INVESTING FOR GROWTH IN PREMIUM SPIRITS AND SPECIALTY FOOD INGREDIENTS - INVESTING FOR GROWTH IN PREMIUM SPIRITS AND SPECIALTY FOOD INGREDIENTS

Transcription

1 INVESTING FOR GROWTH IN PREMIUM SPIRITS AND SPECIALTY FOOD INGREDIENTS May 2018 INVESTING FOR GROWTH IN PREMIUM SPIRITS AND SPECIALTY FOOD INGREDIENTS

2 Forward -Looking Statements Certain of the comments made in this presentation and in the question and answer session that follows may contain forward-looking statements in relation to operations, financial condition and operating results of MGP Ingredients, Inc. and such statements involve a number of risks and uncertainties. Forward looking statements are usually identified by or are associated with such words as "intend," "plan," "believe," "estimate," "expect," "anticipate," "hopeful," "should," "may," "will," "could," "encouraged," "opportunities," "potential" and/or the negatives or variations of these terms or similar terminology. These statements reflect management's current beliefs and estimates of future economic circumstances, industry conditions, Company performance, and Company financial results and are not guarantees of future performance. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from our expectations include, among others: (i) disruptions in operations at our Atchison facility or our Indiana facility, (ii) the availability and cost of grain and flour, and fluctuations in energy costs, (iii) the effectiveness of our grain purchasing program to mitigate our exposure to commodity price fluctuations, (iv) the effectiveness or execution of our strategic plan, (v) potential adverse effects to operations and our system of internal controls related to the loss of key management personnel, (vi) the competitive environment and related market conditions, (vii) the ability to effectively pass raw material price increases on to customers, (viii) our ability to maintain compliance with all applicable loan agreement covenants, (ix) our ability to realize operating efficiencies, (x) actions of governments, and (xi) consumer tastes and preferences. For further information on these and other risks and uncertainties that may affect our business, including risks specific to our Distillery Products and Ingredient Solutions segments, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31,

3 At -A glance MGP is a leading supplier of premium distilled sprits and specialty wheat protein and starch food ingredients Headquartered in Atchison, Kansas with 317 employees (12/31/2017) 2017 Net Sales of $347.4 million and operating profit of $42.9 million Two operating segments with leadership positions Distillery Products (2017 Net Sales of $291.0 million) Leading supplier of premium bourbons, whiskeys, distilled gins, and vodkas Largest U.S. supplier of rye whiskey Largest U.S. supplier of distilled gin Ingredient Solutions (2017 Net Sales of $56.4 million) Largest U.S. supplier of specialty wheat proteins and starches Execution of strategic plan has more than doubled the company s operating income and expanded gross margin by 12.8 percentage points since

4 unique Capabilities And capacities LAWRENCEBURG, IN DISTILLERY Distilling & Aging Wide Range of Whiskeys Standard & Custom Mash Bills Gins Grain Neutral Spirits/Vodka ATCHISON, KS DISTILLERY High Quality, Efficient Production Grain Neutral Spirits/Vodka Gins Industrial ATCHISON PROTEIN & STARCH Specialty Wheat Proteins & Starches Textured Proteins RESEARCH & DEVELOPMENT Extensive R&D Resources R&D Labs at Both Locations 4

5 Strongly positioned in growing markets Distillery Segment net sales $291mM Spirits gaining share Distilled spirits have gained share of total beverage alcohol for 8 straight years, reaching 36.6%. Premiumization Consumers are trading up across all categories, with high end and super premium brands outperforming their categories in % super premium American Whiskey +14.5% high end premium Vodka +11.2% super premium Gin Growth of American Whiskey Category Bourbon/Rye/Tennessee continues to outperform the overall distilled spirits industry. +6.4% volume +8.1% revenue 5 Note: Data sourced from Distilled Spirits Council for U.S. Domestic Market

6 Bull Case for American Whiskey 5-Year volume CAGR is accelerating % 3.7% 5.1% 5.7% 6.3% 6.5% Historical Length of Trends in the U.S. 9 LTR Case Volume (000s) American Whiskey Vodka Tequila Volume Per Capita Consumption LDA Pop 122m 221m 239m Share of TDS 22.8% 8.0% 10.2% Headroom Geographical Expansion Potential American Whiskey SOM of Total Whiskey In US 36% ROW 12% American Whiskey export volume projected +13.9% in Note: Data is sourced from Distilled Spirits Council

7 7 capacity situation assessment Industry is Adding Capacity Existing producers to support growth of existing brands New producers to support growth of new brands Customers Building Capacity To expand their product offerings To expand their marketing efforts Understand and value our role Strengthening our Position Scale competitive pricing Capacity ability to support long-term growth Capabilities meet any customer needs Partnership our core business Leveraging aged retain and attract Broad base fastest growing segments

8 STRONGLY POSITIONED TO SERVE GROWING MARKETS Ingredient solutions net sales $56MM HIGH FIBER Category (N. Amer.) = $1.3B 13% projected 5 year CAGR NON-GMO Category (N. Amer.) = $1.0B 12.9% projected 5 year CAGR HIGH PROTEIN Category (N. Amer.) = $16B 7% projected 5 year CAGR PLANT BASED PROTEINS Category (Global) = $4.3B 7.7% projected 5 year CAGR 37% of Americans are interested in G.M.O.-free products. Source: Mintel MGP Ingredients offers specialty proteins and starches derived from non-bioengineered wheat. 8 Note: 2016/2017 category data based on internal company estimates

9 Our Strategic plan - 9

10 Maximizing value In Distillery products: Driving sales mix up the margin ladder Food Grade Alcohol Products 10 M a r g i n s MGP Branded Product Whiskey: Aged Whiskey: New Distillate White Goods: Gin White Goods: Vodka Industrial Alcohol Premium Beverage Alcohol

11 MIGRATING TO PREMIUM BEVERAGE alcohol 2014 % of Total Food Grade Alcohol Net Sales % 49% 57% 43% 66% 34% 70% 30% Premium Beverage Alcohol Industrial Alcohol 11

12 PREMIUM BEVERAGE ALCOHOL BREAKOUT 2017 NET SALES = $178MM 51% Whiskey 64% Gin & Vodka 36% 12

13 Aged sales and branded platform DESIGNED TO drive future gross margin expansion STAGES OF DISTILLERY PRODUCTS MARGIN EXPANSION BRANDED PLATFORM LEVERAGING AGED SALES PRODUCT MIX OPTIMIZATION: NEW CUSTOMERS / EXISTING CUSTOMER GROWTH PLANT EFFICIENCIES AND EFFECTIVE RISK MANAGEMENT 13 STAGE 1 STAGE 2 STAGE 3

14 Maximizing -Value in Ingredient solutions Focus on MGP proprietary protein and starch products Whatever the science says, many consumers have made up their minds: no genetic tinkering with their food, * SOURCE LINK Focusing on large branded players Leveraging macro trends High fiber High protein Non GMO Plant based proteins The growth in this [meat substitutes] market is propelled by continuous growth in the vegetarian food industry and the increasing health concerns of consumers. SOURCE LINK 14

15 Brand: TILL American Wheat Vodka Concept: Till Vodka. Pride Distilled. Product: Wheat Vodka, using wheat only from Kansas farms USP: A vodka based on values, rather than status or production process. A brand that represents timeless and aspiration values, and tied to the region that embodies them. Kansas is synonymous with wheat. Launched in Q Regional Markets Capturing value share SRP = $

16 Acquired November Capturing value share Brand: George Remus Straight Bourbon Whiskey Super premium pricing: SRP = $44.99 Concept: King of the Bootleggers Product: Proprietary blend of MGP bourbons USP: Compelling concept seen as more unique compared to leading craft bourbon brands. Remus commands super premium pricing. Proprietary blend of mash bills Custom bottle 94 points: Tasting Panel 16

17 Capturing Value Share Brand: Remus Repeal Reserve Straight Bourbon Whiskey Concept: Honoring George Remus Birthday & Repeal Day Product: MGP s select bourbon reserves USP: Released each November on George Remus Birthday, November 13, with activities leading up to Repeal Day, December 5, each series is a unique blend of mash bills and age, showcasing MGP s art of blending. Ultra premium pricing: SRP = $

18 Capturing Value Share Brand: Tanner s Creek Blended Bourbon Whiskey Concept: By Hoosiers. For Hoosiers. Product: An Indiana blended bourbon whiskey USP: Proudly released in honor of Indiana distilling craftsmanship, and in recognition of the support that the great people of the Hoosier State have provided the MGP distillery. Partnering with the Indiana Forrest Alliance. SRP = $

19 Capturing Value Share Brand: Rossville Union Master Crafted and Barrel Proof Straight Rye Whiskey Concept: Celebrating the rich heritage of Lawrenceburg distillery and its unparalleled rye capabilities. Product: Straight rye whiskey 94 and proof SRP = $69.99 USP: Produced at our legendary Lawrenceburg distillery, which was established in 1847 and originally named Rossville Distillery. SRP = $

20 Market focus 20

21 Investing -To Grow Expanding barrel warehouse capacity - authorized to reach $33.8 million Building our barreled whiskey inventory - Investment of $67.9 million at 3/31/18 - Potential uses: - Support own brands - Strategic partnerships - Strengthen position attract and retain customers - Sell on open market potential value 3X Attracting, developing and retaining talent 21

22 OPERATIONAL -EXCELLENCE Committed to operational excellence across the organization - Managing input costs - Efficient production - Consistent high quality products Disciplined approach to managing commodity costs - Formula-driven pricing - Locking in margins - Passing through significant swings in cost Implementing new safety initiative Safety Up Ongoing sustainability efforts - 100% of electricity sourced from renewable wind energy - Elimination of all single use plastics and styrofoam MGP University: Developing the talent to support our growth 22

23 Building -The mgp brand Selected for S&P SmallCap 600 index Named Distiller of the Year by Whisky Advocate in 2015 Honored as Supplier of the Year by largest distilled spirits company in 2017 Member of the Distilled Spirits Council Honored by Kansas Department of Commerce 23

24 Financial -Results

25 Growth in premium beverage and specialty ingredients led to sales growth of 9.2% NET SALES YEAR ENDED 12/31/2017 Fav / (Unfav) vs Prior Year $MM $MM % Distillery Products $291.0 $ % Ingredient Solutions % MGP Ingredients $347.4 $ % KEY DRIVERS Distillery products growth primarily driven by an 18.4% increase in premium beverage sales Ingredient solutions improvement due to gains in specialty wheat protein and fiber businesses 25 Note: Totals in presentation may not foot due to rounding.

26 Distillery Net sales MIX Shifted To Higher Value premium beverage alcohol NET SALES YEAR ENDED 12/31/2017 Fav / (Unfav) vs Prior Year $MM $MM % Premium Beverage Alcohol $178.0 $ % Industrial Alcohol 76.6 (0.7) (0.8) Food Grade Alcohol $254.6 $ Fuel Grade Alcohol 6.4 (1.0) (13.6) Distillers Feed 19.3 (2.4) (11.2) Warehouse Services Total Distillery Products $291.0 $ % 26 Note: Totals in presentation may not foot due to rounding.

27 Mix Shift is driving MGP PROFITABILITY AND Margin growth $80.0 MGP Gross Profit Margins 25.0% $ % 21.9% $ % 20.0% $ % $40.0 $76.0 $ % $58.5 $ % $20.0 $ % $10.0 $- $MM % 27 Gross Profit Gross Margin

28 Distillery Gross Profit Key driver of MGP s operating income growth OPERATING INCOME DRIVERS 2016 TO 2017 $MM $10.0 $0.8 $42.0 $(6.4) $(3.4) $ Distillery Gross Profit Ingredients Gross Profit * 2016 Other Operating Income included legal settlement and sale of corporate asset. Note: Totals in presentation may not foot due to rounding. SG&A Other Operating Income* 2017

29 STRONG OPERATING CASH FLOWS PROVIDE GROWTH INVESTMENT OPPORTUNITIES $11.3 OPERATING CASH FLOW DRIVERS YEAR ENDED 2017 $MM $41.8 INVESTING ACTIVITIES ($M) $(14.8) $(4.9) $33.5 Source / (Use) Amount PP&E additions $(21.1) Divestiture of ICP 22.8 Net cash provided by investing activities $ 1.8 Remaining Cash Flow $35.2 Net Income Depreciation and Amortization Investment in Barreled Distillate Other Operating Cash Drivers* Cash Provided by Operations * See appendix for detail. 29 Note: Totals in presentation may not foot due to rounding.

30 MGP s Balance Sheet Is Strong DEBT TO EBITDA $MM Debt EBITDA $9.9 $39.1 $33.5 $51.3 $36.0 $57.3 $24.6 $ YE Debt to EBITDA Ratio of 0.38 $146.7MM Available on Credit Facility at 12/31/ Note: See Appendix for GAAP to Non GAAP Reconciliation

31 Mgp WILL INVEST TO GROW WHILE RETURNING FUNDS TO SHAREHOLDERS Working capital CAPITAL ALLOCATION PRIORITIES Continue to build whiskey inventory Capital expenditures Complete approximately $34 million warehouse expansion Invest in capabilities Acquisitions May be used to accelerate expansion into brands Key criteria established Super premium brands Product MGP can produce Strong financial returns 31 Return funds to shareholders

32 New Credit agreement provides greater access to capital, improved flexibility and reduces rate risk AGREEMENT HIGHLIGHTS $150 million revolving credit facility with Wells Fargo $20 million 10-year term loan with Prudential Capital 3.53% fixed rate Acquisition limit raised to $100 million per year Provided ratios are maintained within thresholds See 8-K dated August 24, 2017 for full description of agreement 32

33 First quarter -Financial Results

34 Q1 NET SALES WERE UP 0.9% WITH BOTH SEGMENTS GROWING - NET SALES QUARTER ENDED 3/31/2018 Fav / (Unfav) vs Prior Year $MM $MM % Distillery Products $74.4 $ % Ingredient Solutions % Total $88.0 $ % KEY DRIVERS Distillery: Increased sales for DDG (pricing), warehouse services and industrial alcohol offset a decline in premium beverage alcohol (timing of customer orders / shipments) Ingredients: Increased sales in spec. wheat starches and proteins partially offset a decline in commodity wheat starches and proteins 34 Note: Totals in presentation may not foot due to rounding.

35 CONSOLIDATED GROSS MARGINS AND PROFITS WERE FLAT TO DOWN SLIGHTLY. STRONG INGREDIENTS PERFORMANCE OFFSET DISTILLERY - GROSS PROFIT MARGINS FIRST QUARTER PERCENT OF NET SALES KEY DRIVERS Distillery down (1.2)pp - Lower premium beverage alcohol sales plus lower margins on industrial sales offset by improved pricing on DDG 21.8% 21.5% Ingredient solutions up 430 bps - Higher average prices partially offset by higher input costs 35 Q Q $MM: $19.0 $19.0

36 OPERATING INCOME DOWN 8.8%. IMPROVED INGREDIENTS PERFORMANCE OFFSET BY INVESTMENTS IN SG&A AND SOFTER DISTILLERY PERFORMANCE OPERATING INCOME DRIVERS FIRST QUARTER 2017 TO 2018 $MM $11.4 $(0.7) $0.7 $(0.9) $10.4 Q Note: Totals in presentation may not foot due to rounding. Distillery Gross Profit Ingredients Gross Profit SG&A Q1 2018

37 EPS UP DUE TO LOWER TAXES EARNINGS PER SHARE DRIVERS FIRST QUARTER 2017 TO 2018 $0.50 $(0.04) $(0.02) $0.01 $(0.01) $0.08 $0.52 Q Operations ICP Earnings Interest Expense Net Wtd. Avg. Shares Taxes Q

38 Guidance MGP is confirming the following guidance for fiscal 2018 and beyond: Operating income is expected to grow between 10% and 15% for fiscal year The Company s conservative estimate of growth in operating income in 2019 is 15% to 20% as sales of aged whiskey inventory become a more significant factor net sales growth is projected in the high single-digit percentage range versus 2017, subject to some volatility as the Company continues to shift sales from industrial to premium beverage alcohol gross margins are expected to continue to grow modestly versus effective tax rate is forecast to be 25%, and shares outstanding are expected to be approximately 16.9 million at year end. 38

39 SUMMARY Long-term strategy in place Well positioned against macro trends Great capabilities Making necessary investments to deliver long term shareholder return Strong results 39

40 APPENDIX U.S. spirits market volume trends Industrial alcohol market dynamics background information ICP background information GAAP to Non GAAP reconciliations Cash flow details 40

41 U.S. Spirits Market 9-Liter Cases (000s) 2017 Volume % Change Total Distilled Spirits (TDS) 226, % Total Whiskey 64, % American Whiskey (Bourbon/Rye/Tennessee) 23, % Super Premium 2, % Rye % Vodka 71, % Super Premium 18, % Gin 9, % Super Premium % Note: Data is sourced from Distilled Sports Council 41

42 Industrial alcohol market Dynamics Volume flows between markets when ethanol margins are compressed Fuel Ethanol 14.3 Billion?? Industrial 313 Million Beverage 74 Million?? Market Leaders Market Leaders Market Leaders 42 Poet ADM Green Plains GPC ADM Equistar The Fuel Ethanol Effect As fuel ethanol prices come down and crush margins turn lower or negative, producers are forced to go idle or enter the Industrial or Beverage markets to maintain margins. This in turn depresses pricing and overall margins of the industrial alcohol market due to market oversupply. MGP GPC MGP ADM 2016 MGP Internal Estimates. Volumes in wine gallons

43 ICP Background and Divestiture MGP owned 30% of Illinois Corn Processing, LLC ( ICP ), a producer high quality food grade alcohol, chemical intermediates and fuel Income from MGP's ownership of ICP is reported as equity method investment earnings. The transaction does not affect MGP's sales or operating income, but reduces MGP's net income by eliminating equity method investment earnings after the date of closing Prior to closing in Q2 2017, MGP received $7.4 million. At closing, MGP received $9 million in cash before transaction fees and taxes as well as a promissory note with a principal amount of $14 million Declared special dividend of $0.85 per share of common stock payable on September 8, 2017 On September 15, 2017, the note was paid off and MGP received a total of $14.3 million dollars including principal, interest, and a final working capital adjustment 43 MGP continues to purchase product from ICP to support its industrial alcohol customers and beverage alcohol production

44 Reconciliation of GAAP to Non GAAP Reconciliation of GAAP to Non GAAP Measures EBITDA (Dollars in Thousands) Net Income $ 41,823 $ 31,184 $ 26,191 $ 23,675 Interest 1,184 1, Taxes 10,935 13,533 12,227 2,265 Depreciation / Amortization 11,308 11,253 12,382 12,325 EBITDA $ 65,250 $ 57,264 $ 51,334 $ 39,081 Total Debt (See Note 5 of 10-K; Note 4 of 10-K for 2014) $ 24,554 $ 36,001 $ 33,460 $ 9,899 Debt to EBITDA

45 CASH Flow Details Other operating cash drivers YTD Ended December 31, 2017 Dollars in Thousands Loss (gain) on sale of assets 7 Share based compensation 2,574 Deferred income taxes, including change in valuation (3,420) Equity (gain)/loss of unconsolidated subsidiaries (11,033) Distribution received from equity method investee 7,131 other, net 61 Changes in working capital items: Receivables, net (8,262) Inventory, excluding barreled distillate 494 Prepaid Expenses (498) Refundable income taxes 725 Accounts payable 9,540 Accounts payable to affiliate, net (3,349) Accrued expenses 2,278 Deferred credit (827) Accrued retirement, health and life insurance benefits (289) Total (4,868) 45