Good day, and welcome to the MGP Ingredients First Quarter 2022 Financial Results Conference Call. 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 three 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 ending the quarter up 25.8% to $111.5 million. Gross profit for the quarter improved to $38.9 million or 34.9% of segment sales. Sales of premium beverage alcohol increased 37.7%, while brown goods sales grew 44.4% from last year due to higher aged whiskey and new distillate sales. Aged whiskey sales also served as the primary driver to the increase in gross margins in the period. Our growth in sales of brown goods this quarter again outpaced the longer-term market trends. This was attributed to the sustained strong demand in each of our customer categories, as well as our team's ability to capture unfilled demand. We expect strong pricing trends to persist. Our inventory of aging whiskey has offered MGP a sustained position of strength, and we believe this will continue throughout 2022. Sales of new distillate also posted strong growth for the quarter, as we experienced an increase in demand compared to the prior year period. While consumer demand for American whiskey remains robust and our diverse customer mix positions us well, we remain uncertain as to when the growth rates will begin to normalize and align more with the long-term trend for the overall category. We believe our significant share and scale advantage will position us well as this increased period of demand continues. Moving to white goods. Sales posted another solid quarter with growth of 20.6%, primarily due to improved pricing and volume. The growth partially reflected volume shifts away from industrial alcohol and towards our white goods premium beverage products. As a result, sales for our industrial alcohol products decreased 33.7% this quarter. The decline was also partially attributed to reduced third-party sales of industrial alcohol produced by ICP, our former joint venture partner. As previously discussed, we anticipate margins for both industrial alcohol and white goods products to continue at these lower historical levels, which are in the low single digits as the demand for industrial alcohol continues to moderate and due to the additional supply that has entered the market. This anticipated continued decline in the profitability of white goods and industrial alcohol is factored into the fiscal year 2022 guidance. Revenue from warehouse services increased 36.2% this quarter as compared to the first quarter 2021. This growth can be attributed in part to the growth in the number of customer barrels aging in our whiskey warehouses and other services we provide. Turning to Branded Spirits. Sales totaled $55.8 million for the quarter, primarily due to sales of brands acquired as part of the Luxco acquisition. We also benefited from continued strength in our premium, super premium and ultra-premium brands, reflecting higher case volume of these higher margin products as well as increased points of distribution for the legacy MGP brands. Gross profit for the segment increased to a record $24.8 million or 44.5% of segment sales for the quarter. Strengthening consumer demand for our brands, especially our premium, super premium and ultra-premium offerings continues to be a major catalyst for growth. We are encouraged by the growth we're experiencing as we continue to successfully execute our premiumization strategy, increased distribution and improved pricing on select brands, as well as product mix contributed to the record results this quarter. We believe consumer demand for our expansive family of brands will continue to position us well for incremental growth. Turning to Ingredient Solutions. Sales for the quarter increased 46.2%, while gross profit increased to $8.1 million or 29% of segment sales, each of which represents record results for the segment. As a reminder, we experienced some temporary softness in our Ingredient Solutions segment in the first quarter of 2021, primarily due to a natural gas curtailment that impacted approximately 2 weeks of production last year, which reduced gross margin by approximately 400 basis points. The increase in sales was primarily driven by increased volumes and higher average selling prices of specialty wheat starches and proteins as well as commodity wheat starches. Our experienced sales, innovation and R&D teams worked effectively and collaboratively to meet our customers' needs as we achieved another quarter of record results. Before I turn the call over to Brandon, I want to reiterate my excitement for the continued momentum we experienced this quarter across each of our business segments. Our product offerings remain aligned with strong consumer trends as evidenced by our ability to effectively recruit new business and grow with existing customers. This concludes my initial remarks. Let me now turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?

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 three segments. Gross margin increased by 700 basis points to 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 three business segments. Corn, wheat flour, and natural gas are three 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 example, there are certain customers for our white goods and industrial alcohol products that choose not to contract in advance. Additionally, customers for our fuel-grade alcohol, distillers feed, and related coproducts also purchase in the spot market. As a result, we cannot provide assurance that we will always be able to price through increases in commodity costs to our customers in the open market. That said, we remain committed to pricing through these increases where possible, and our full-year consolidated guidance contemplates these inflationary headwinds. Additionally, supply chain disruptions have had a minimal impact on our operations over the past several quarters. But this is another area we continue to monitor to mitigate potential impacts. As we've previously stated, our strategy has been to migrate away from industrial alcohol towards our white goods premium beverage products whose customers historically are longer-term in nature and pricing less susceptible to wide swings. Consistent with those efforts, white goods sales for the first quarter increased by 20.6% to $20.1 million, while industrial alcohol decreased by 33.7% to $11.5 million. Cash flow from operations was $22.2 million in the first quarter, which was up from approximately $17 million in the first quarter of 2021, reflecting the strong cash-generating capability of our business and the significant contribution of the Luxco acquisition. Strong free cash flows for the quarter further highlight the value and execution of our long-term strategy, providing MGP with adequate support for 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 $232.7 million and a strong cash position of $27.3 million. Our investment in inventory of aging whiskey increased by $6 million at cost as compared to the fourth quarter of 2021. This net increase was driven by increased putaway during the quarter. Matching whiskey putaway with growing future Distilling Solutions and Branded Spirits segment sales is one of our priorities and long-term strategies. We also remain committed to continuing our investment in our operational capabilities. We expect approximately $47.2 million in capital expenditures during 2022, which represents an approximate $10 million increase above the forecast we provided during last quarter's earnings call. We've identified opportunities to accelerate projects, such as the construction of the texturized protein facility in Atchison, Kansas as well as new opportunities that will strengthen our competitive position in the markets we serve. We believe these new and accelerated projects all share attractive payback periods and returns on investment, which should enhance shareholder value over the long-term. The Board authorized a quarterly dividend in the amount of $0.12 per share, which is payable on June 3 to stockholders of record as of May 20. The Board continues to view dividends as an important way to share the success of the company with shareholders. We believe the capital allocation strategy focused on organic and acquisitive growth aligns well with our long-term strategy, as well as the underlying consumer trends, our business is well positioned to leverage. 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.

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 three 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 two 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 brings 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 to continue through fiscal 2022. We will maintain a high level of operational execution and will be deliberate in all actions we take as we navigate the market dynamics this year. We are confirming our full-year fiscal 2022 guidance. We expect sales to be in the range of $690 million to $715 million, which would equate to a percentage growth rate range of approximately 10% to 14% from the prior year period. Adjusted EBITDA is expected to be in the range of $150 million to $157 million, which would equate to a percentage growth rate range of approximately 6% to 11% from the prior year period. We are forecasting basic adjusted earnings per share to be in the $4.15 to $4.35 range, with basic weighted average shares outstanding expected to be approximately 22 million at year-end. As we progress our ESG initiative, we recently disclosed our environmental and sustainability policy statement and Q1 2022 waste disclosure report on our company's website under our social responsibility section of the site. We remain on track to disclose the company's greenhouse gas emission information during this year and the environmental sustainability report for calendar year 2022 in Q1 of 2023. We are also working with a third party to complete a holistic assessment of the company's ESG program to ensure we have an effective and optimized approach to our ESG journey going forward. We are committed to refining the effectiveness of our tactical execution, and we'll 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.

The first question comes from Mitch Pinheiro with Sturdivant.

I don't know if you mentioned this, but you talked about new distillate sales being strong in the quarter. How does that compare with age? Were the growth rates similar, or did one grow faster than the other?

Yes. Great question, Mitch. Thanks for that. We actually saw well in the double-digit growth for both new distillate and our aged 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, how much visibility did you have into the quarter? Were you surprised by new distillate sales at all? I know you don't get complete visibility with customers, but can you talk about what might have changed and contributed to the strength?

Yes. We're observing positive trends across all of our customer segments, ranging from craft to regional to national and multinational. There has been an overall tightening in the market for age, but we are now also noticing signs of this for new distillate capacity. As many of our customers continue to succeed and improve their financial positions, they are investing more upfront than they have in previous years.

Okay. Regarding our guidance for the next three quarters and the situation with brown goods, how should we approach this? Clearly, these growth rates cannot continue indefinitely, or we will run out of products to sell. Should we consider a balanced growth approach between aged and new distillate for the remaining quarters?

Yes, you're correct. For the quarter, our combined sales of new distillate and aged products increased by more than 44%. However, we wouldn't recommend that you or anyone else forecast this level of growth moving forward. We've consistently stated that in the long run, we expect our growth to align more closely with the overall growth of the category. As we look ahead to the remainder of the year, we don't foresee the same rate of growth in the upcoming quarters for our brown goods for this reason. This is how we're approaching the situation. There is substantial demand as we enter the year, with many of our customers needing aged barrels and new distillate for their operations.

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. Was 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 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.

Regarding the outlook, your first quarter results clearly exceeded at least the Street's expectations, and they might have also surpassed your initial forecasts. Are there any significant developments for the rest of the year that you are noticing? Is there anything new that has emerged? You mentioned that you are reasonably well hedged on green. I believe your projections for white goods and industrial were already included in your initial guidance, unless I am mistaken. Is there anything else we should be aware of as we look ahead to the next few quarters?

Thanks, Bill. It was a very strong quarter, as you can clearly see. However, we've always emphasized that our business operates over four quarters, and we prefer not to overreact to any single quarter, particularly the first one of the year. That said, there are three key areas we're considering for the rest of the year. First, concerning commercial performance, as previously discussed with Mitch, we do not expect to achieve the brown goods sales performance of 44% in the following quarters. Second, in Q1, we saw robust pipeline shipments for our super premium and ultra-premium American whiskey brands. While we'll continue to monitor this, we do not foresee maintaining that level for the remainder of the year. We'll evaluate how depletions occur from Q2 to Q4 and observe how distributors manage to refill their pipeline. So those are the two commercial aspects we're focusing on. Regarding inflation, there are significant headwinds with commodities. Despite the inflation we've experienced in Q1, stock pricing has generally aligned with our expectations. However, there are specific areas in our business to consider. For example, certain customers in white goods and industrial sectors do not engage in contracts and will purchase on the spot market. Additionally, as we mentioned, fuel and distillers grain and related coproducts accounted for just over $12 million in Q1 sales, all procured on the spot market. As we progress through the rest of the year, we're keeping an eye on how stock market prices hold up relative to underlying commodity input prices.

Okay. I understand. Regarding the demand for brown spirits, both new and aged, Dave, can you explain the customer behavior driving this demand? It's understood that there's a global and U.S. shortage of these products. Is the increase in customers looking at your aged inventory due to this shortage, or are existing customers more willing to purchase earlier? Additionally, do you have customers who are concerned about potential shortages in the future and are therefore accelerating their new purchases now? Can you explain the behavior driving this demand in the current net short environment?

Yes, I think everything you mentioned is happening. We continue to see strong demand for aged products from our existing customers as well as some new customers entering the market. We've noted in the past few calls that the aged inventory is very tight right now. On the new distillate side, we are also experiencing strong demand, as Brandon pointed out, from both existing and new customers interested in new distillate. Consequently, we are encouraging customers to contract more of our new distillate capacity to safeguard their brands. Additionally, we are actively encouraging customers to contract aged whiskey, which has historically been challenging to achieve, but we are noticing an increased willingness among customers to engage in these contracts. While it currently represents a small part of our business, it seems to be growing in this current market environment.

Got it. And then two 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 two 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 just one last question for me. Regarding Luxco, I may have missed it if you mentioned it. What was the year-over-year pro forma growth for the branded portfolio this quarter? Was it steady across the board? Did the brown brands perform particularly well? Could you provide any additional insights on the performance, considering there are over 100 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 three quarters last year. So we're really seeing a strong pull 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 seen 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 lifting of the tariffs had an insignificant impact on us. We don't derive a significant portion of our revenue from international shipments, whether in our Distilling Solutions segment or Branded Spirits. We believe there is good long-term potential, but the reduction or suspension of tariffs really made a minimal difference in the quarter.

Okay. I have a quick follow-up question regarding the Distillery segment. Do you have visibility on shipping products in that group to domestic customers and knowing whether they will end up in international markets, or is that something you don't have visibility on?

Yes, we don't have clear visibility on that. The assumption is that if we're shipping product to a branded customer in the U.S. and they are exporting that brand internationally, some of that liquid is likely going to international markets, but we can't determine the percentage of their brands that go international versus those that remain domestic.

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 based, for example, in Western Europe or parts of Asia. So we have greater visibility there. But as far as what brand it's 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 three 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.