MGP Ingredients Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the MGP Ingredients Second Quarter 2023 Earnings Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mike Houston with Lambert Global.

Operator

Please go ahead.

Speaker 1

Thank you. I'm Mike Houston with Lambert Global, MGP's Investor Relations firm. And joining me today are members of their management team, including Dave Kolo, President and Chief Executive Officer and Brandon Gall, Vice President of Finance and Chief Financial 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 based on current expectations. The company's actual results could differ materially from any forward looking statements made today due to a number of factors, including the risks and uncertainties described in today's earnings release and the company's other SEC filings.

Speaker 1

The company assumes no obligation to update any forward looking performance. Reconciliations of these measures to the most directly comparable GAAP measures are included in today's earnings release. If anyone does not already have a copy of the earnings release issued by MGP today, you can access it at the company's website, www atmgpingredients.com. At this time, I'd like to turn the call over to MGP's President and Chief Executive Officer, Dave Kolo. Dave?

Speaker 2

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 June 30, 2023, 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 and A. I am proud of the considerable progress we have made toward achieving our targets for fiscal 2023. Our strong performance during the Q2 could not have been possible without our impressive and resolute team.

Speaker 2

We achieved our best quarterly sales and gross profit performance in company history. Adjusted EBITDA during the second In addition, on June 1, we closed on the acquisition of Penelope Bourbon, which expands the presence of premium plus price tier brands in our portfolio. Penelope has been a fast growing brand at ultra and super premium price points within the American Whiskey category and is expected to be gross margin accretive to our Branded Spirits segment as well as accretive to consolidated adjusted basic earnings per share. We plan to build on this momentum and importantly, this acquisition is an example of executing against our Consolidated sales for the Q2 of 2023 increased 7% year over year to $209,000,000 while gross profit increased 29% to $76,300,000 representing 36.5 percent of consolidated sales. Net income increased 26% to $32,000,000 While adjusted net income increased 31 percent to $33,100,000 adjusted EBITDA increased 28% to $51,200,000 In our Distilling Solutions segment, sales of brown goods grew 30% compared to the prior year period.

Speaker 2

The increase was driven primarily by increased pricing due to continued strong demand for both new distillate and aged whiskey. Our Branded Spirits segment sales decreased 2% year over year due to volume declines in our mid and value price tier brands. As a reminder, we experienced significant one time volume gains in our mid and value brands in the Q1 associated with our distributor realignment. We remain encouraged by consumer trends overall and specifically the demand for our Premium Plus price tier brands, which achieved sales growth of 29% compared to the prior year period. Excluding Penelope, Premium Plus sales grew north of 20% in the quarter.

Speaker 2

Consumer demand for our American Whiskey and Turning to our Ingredient Solutions segment, our team has continued to execute at an elevated level and achieved record second quarter sales and gross profit results during the period. Further optimization of the segment product mix to align with broader consumer trends resulted in an 18% increase in segment sales compared to the prior year period and gross profit 33.6 percent of segment sales. Turning to discuss each segment in greater detail. We posted another strong quarter in our Distilling Solutions segment with sales increasing 9% to $116,900,000 year over year. Gross profit for the quarter increased to $38,700,000 for 33.1 percent of segment sales.

Speaker 2

The increase in gross profit can be attributed primarily to the increase in sales of new distillate in aged whiskey. Compared to the prior year period, sales of brown goods for the quarter increased 30%, driven primarily by increased pricing due to continued strong demand for both new distillate and aged whiskey. Brown Good sales growth has continued to outpace longer term market trends and has been primarily driven by craft as well as multinational customers. Our confidence in our brown goods sales visibility through fiscal 2023 remains high. Looking ahead to fiscal 2024, our visibility is beginning to take form and we believe we have the majority of our expected Distilling Solutions Our significant market advantages continue to position us well to support continued growth in the American Whiskey category.

Speaker 2

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 and industrial alcohol. We continue to reduce the volumes produced and sold of our industrial alcohol and white goods products during the Q2. As a result, white goods sales decreased by 4% year over year and sales of our industrial alcohol products decreased 22% during the Q2. As expected, on a combined basis, these product lines continue to have negative gross margins in the quarter.

Speaker 2

Last month, we announced the planned closure of the White Goods and Industrial Alcohol Distillery in in Kansas slated for January 2024. This announcement reinforces our strategy focused on shifting away from industrial alcohol and white goods products to mitigate the continued impact of increased input cost and excess supply available in the market. The decision was not made lightly. After careful consideration, We determined this is a necessary step following many consecutive quarters in which gross margins for white goods and industrial alcohol were negative. During the past 2 years, the impact of additional supply of white goods and industrial alcohol into the market following COVID, combined with increases in local corn basis costs, resulted in the production of these product lines at the Atchison distillery to no longer be economically viable.

Speaker 2

Brandon will speak about the financial impacts as well as provide additional details on a pro form a basis Shortly. Before that, I want to clarify that this decision will not impact the operations of any of the company's other production facilities, and we plan to continue normal operations at the Acheson distillery through the end of the year. As a reminder, in an effort to pursue this strategy, We first had to solve how to physically decouple the Atchison distillery from the ingredients facility. Now that a plan has been identified to Successfully decoupled the facilities, we are now evaluating the most economically viable options for the waste starch stream. As you recall, the Waystar stream is a byproduct of the ingredient facility that is purchased by the adjoining distillery and results in an intercompany credit to the Ingredient Solutions segment.

Speaker 2

We firmly believe these actions will enable us to further align our However, given the recent announcement of the Acheson distillery closure, we will gain more clarity on how this decision will impact the back half of fiscal twenty twenty three as we work with customers on their transition plans. Turning to branded spirits, segment sales totaled $57,600,000 during the quarter, a decline of 2% versus the prior year period. While the decline was driven by lower volumes in our mid and value price tier categories, we are encouraged by the strong performance of our Premium Plus brands. Our continued focus on investing behind our higher margin Premium Plus brands resulted in an increase in gross profit to $26,000,000 or 45.1 percent of segment sales. The increase in gross margin can be attributed to the favorable performance of our higher margin Premium Plus brands.

Speaker 2

As I briefly mentioned earlier, during the Q2, we closed the acquisition of Penelope Bourbon, a fast growing brand that Our ability to further participate in the popular American Whiskey category and which we believe has meaningful long term growth potential. We could not be more enthusiastic about this deal as it supports our long term strategy focused on premiumization and enhances our portfolio of premium plus price tier brands. The integration process is on track and we remain pleased with Penelope's continued momentum as we expand its presence to new markets. Our branded Spirit's strategy remains focused on growing profitability by leveraging the expansion of our Premium Plus Brands portfolio with a particular focus on our tequila and American Whiskey brands. Turning to ingredient solutions, Sales for the quarter increased 18 percent to a record $34,500,000 while gross profit increased to a 2nd quarter record of $11,600,000 or 33.6 percent of segment sales.

Speaker 2

The increase in sales Protein and starches as well as our commodity wheat starches. Finally, I want to thank our team for their tremendous efforts and continued execution. We remain encouraged by our diverse customer base and our product offerings, which continue to align with broader consumer trends. We believe our improved profitability and our proven ability to execute against our long term strategy Continue to provide us with the momentum required to achieve our fiscal 2023 goals. This concludes my initial remarks.

Speaker 2

Let me now turn things over to Brandon Gall for a review of the

Speaker 3

key metrics and numbers. Brandon? Thanks, Dave. For the Q2 of 2023, consolidated sales increased 7% compared to the prior year period to $209,000,000 Gross profit increased 29 percent to $76,300,000 representing 36.5 percent of sales. Advertising and promotion expenses for the 2nd quarter increased 42% to $8,600,000 as compared to $6,100,000 in the prior year period.

Speaker 3

Of this amount, dollars 7,900,000 was invested toward our Premium Plus Branded Spirits, which represented 13.7 percent of total Branded Spirits segment sales in the quarter. The year over year increase is consistent with our premiumization strategy and we plan to continue to increase the marketing spend on our higher margin premium plus price tier brands. Corporate selling, general and administrative expenses for the quarter increased $5,700,000 to $23,500,000 as compared to the Q2 of 2022. Operating income for the Q2 increased 25% to $44,100,000 due primarily to the previously mentioned increase in consolidated gross profit. Excluding business acquisition costs associated with Penelope, adjusted operating income increased 29% to $45,600,000 Our corporate effective tax rate for the Q2 of 2023 was 25.3% compared with 22.4% from the year ago period.

Speaker 3

The increase in our corporate effective tax rate was primarily due to higher income before income taxes and lower tax credits. Net income for the 2nd quarter increased 26% to $32,000,000 while adjusted net income increased 31 percent to $33,100,000 Basic And diluted earnings per common share increased to $1.44 per share from $1.15 per share. Adjusted basic and diluted earnings per common share increased to $1.49 per share from $1.15 per share. Adjusted EBITDA for the quarter was $51,200,000 an increase of 28% compared to the year ago period. The increase was primarily driven by the strong performance of all three business segments.

Speaker 3

Now an update on commodities. Corn, wheat flour, rye and natural gas represent our largest commodity expenses, and each continue to experience elevated prices throughout the Q2. Compared to the prior year period, our input costs for corn increased 8%, wheat flour increased 24%, Rye increased 47% and natural gas increased 18%. Our risk management process and our focus on products that are premium and more specialty in nature have continued to enable us to mitigate the impacts of inflation over the past several quarters in most of our product lines. Additionally, we enter any given year with the majority of the commodities purchased against committed volumes.

Speaker 3

Furthermore, we do not experience any significant supply chain disruptions during the Q2 of 2023. As Dave mentioned, in July, we announced the planned closure of our Ashison distillery and expect to incur one time aggregate pre tax charges of approximately $23,000,000 to $31,000,000 in fiscal 2023. This range includes the following estimates. $17,000,000 to $21,000,000 in non cash restructuring expenses for asset impairments, including fixed assets, inventory and leases $2,000,000 to $4,000,000 in cash expenses for items such as severance costs, contract termination fees and consulting fees, and $4,000,000 to $6,000,000 And capital expenditures in connection with the decoupling of the Atchison distillery from the Ingredient Solutions facility, also located in Atchison, Kansas. Now, I'll look at the financial impact of the Atchison Distillery's performance on a preliminary pro form a unaudited basis for fiscal 20 22 and year to date ended June 30, 2023.

Speaker 3

For fiscal year 2022, excluding the financial impacts of the Epsilon Distillery, Results were as follows. Consolidated sales in Distilling Solutions sales are reduced by $140,800,000 Consolidated gross profit is increased by $620,000 and consolidated gross margin is increased by 7 20 basis points. Distilling Solutions gross profit is increased by $6,100,000 And ingredient solutions gross profit is reduced by $5,500,000,000 For the year to date ended June 30, 2023, Excluding the financial impacts of the Atchison distillery, results were as follows. Consolidated sales and distilling solutions sales are reduced by $62,300,000 Consolidated gross profit is increased by $118,000 and consolidated gross margin is increased by 6.50 basis points. Distilling Solutions gross profit has increased by $3,500,000 Ingredient Solutions gross profit is reduced by $3,400,000 The reduction in gross profit for the ingredient solutions segment in both periods is a result of increased cost of goods sold from no longer receiving an intercompany credit for the waste start slurry byproduct purchased by the adjoined Acheson Kansas distillery.

Speaker 3

The value of the intercompany credit is derived from the value of corn, which has fluctuated over time. These pro form a financials assume the loss of the waste arch slurry credit and no gain or loss on disposal. As Dave already mentioned, we continue to assess viable options for the ingredient solutions waste start stream post decoupling and the respective impacts to overall consolidated profitability. Additional information will be provided when the company releases its financial results as more information becomes available. In accordance with accounting guidance, we expect to qualify for discontinued operations presentation once the facility is shut down and assets are available to be sold.

Speaker 3

It's important to note That in some circumstances, white goods, industrial alcohol, fuel and at times certain co products are produced at the Lawrenceburg, Indiana distillery. Please refer to the pro form a schedules included in this morning's earnings release for more information. Moving to cash flow. Cash flow from operations was $20,200,000 for the year to date period, down from $43,000,000 in the prior year to date period. The reduction in cash flow from operations was driven by an increase in accounts receivable due to the timing of sales as well as increases in inventory, primarily our barreled distillate and finished goods inventory.

Speaker 3

Our balance sheet remains healthy, allowing us to continue to invest to grow. We remain well capitalized with debt totaling $325,100,000 and a cash position of $22,000,000 Turning to capital allocation. We remain focused on organic and acquisitive growth opportunities that align well with our long term strategy as well as underlying consumer trends, which we believe our business is well positioned to leverage. On June 1, we closed our acquisition of Penelope Bourbon, which we paid $105,000,000 in cash upfront. The structure of the deal includes an additional potential earn out up to an additional maximum cash payout of $110,800,000 for a total consideration of up to $215,800,000 The additional potential earn out is contingent upon certain performance conditions being met and is measured through December 31, 2025.

Speaker 3

The earn out will be treated as a contingent consideration liability and will be remeasured on a quarterly basis for accounting purposes. We will continue to evaluate M and A opportunistically to accelerate growth and increase our capabilities and product offerings. Additionally, putting away whiskey remains a critical component of our capital allocation strategy. Effectively matching whiskey put away with growing future distilling Solutions and branded spirits segment sales remains a key priority and is critical to our long term strategy. Our investment in inventory of aging whiskey increased to $234,600,000 at cost, an increase of $24,000,000 compared to the Q1 of 2023.

Speaker 3

Investing in capital expenditures to enhance our operational capabilities is another important capital allocation priority, and it resulted in capital expenditures of $14,000,000 in 2nd quarter, an increase of $4,500,000 versus the prior year quarter. We now expect approximately $63,000,000 in expenditures for the full year 2023, which is up from the $58,000,000 figure we showed last quarter due to the decoupling capital investment associated with the planned closure of the Atchison distillery. We continue to expect our capital expenditures will be used for facility improvement and expansion, Such as our new texturized protein extrusion facility in Atchison, Kansas, our distillation expansion at Luxe Road Distillers at Bardstown, Kentucky, and the addition of Whiskey Barrel Warehouses to support continued growth at our Lawrenceburg and Bardstown distilleries. Additionally, we plan to prioritize investments in facility sustenance projects as well as environmental health and safety projects. The Board of Directors authorized a quarterly dividend of $0.12 per share, which is payable on September 1 to stockholders of record as of August 18.

Speaker 3

The Board continues to view dividends as an important way to share the success of the company with stockholders. 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 believe we can better position the business to benefit from underlying consumer trends. And now, let me turn things back over to Dave for concluding remarks.

Speaker 2

Thanks, Brandon. We are pleased with the strong performance this quarter. Demand for our products in each of the 3 segments remain strong, and we believe our actions will continue to position the business for long term success. To account for our strong first half performance, Along with the recent acquisition of Penelope Bourbon, we are updating our full year fiscal 2023 guidance to the following. We continue to expect sales to be in the range of $815,000,000 to $835,000,000 Adjusted EBITDA is now expected to be in the range of $187,000,000 to $192,000,000 reflecting an increase of approximately $9,000,000 to the low and high end of the guidance range we provided last quarter.

Speaker 2

Adjusted basic earnings per common share has been revised upward and is now expected to be in the range of $5.35 to $5.50 per share with basic weighted average shares outstanding expected to be approximately 22,100,000 at year end. The acquisition of the Penelope American Whiskey brand on June 1 and the announcement in July to close our Adjutson, Kansas distillery and exit the white goods and industrial alcohol product lines produced at that location by January 2024 mark 2 key strategic decisions for the company. The Penelope acquisition is in line with our stated strategy to grow our branded spirits portfolio by acquiring brands that have strong growth trends and expect to be gross margin accretive to our business. The closure of the Atchison, Kansas distillery and exit of the associated industrial and white Fits products produced at that facility by January 2024 supports our overall gross margin expansion efforts by rationalizing product lines Going forward, we remain committed to leveraging the solid foundation we have established over the years with the ongoing objective of delivering sustainable long term value for our stockholders. That concludes our prepared remarks.

Speaker 2

Operator, we are ready to begin the question and answer portion of the call.

Operator

We will now begin the question and answer session. Before pressing the keys. The first question comes from Gerald Pasquarelli with Wedbush. Please go ahead.

Speaker 4

Hi, good morning. Thank you very much for the questions. So just to start on kind of some of your previous commentary. Obviously, your announcement to close the distillery in Kansas, you acquired Penelope Bourbon Over the course of the quarter, you've been clear that you want to drive margin accretive growth, but should we view some of these recent As the company may be getting a little more aggressive to drive this growth than you've been in the past? And specifically, Should we maybe expect more kind of similar acquisitions to the Penelope acquisition that you announced A couple of months ago over the near term, is that fair, just in terms of what you're looking to acquire and specifically will it be in Bergen?

Speaker 4

Thank you.

Speaker 2

Yes. Thanks, Gerald. The decision to close the Atchison distillery, let's start there. We've been talking about the negative impact that white goods and industrial had on our business for the last really 2 years. And we one of the reasons we could not really exit that business was that we had to figure out a way to decouple the distillery from the ingredients facility due to the fact that the distillery receives the waste starch stream That's generated from the ingredients facility.

Speaker 2

And what we've been able to do, figure out basically over the last 12 months is A solution to allow us to decouple, which is then triggered the decision to go ahead and close the Patchetton Distillery. So I'd say that's pretty consistent with what we've been talking about, but we had to come up with an engineered solution in order to make that happen, which we've now done. And we're always looking for ways to improve our margin profile in the business. And this is certainly a positive Step in that direction. So I'd say it is an aggressive move, but we have it well thought out and we have Very good solutions that we'll be putting in place between now and the end of the year to allow that decoupling to occur.

Speaker 2

On the acquisition front, Penelope is right in the bull's eye of the type of brands that we would like to acquire. It's Obviously, an American Whiskey brand, which continues to be American Whiskey, one of the highest growth categories in all of spirits. It's been a high growth brand in the Ultra Premium and Premium Plus price points, if you will. So it's definitely a brand that We've been talking about that fits the profile of how we want to grow our Premium Plus segment of our business and brands. And absolutely, as we go forward, we continue to evaluate brands such as Penelope or brands in the American Whiskey category, tequila category that meet the criteria of high growth brands, margin accretive to the overall portfolio and that we feel has Future upside and growth.

Speaker 2

So I don't know that it's a signal we're being more aggressive versus just consistent with what we've been stating our strategy is.

Speaker 4

Perfect. Thanks very much for the color. One more and then I'll pass it on. This is just a housekeeping question. When we look out to 2024, just based on your commentary on being able to still produce potentially Produce white goods at your other distillery, should we I guess, Simply speaking, are you planning on still producing white goods in 2024 or is that unclear and up for evaluation at this point?

Speaker 3

Yes. So we shared this morning, Gerald, that year to date, if you The Aspen distillery, Whitegoods production in the Lawrenceburg, Indiana distillery was about $6,900,000 worth of sales. We do this just for select customers, and this will likely continue, but a couple of things to note. It's not going to be significant. We don't expect, for example, all the volume in Atchison to swing over to Lawrenceburg, right?

Speaker 3

So we don't expect it to be significant. It will be for Just in select circumstances. And another thing to note, because the amount of volume we're doing in Lawrenceburg is Relatively much smaller than Atchison, we're able to use a different process whereby the actual gross margin on that On those sales is actually positive. So just a couple of things worth noting.

Speaker 4

Perfect. Super helpful. Thanks very much, guys.

Operator

The next question comes from Vivien Azer with Cowen and Company. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 2

Good morning. Good morning, Vivien.

Speaker 5

So I wanted to start on the guidance. Obviously, very nice Obviously, the range is reasonably wide. But are there any offsets that are worth calling out relative to the initial plan When you established guidance in February around the underlying business where maybe you've gotten a little bit less constructive and Penelope is the offset allowing you to hold the top line? Thank you.

Speaker 3

Yes. And yes, so the guidance we issued this morning, the raise does reflect continued strong underlying Trends we're seeing in our business and continuing to see. From a sales perspective, Vivien, our guide implies a year over year back half increase of 6% At the midpoint, which is very consistent with what we saw in the first half. Penelope is factored in to our back half and the rest of the year guide. But our sales guide leaving it unchanged also reflects the uncertainty the Atchison distillery closure is having As we look to transition plans with our customers in the back half.

Speaker 3

One other thing worth noting, Vivien, is It's emblematic of our continued success we're having in margining up our business as it implies year over year EBITDA margin expansion, which is the continued direction that we're looking to take our business.

Speaker 5

Certainly, and the improvement in the adjusted EBITDA margin It's certainly nice to see. For my follow-up question, please, you noted that you've made some very good headway in terms of Securing commitments in 2024, can you offer any more incremental color on that new versus aged and how the timing Would benchmark relative to prior years? Thanks.

Speaker 3

Yes. So as Dave shared earlier, the majority of our expected brown goods sales next year are committed at this point. And that goes across all spectrums. So that's Multinational and craft customers, for example, Vivienne, and it's also new distillate and aged. At this point in time, because we do contract Multiple years for new distillate, it probably skews more towards the new distillate side of the multinational customer type as you'd expect, but It is representative of our whole customer set and portfolio.

Speaker 5

Terrific. Thank you.

Operator

The next question comes from Sean McGowan with ROTH MKM. Please go ahead.

Speaker 4

Yes. Thank you. First question is on the decline in the segments under Premium How much of that is due to you managing it down versus just reduced demand? Like some color on that if you

Speaker 2

Yes, Sean, if you'll recall in the Q1, we had size gains in our mid and value brands revenue and that was due to the distributor realignment initiative that we announced In the Q1, and I think what we're seeing is in the Q2, obviously, we didn't have that one time gain. And we did speak to that last quarter that we weren't expecting to continue to see growth in admitted value once we got past the initial pipeline fill, if you will, Associated with the distributor realignment, we are not actively managing down our mid value brands. We're letting them Basically, follow a natural course of what's going on in the broader market around mid and value brands. So it's not an active Process we're pursuing to manage those down.

Speaker 4

Okay. Thank you. And then my follow-up is on the gross margin improvement, which continues to be pretty strong. Can you quantify, Brandon, how much of the gross margin improvements, maybe particularly within Premium Plus, how much of that is price versus Other

Speaker 6

factors?

Speaker 3

Yes, it's definitely price and mix. As we continue to naturally Gravitate more and more of our portfolio to that premium plus price points, you're going to get that natural lift, Sean. And as we've discussed that Looking at not necessarily the top line of the entire brand and spirits segment, but looking at the growth of the Premium Plus sales is really indicative Where we're looking to take this portfolio long term because if we're successful there, you're going to see that natural margin lift as we saw in the quarter.

Speaker 4

Okay. Thank you very much.

Speaker 2

You bet.

Operator

The next question comes from Mark Torrente with Wells Fargo. Please go ahead.

Speaker 7

Hey, good morning guys. Thank you for taking my questions. Just a few here. On Penelope, there are limited Financial disclosures with initial release. Could you provide any more sizing, growth expectations, margin profile, synergy expectations, etcetera?

Speaker 7

And then any additional detail on the earnout provision from here?

Speaker 3

Yes. I'll start with that one. Thanks, Mark. Yes, so the information we Provided and disclosed on Penelope was admittedly a little bit limited. We did that on purpose for competitive reasons.

Speaker 3

They are a customer of ours and there may be additional similar type deals we look at in the future and we wanted to Disclosed only as much as we thought necessary on that front. And this is a very margin accretive brand. It's also, as already noted, an existing customer of ours. So a lot of the inventory they do have is at their cost, which was what we sold to them, And that's now transferred over. And as we work through that over the next in the coming quarters and even years in some cases, we do expect to gain those synergies On the cost side and then as we roll out to additional markets and also gain points of distribution in the markets we're Yes, we expect to see further tailwinds there as well, Mark.

Speaker 7

Okay. And then you You touched on and made some are the recent actions that you guys have undertaken, prohibitive in any way for more immediate deals. Are you more focused on paying down the debt here? And then is Europe still a priority for you guys?

Speaker 3

Yes. So this is not prohibitive for us to continue looking at assessing additional deals. Our leverage ratio is very manageable. It's under 2x on a net basis. So our facility and debt arrangements definitely give us The dry powder available, if we do see something that makes a lot of sense for this business.

Speaker 3

And yes, as we've discussed, Mark, Brands like Penelope here domestically make a lot of sense for us and where we're trying to take the brand spirits portfolio. But we also do see to your point and continue to see white space outside the United States. 90 7% of our sales are in North America. And so we see great opportunity to expand that and take our portfolio elsewhere over time.

Speaker 7

Okay. And then just one more for me, Ingredient Solutions, will this now be completely separated from an operational standpoint? And how are you guys thinking about this business going forward? Thanks.

Speaker 2

Yes. Once we complete the decoupling process by the end of the year, Mark, The 2 facilities will be decoupled. We still think very highly of our ingredients business and we'll continue to operate and grow That part of our business, it's probably been one of our most consistent performers in year after year growing top line, expanding gross margins And contributing to the bottom line. So at this point, we view that as a key part of the business going forward.

Operator

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

Speaker 6

Thanks. Good morning. Good morning. First, just Trying to understand the modeling for the back half as you exit the white goods business. And I understand on a Pro form a basis, they're not adding a whole lot of earnings per se, but I'm just trying to understand as customers Walk away over these next 4, 5 months, I imagine that facility which is running 20 fourseven, 365 is Underutilized, lower and lower and it does kind of generate some reverse operating leverage.

Speaker 6

I think that's the way it works. So Don't know how you're modeling it or how that's accounted for into your guidance or how or if you're just kind of excluding that and assuming It was a normalized business, to get some of the numbers, just any color there would be great.

Speaker 3

Yes. So, firstly, we're committed to honoring our customer relationships and commitments throughout the end of the year, Bill. So we're really not looking to fully close the facility until January 2024. That being said, Transition plans happen with customers. These are customers that in a lot of cases have been customers for not just years, but decades.

Speaker 3

So we are fully committed to helping them transition in an orderly process. However, that being said, we don't know at this point what that's going to look like. So as you'll recall, we did moderate back our throughput at that facility at the beginning of the year to really take out what we felt like were some of the more Volatile type sales that we're making on the margin. And so we have moderated it back so far in the 1st 6 months of the year. That's going to continue.

Speaker 3

But as for how the rest of the business is going to go, there some of that is contemplated in our guide. And we'll give you another update as or more updates as the year goes on as we report earnings.

Speaker 6

Got it. But it's safe to say they're operating at probably some incremental losses in the back half that's factored into your guidance?

Speaker 3

It very much could be Bill.

Speaker 6

Okay. And then, Dave, as you look, I know it's a low margin business that you're walking away from, but it is still Profitable or accretive to some extent EPS, especially vodka, gin side, I mean, how do you look In terms of the company's earnings power or earnings growth over the next few years, do you feel like you can easily replace that with other parts The business to continue growth, you feel like next year is a step down in terms of EPS growth as you walk away from part of the business, Any thoughts there?

Speaker 2

Yes. No, I think it will actually help our ability to grow our Our margins improve our margin profile and our EPS growth over the years, Bill, because basically If you look at the pro form a financials that Brandon spoke to, in 2022, I think we had $140,000,000 in revenue with 0 gross profit. Once you factor in the netting out of the waste starch credit that goes back to ingredients to offset the loss on the Whitegood Industrial Product Lines. And then the same thing year to date this year, we're basically on a basis, we have all the revenue that's coming from white goods and industrial is generating again on a net basis taking into account the Credit going back to an ingredients, no gross margin whatsoever. So it actually should help us going forward To expand gross margin profile and to grow EPS.

Speaker 6

Got it. And then one last one for me. Just trying to understand The Penelope impact, and I'm not sure if you disclosed that, like is there a rough number we're including into this year or next year or as we're looking next year or is that to be determined?

Speaker 3

Yes, we haven't disclosed that yet, Bill, for the reasons we've discussed and it is contemplated in. It's obviously a very gross margin accretive deal for our Brand and Spirits segment, and we also I expect it to be immediately accretive to our consolidated earnings per share. So that hasn't changed. The little bit of color we did share was that We closed the deal on June 1, so there is a month of performance of Penelope in Q2. Premium Plus Sales were up year over year 29%, but we want to be sure to add that even if you exclude Penelope in the quarter, Our Premium Plus sales were up north of 20%.

Speaker 3

So the rest of the portfolio is really performing as well. But as the year and years after go on, we expect Penelope to add more and more to it.

Speaker 6

Okay. Yes, sorry, I meant to ask in a different way. I think you've said Penelope is in 30 states. Can you get I mean that seems to imply that it's pretty widely distributed. Is there any other metrics you have just to kind of give us an idea of how that compares to like Yellowstone or other some of your other Luxco brands?

Speaker 3

Yes. And so There's more states to go to your point, but it's a very young brand. It's one that's growing very, very fastly. And in the states we're in, and I think where you're going, Bill, is points of distribution. And we see a lot of runway there As well, just given that in a lot of the markets, those 30 markets you just mentioned, they've only been in there in some cases months, It's just up to a couple or a few years.

Speaker 3

So we see not only from a market perspective, but also from an account perspective, a lot of Runway, as far as quantifying how it compares to maybe the rest of our portfolio or Yellowstone, we're not prepared to do that at this point. But we'll take that into consideration moving forward.

Operator

The next question comes from Mitch Panaro with Stuttgart. Please go ahead.

Speaker 8

Good morning. Just a follow-up. So Penelope had 1 month of sales in the quarter. Was there did it have any impact on Your finished goods or barreled distillate figures for the end

Speaker 3

of the quarter? Yes, Mitch. Good point. So our barreled inventory are put away Increased in the quarter about $24,000,000 More than half of that was just organic Due to a lot of our efforts to put away to match for future demand, but also it's due to our continuous improvement efforts As we've been seeing, especially at our Lawrenceburg, Indiana facility, but the remainder of that, so just under $10,000,000 of that number It's due to Penelope barrels that were part of the acquisition that came across and are now being reflected on our balance sheet.

Speaker 8

And was any finished goods there as well

Speaker 3

or Yes, there's definitely an increase in our finished goods. So that came as part of the acquisition as well, as you'd imagine. So there was an increase there.

Speaker 8

Okay. Thank you. And then just a question on The Branded Spirits. So obviously, the 28% price mix in the But what does the volume look like in your Premium Plus categories? Is it flat?

Speaker 8

Are Consumers accepting these significant price increases without any Problems, can you talk about that a little bit?

Speaker 3

Yes, the volume actually was up for Premium Plus as well in the quarter. On all fronts, it was a very, very strong quarter for our Premium Plus brand and spirits price tiers segment. And we the momentum really seemed to come out of the back half of the quarter too. And when you couple the momentum we have there And the relationship with our RNDC that we entered into in the Q1 with Penelope Acquisition and that was announced earlier in Q2. We really feel like we're in a we're really well positioned, Mitch, to really deliver a strong back half.

Speaker 2

Hey, Mitch. What I would add to what Brandon said is the other thing we spoke of on our Q1 call relative to brands was felt there was excess inventory in the market at the distributor level. And I'm sure you've been reading about destocking occurring And spirits in general, so we feel like we pretty much cycled through that. And as we got To kind of mid to back half of the second quarter, we started seeing shipments pick up again, specifically in our Premium Plus brands. So I think overall, the price points we have on those brands, we're starting to see the shipments pick back up, Which is a great sign because it continues to show consumer pull on those key brands as well as we feel like we've kind of worked through The overstock issues that we were battling through in the Q1.

Speaker 8

Okay. And then just one last question on the ingredient solutions. So the volume there was also down 1%. And I'm just curious How that fits with the longer term trends of Whether it's plant based alternatives or higher fiber, if you could just talk about that a little bit, I'd appreciate it.

Speaker 3

Yes. So Dave just entered destocking on the branded spirit side. Coming into the year on our food ingredients side, a lot of our customers are large distributors here in the United States. And entering the year, they were a little Heavy on their inventory as well. So Q1 and even a little bit into the beginning of Q2, the purchase Patterns were a little lighter than we'd expected.

Speaker 3

However, Mitch, that has picked up as that's been more or less right sized From an inventory standpoint, so it was a great quarter for the segment and we expect A strong back half to the year for Green Solutions.

Speaker 8

All right. Thank you very much.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Dave Kolo for any closing remarks.

Speaker 2

Thank you for your interest in our company and for joining us today for our Q2 earnings call. We look forward to talking with you again after the Q3.

Operator

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

Powered by Quartr
Earnings Conference Call
MGP Ingredients Q2 2023
00:00 / 00:00