we should start seeing shipments by late end of Q3 into Q4. And it’s a pilot in the sense that we’re targeting a specific channel to learn from the receptivity of the product line and if there’s any additional tweaks we need to make to the product. But what I can tell you is the reception to this product within the colleges and the universities at this point has been very strong. So I think it’s going to be a great learning experience for us. And if it’s successful as we believe it will be, we think there’s going to be additional opportunities to obviously be in food service beyond just colleges and universities.
Ben Klieve
We’ll stay tuned for updates there next quarter. Congratulations on a good quarter.
Operator
[Operator Instructions] I’d like to turn the floor back over to Dave Colo for any closing remarks.
David Colo
Thank you for your interest in our company and for joining us today for our second quarter earnings call. We look forward to talking with you again after the third quarter.
Operator
Ladies and gentleman, with that, we’ll conclude today’s conference call and presentation. Thank you for joining. You may now disconnect your lines.
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