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Edited Transcript of MGPI earnings conference call or presentation 8-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 MGP Ingredients Inc Earnings Call

Atchison Mar 8, 2017 (Thomson StreetEvents) -- Edited Transcript of MGP Ingredients Inc earnings conference call or presentation Wednesday, March 8, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bob Burton

MGP Ingredients, Inc. - IR

* Gus Griffin

MGP Ingredients, Inc. - President & CEO

* Tom Pigott

MGP Ingredients, Inc. - VP of Finance & CFO

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Conference Call Participants

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* Alex Fuhrman

Craig-Hallum Capital Group - Analyst

* Bill Chappell

SunTrust Robinson Humphrey - Analyst

* Francesco Pellegrino

Sidoti & Company - Analyst

* Jon Braatz

Kansas City Capital Associates - Analyst

* Howie Xia

BeaconLight Capital - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the MGP Ingredients fourth-quarter 2016 financial results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Bob Burton, please go ahead.

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Bob Burton, MGP Ingredients, Inc. - IR [2]

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Thank you, Nicole. Good morning everyone and thank you for joining the MGP Ingredients conference call and webcast to discuss the Company's financial results for the fourth quarter and fiscal year of 2016.

I am Bob Burton with Lambert Edwards, MGP's Investor Relations firm, and joining me are members of their management team including Gus Griffin, President and Chief Executive Officer, and Tom Pigott, 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 revenue, earnings and capital structure 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, Gus Griffin. Gus?

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [3]

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Thank you, Bob. And thank you all for joining us on this call.

On this call we will provide an overview of the quarter and year, updates on key financial performance metrics and a discussion of progress against our strategy. Then we will take your questions. We expect the call to run about 45 minutes.

Now turning to results. 2016 was a great year for MGP. We built on the solid foundation we set in 2015.

We made substantial progress against all of our growth strategies. The key components of our strategy include maximizing the value of our production capacity, capturing a greater share of the value chain, investing for growth, continuing strong risk management discipline and building the MGP brand.

In 2016 the progress we made against all these strategies was demonstrated in our financial results. While our net sales declined 2.9% in 2016 we maximized the value of our production, achieving strong double-digit growth in premium beverage alcohol while steadily migrating away from less attractive industrial alcohol. As a result, we grew full-year gross profit 11.5% and gross margins expanded by 260 basis points. Operating income also improved 27.8% for the year, driven by the growth in gross profit and the special items we recorded in the third quarter.

Looking at each segment individually, in our Distillery Products segment while year-long softness in the industrial alcohol market offset premium beverage revenue gains, MGP's bourbon and rye whiskeys delivered strong revenue growth throughout the year, outperforming the continued steady growth of the bourbon category and contributing to gains in MGP's gross profit. Over time the continued shift towards beverage alcohol should provide MGP and our investors a more stable and profitable revenue stream. Our premium beverage alcohol net sales grew by 14.5% for the year while industrial alcohol declined 21.9%.

We remain pleased with the pace of our migration as premium beverage alcohol reached 66% of food grade alcohol sales for the year. This is up from 57% in 2015.

As we have said in the past, we are putting away barreled whiskey inventory for our own use. In addition to using it to support the development of our own brands it may also be used to build strong strategic partnerships and to attract and retain new distillate customers. Due to the rapid growth of the bourbon category and the accelerated M&A activity in the industry the demand for a lightly aged whiskey has been very strong.

Because of this strong demand we were able to begin leveraging limited sales of lightly aged whiskey inventory to support our strategy of building partnerships and attracting and retaining customers for our new distillate. Our ongoing strategy is to aggressively build our inventory of aged whiskey, and despite these sales we ended the year with over $50 million of inventory, up $22.7 million versus 2015.

For competitive reasons we do not share volumes, pricing or margin for specific product lines, but the projected impact of this activity is included in the guidance we have provided to investors today. With the shift in product mix toward higher-margin premium beverage alcohol, full-year segment gross profit grew to $56.8 million even as revenue declined. Gross margins improved to 21.4%, a 270 basis point expansion.

Turning to Ingredient Solutions, this segment return to modest growth in the fourth quarter as sales gains and specialty wheat starches more than offset sales declines in commodity wheat starch and proteins versus the prior-year period. While full-year revenues declined 7.6%, gross profit grew by 7.3% to $8.4 million.

Gross margins expanded 220 basis points driven by lower input cost and improved plant efficiencies, partially offset by lower selling prices. We continue our work to take full advantage of the macro trends benefiting this segment. For 2016 execution of our strategy drove improvements in gross profit, margins and operating income.

That concludes my initial remarks. Let me now turn things over to Tom Pigott for a review of the key metrics and numbers. Tom?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [4]

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Thanks, Gus. As Gus discussed we had a strong gross profit performance for the quarter and the year.

For the quarter our consolidated net sales were relatively flat, decreasing 40 basis points to $81.1 million. However, gross profit increased 11.6% to $17.6 million for the quarter, driven by a 240 basis points improvement in gross margin. The margin growth was primarily driven by the favorable mix gusset mentioned.

For the year, consolidated net sales decreased 2.9% to $318.3 million. Gross profit increased 11.5% to $65.3 million as gross margins expanded 260 basis points to 20.5%. Again, the key driver of our margin growth was the migration to higher-margin products.

We continue to invest for the future and SG&A. For the quarter SG&A expense was up $1.3 million due to timing of the accrual for incentive compensation, an increase in advertising and promotion partially offset by a decline in pension expense.

For the full-year 2016 SG&A was up $1 million primarily due to increased advertising and promotion, higher personnel costs and increased professional fees, partially offset by a decrease in incentive compensation and severance costs. The strong gross profit performance contributed to a 5.2% increase in operating income for the quarter.

For the year on a GAAP basis operating income increased 27.8% to $42 million. Of the 27.8%, 10.3 percentage points were driven by $3.4 million in other income recorded in the third quarter of 2016 from the insurance settlement and asset sale. Operating performance drove the remaining 17.5 percentage points of growth.

Our ICP joint venture made an improved contribution of $1.8 million to this quarter's results and for the year equity earnings contributed $4 million, down from $6.1 million in $6.1 million in 2015. Our full-year tax rate was reduced to 30.3%, down from 31.8% in the prior year.

Net income for the fourth quarter increased 27.9% to $8.3 million and earnings per share increased 26.3% to $0.48. Net income for the full year increased 19.1% to $31.2 million and earnings per share increased 23% to $1.82 per share, primarily driven by the strong operating performance over the full year.

Our cash flow performance for the year was very good as we generated $19.7 million in operating cash flow, an increase of 5.7%. Within this result we funded an increase in our MGP aged whiskey inventory of $22.7 million.

In addition, this $19.7 million in operating cash flow more than funded our investing activities of $17.7 million. The investing activities included both the warehouse expansion program as well as the acquisition of the George Remus brand.

Overall MGP's balance sheet remains very solid, allowing us to continue to invest to grow as well as return funds to shareholders. Recently the Board authorized our first-quarter dividend, doubling the amount to $0.04 per share. The Board views dividends as an important way to share the success of the Company with shareholders.

Going forward, MGP is providing the following guidance for fiscal 2017 and beyond. Reconfirming previous guidance, operating income is expected to grow between 10% and 15% annually from 2016 through 2018. This guidance excludes the favorable litigation settlement and asset sale gain recorded in the third quarter of 2016.

Recognizing the difficulty of projecting three years into the future, our conservative estimate of growth in operating income in 2019 is 15% to 20% as sales of aged whiskey become a more significant factor. Modest growth is expected in 2017, in net sales in 2017 subject to some volatility as the Company continues to shift sales from industrial alcohol to beverage alcohol.

2017 gross margins are expected continue to grow versus 2016, the 2017 effective tax rate is forecasted to be 31% and shares outstanding are expected to be approximately 16.8 million at year-end. 2017 profitability ICP remains exposed to challenging and volatile conditions in the fuel ethanol industry.

Let me now turn things back over to Gus for his concluding remarks.

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [5]

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Thanks, Tom. We have discussed in some detail how our overall strategy is advancing at MGP. We made substantial progress in 2016 and we believe that we enter 2017 strongly positioned for growth.

We remain focused on our key strategies over the long term. And although we may experience quarter-to-quarter volatility we remain confident that focus on these strategies will drive superior long-term shareholder returns.

We are maximizing the value of our production by focusing on premium beverage alcohol and migrating away from the lower-margin industrial alcohol. A key part of this continued migration will be attracting new customers for both our gins and vodkas as well as for our new whiskey distillates.

We are expanding our salesforce to broaden our customer base. We have developed additional capabilities and have launched a new gin platform to help accelerate our customers' NPD efforts.

We made progress on capturing value share by introducing Till American wheat vodka and acquiring the George Remus brand. Till has already won five prestigious awards and we have expanded its initial distribution. We are very excited about the potential of the George Remus brand and will be announcing expansion plans for it in the near future.

We also added leadership and are building out our sales and marketing team to support our brands initiative. We invested to grow, steadily executing our $29 million whiskey warehouse expansion plan and aggressively putting away whiskey.

Our MGP aged whiskey inventory valued at cost has now reached $50.9 million. We implemented strong risk management programs, managing input cost to help expand our margins. And we continued to consistently build the MGP brand with all of our stakeholders. The results just reported underlie our belief that these strategies position us for long-term shareholder growth.

That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Alex Fuhrman, Craig-Hallum Capital Group.

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Alex Fuhrman, Craig-Hallum Capital Group - Analyst [2]

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Great, thank you for taking my question. And congratulations on quite a 2016.

I wanted to ask a couple of things, but looking at the operating income guidance over the next couple of years and starting to see that bigger ramp that you are looking for in 2019, can you give us a sense of how much aged product you have factored into that guidance over the next two years? And then as you talk about getting to more of a 15% to 20% EBIT growth rate in 2019, does that assume that you start selling aged product at roughly the rate, call it, $5 million, $6 million per quarter that you've been putting it away? Just wondering how we should try to think about those numbers here.

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [3]

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Alex, I will take the aged whiskey piece and then I will turn it over to Tom to talk a little more about the guidance. I think it's important to understand we sold some aged this year. It was lightly aged, and there was limited sales.

So we still remain focused on both building our aged whiskey inventory over time and holding it to get the most value for it. But at the same time when attractive demand comes along that fits our strategic needs in terms of attracting and retaining customers for our new distillate, it also makes sense for us to do that.

In terms of figuring out what we are going to put away, what our put-away rate is going to be for the long-term that's a little bit art and science. Every year we get a little bit better view of market trends, a little bit better view of future demand.

And then so the actual rate we put away is going to be both influenced by our view of the projected long-term demand and the potential short-term sales of the lightly aged inventory. So we think it will continue to grow but maybe possibly at a slower rate than it has.

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [4]

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Yes, so, Alex, overall we do see a steady increase as the value of that inventory grows up and that's factored into our guidance. Because of the dynamic nature of our customers' demand and the opportunities that presented to us we don't want to get too specific in terms of what we provide you given the nature of the situation. But suffice it to say, we are in the very early innings of this aspect of our strategy, and we are sitting on a very valuable $50 million of inventory that we will deploy over time and that's all factored into our guidance.

Certainly as we noted in the release there is some conservatism as we get further out. But, again, it's dynamic and we don't want to put specific numbers out there at this stage in the process.

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Alex Fuhrman, Craig-Hallum Capital Group - Analyst [5]

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No, that's helpful for us thinking about it. Then I was wondering if you could just put a little bit more context around the growth rate on the beverage alcohol side. And, obviously, we don't have a lot of history on seeing that number reported.

It, obviously, grew very nicely. It looks like 9% growth here in the first quarter, but had been growing a little bit faster earlier in the year.

Can you give us just a little bit more perspective on the underlying growth rate that you've seen over the last couple of years in the beverage alcohol? And does that tend to be a number that can fluctuate a lot quarter to quarter given the timing of sales and the buying patterns of some of your customers being more of a B2B business?

Just wondering how we should think about that 9% growth for beverage in the fourth quarter? Do you guys feel that was a great number yourselves? And then as you look toward some type of revenue growth here in 2017 more or less what kind of a growth rate are you envisioning for the beverage part of the business, which I would imagine you have a little bit more visibility into than the industrial part?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [6]

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Overall we are pleased with the growth on the year and on the quarter. The thing that you hit a little bit on it in your question, there's timing of orders in terms of when, since we are several steps removed from the end consumer, the actual revenue growth quarter on quarter can be lumpy in our business. And the important thing also is that when we look at what we were wrapping around in Q4 of last year premium beverage alcohol net sales were up 46%.

So we had a very difficult comp period and so that's part of the reason why you don't see as big a growth number as we reported in other quarters. But overall we feel confident that we will continue to grow share in growing categories and drive strong revenue growth in premium beverage alcohol.

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Alex Fuhrman, Craig-Hallum Capital Group - Analyst [7]

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Great, that's really helpful. Thank you very much.

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Operator [8]

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Bill Chappell, SunTrust.

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Bill Chappell, SunTrust Robinson Humphrey - Analyst [9]

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Thanks, good morning. A few questions.

One, just Brown-Forman the other day commented that there was some slowdown in spirits overall in the December quarter. They didn't really know why. Didn't know if you were seeing that, and then as you look with your inventory build what is your expectation for brown spirits in particular to grow over the next three or four years as what you take into account?

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [10]

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Bill, we always look at long-term trends. We are putting away whiskey for multiple years based on that. So I think the most recent 12-month Nielsen, excuse me, the most recent 12-week Nielsens for TDS was still up 2.9%, but it declined versus the previous 12 weeks, I guess.

But what we look at is total TDS for 2016 was up 4.5% in value and 2.4% in volume. Bourbon where we are more exposed was up 7.7% in value and 6.8% in volume, which are actually accelerations of the previous year and the five-year CAGR.

And I think another important thing to note is it is also the seventh straight year that spirits have taken share from beer. So the underlying macro trends are very, very strong.

I think it was also nice to see vodka rebound last year and then also gin, the total category was actually up just a little bit under 1%. So in terms of long-term trends, which is what we really base our projections on and our investing on, I think we are seeing good strong healthy trends and particularly it's great to see that acceleration in the bourbon category.

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Bill Chappell, SunTrust Robinson Humphrey - Analyst [11]

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Okay. And then on the inventory side, I understand you will continue to build but is 2017 the last build year and then we would start to see it in terms of what's on the balance sheet start to plateau and then pull down or could it continue to build into 2018?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [12]

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Yes, so for 2017 you are right, we do expect it to continue to build. Getting out further, I think you will see us start to deploy more in that, the level of increases moderate as that inventory becomes aged and will sell. But the overall balances will continue to grow in 2017.

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Bill Chappell, SunTrust Robinson Humphrey - Analyst [13]

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Okay. And last just on customers, can you just help clarify on white spirits have there been any major customer losses in the past couple of years? And then do you expect. I think what you had said was is refocusing the business so that you could go out and win new customers but that was a longer time frame, do you expect or have you won any new business in recent that helps that side of the business in 2017, 2018?

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [14]

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Yes, I think just we're talking about beverage alcohol, premium beverage alcohol now, right Bill?

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Bill Chappell, SunTrust Robinson Humphrey - Analyst [15]

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Correct, yes, on vodka gin.

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [16]

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Yes, over time you've heard me say before I think that on the whiskey side we've never lost a customer. On the vodka side that's a much more -- different factors come in. It could be simply the brand changes where it's bottled and so they pull from a different source, but it's not an absolute when you hang onto these.

But we have renewed our effort there. It's part of the overall migration plan from industrial alcohol to premium beverage alcohol. So we have renewed our commitment to the beverage alcohol, the G and S in the segment, and we've expanded our capabilities.

We are putting a bigger sales effort against it. So it will take a while. It's not going to be a steady trend.

This year we moved from 57% to 66%. It comes as you win the business. But we think we are in both a better position to win new business and a better position to hang on to our business in the white goods space than we were in the past.

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Bill Chappell, SunTrust Robinson Humphrey - Analyst [17]

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Okay. And actually one more, on gross margin that was a lot better than I expected in the quarter despite the mix maybe being a little bit different. How much of that is commodities and just favorable and the outlook as we go into 2017 there?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [18]

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Yes, so you are right, Bill, on the quarter we did have some commodity favorability but that was largely offset by some lower average pricing both in industrial and some of our premium beverage contracts that fluctuate with the commodities. So the commodity favorability we received was broadly offset by the lower average pricing and overall we see commodities being right now slightly favorable year over year. But, again, a lot of our pricing mechanisms try to neutralize the impact of commodities throughout the year.

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Bill Chappell, SunTrust Robinson Humphrey - Analyst [19]

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Got it. Thanks so much.

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Operator [20]

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Francesco Pellegrino, Sidoti & Company.

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Francesco Pellegrino, Sidoti & Company - Analyst [21]

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Good morning, guys. So just first off, I really appreciate the greater transparency that you guys are giving into the food grade alcohol.

I noticed that you gave year-over-year numbers. Could we get may be half premium beverage alcohol revenue for the first half of 2016 and the second half of 2016 or even quarterly just so we have a little bit more transparency for what the Company reports going forward?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [22]

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Yes, so in our 10-K we've given it to you for each year and I think based on the two quarters you can impute some of those numbers. And we will certainly try to provide more in our disclosures going forward to help you out.

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Francesco Pellegrino, Sidoti & Company - Analyst [23]

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Okay. But maybe we can touch base about that off-line. Because as I forecast going forward just thinking about the ramp in growth that the Company is going to be experiencing just having that ahead of time would be helpful. But that's okay.

So one of the other things that I want to ask you about was what's up with the related party purchase sequentially speaking from 3Q to 4Q and the jump that we saw?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [24]

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Yes, overall, so the related party transactions are us buying industrial alcohol to support our customers from ICT, which is a joint venture in Pekin. And basically they supplement our industrial alcohol business.

Now from quarter to quarter there are different times when atrasentan is running pretty full and they can supplement our capabilities there, especially as we migrate to premium beverage alcohol at that facility. So you will see some volatility in those transactions, but overall the strategy is to slowly migrate away from the industrial alcohol side of the business and focus on the premium beverage alcohol.

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Francesco Pellegrino, Sidoti & Company - Analyst [25]

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What's interesting about it, though, is if the industrial market is so bad and then sequentially speaking you have this huge uptick in related party purchases then it flows through to the income statement with a really large, what was it, a $1.7 million difference year over year in related (multiple speakers)

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [26]

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What I would tell you is that from time to time there is an opportunity to make some margin on that business and supplement our customers' demand. So you will see some ups and downs in those figures.

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Francesco Pellegrino, Sidoti & Company - Analyst [27]

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Okay. If we are going to be seeing ups and downs in those figures, then why has the Company been restating the related party purchases for the past years?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [28]

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Well, a couple of things. One, what I want to explain is the sales that were reported on the front of our income statement are our sales to customers. And then what's in footnote 3 is our purchase for ICP, so those two numbers won't be the same because we are carrying inventory.

And then on the second point is from time to time we will go through and we might see a transaction that may not have been picked up in our SAP query, and if we see that we always do correct it. None of the corrections are material or have any significant impact on our business.

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Francesco Pellegrino, Sidoti & Company - Analyst [29]

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Okay. Changing gears for a minute, so all the CapEx spending that you guys have been investing within the distillery segment, when should we start to be anticipating or expensing this or realizing that the growth in depreciation going forward?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [30]

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So overall the capital plan, the warehouse expansion plan is a $29 million program and it's in place to allow us to store more aged whiskey going forward. The plan is well on its way and expected to be complete in 2018.

Now as each, the plan has several warehouses attributed to it, so as each warehouse is completed it's capitalized and included into our results. So over time you will see that start to appear in the depreciation expense. Now that said, there have been some assets that rolled off, and so you do have an in and out on that line in the P&L.

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Francesco Pellegrino, Sidoti & Company - Analyst [31]

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And just my last question, so when you guys give guidance, like you guys always set aggressive guidance and to be honest with you, you always come in and just exceed expectations for, I guess, the expectations that you set for yourself. So I'm not really concerned about the long-term guidance that you guys have provided us with, but more concerned about just where the overall industry is going for some of these out years.

And when you just look at where annual bourbon barrel sales were last year like around like 1 million barrels, but 1.9 million barrels were produced last year there are 6.7 million barrels of total inventory of bourbon in Kentucky, I just see this massive inventory build for the industry. I know it's something that if it works out well for you, you guys are going to be doing extremely well on the margin side.

But it just seems as if we are sitting on this snowball or this ticking time bomb where eventually supply could eventually crush demand and it just seems as if we have all these indicators right now where production is. And production is so far ahead of demand that it just seems as if it's becoming more of a concern than this lucrative opportunity. And just a little bit of color or push back on that.

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [32]

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Sure. This is Gus. Let me address that.

First of all, you have to remember the people are putting, the production should be four or more years ahead of demand because you have a growing category you are putting down to meet the demand in four years or more. That's the first thing.

Second, I think you've probably heard me talk about my theories on the strength of the growth of the bourbon category. Not only the strength of that trend, but the longevity of that trend. So we saw today I gave you some numbers that the five-year CAGR and last year I think we're about 5% in 2016, the growth rate was 6.8% in volume.

So the trend is actually accelerating. We think this is a decades, plural, long trend for several reasons.

I think another piece of data that was just released was the export volume for bourbon was up over 10%. So one of the things that's going to drive the bourbon category long term is international expansion and to see that up 10% obviously, much, faster than it's growing in the US. So it's another reason we think it's going to go on for the long term. And then finally just getting to us as a Company, one of the reasons we are growing faster than the category is we have a very diverse portfolio of customers and we are more broadly exposed to the fastest-growing categories and the fastest-growing segments.

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Operator [33]

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Jon Braatz, Kansas City Capital.

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Jon Braatz, Kansas City Capital Associates - Analyst [34]

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Good morning, Gus, good morning Tom. Just a little clarification. In the fourth quarter here you sold some premium or aged whiskey.

Was that something that arose just because of market circumstances or is it sort of a change now that over the next couple of years you will be selling a little bit more aged whiskey? And if that is the case, and your guidance basically remains the same, is the offset to that higher expenses associated with building your branded volume in, let's say, vodka, whiskey and gin?

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [35]

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John, this is Gus. Let me talk a little bit about the sale of the aged.

First of all, these were limited sales and it was lightly aged. Most of this product was a year old. And that really comes about because of the strength of the growth of the category but also the M&A activity.

So you had new buyers buying brands who had even more aspirational growth than the sellers and might have had holes in their inventory that they wanted to fill. Where it plays out for us is we want to make sure that we partner with our customers and selling this lightly aged product is a way to help them and help us retain customers and attract new customers.

So strategically it makes a lot of sense for us. And it's also very profitable. In terms of where -- Tom, you want to talk about where it plays out in our guidance?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [36]

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Yes, so keep in mind the guidance, Jon, is off we overdelivered 2016, so we are off a higher base. And certainly there is some contemplation of aged inventory as well as investment in brands built into the guidance at this point. So yes, both factors are built into what we are projecting out in the future.

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [37]

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(multiple speakers) Sorry, Jon. I just want to make sure there's no misunderstanding. Our long-term strategy hasn't changed. So we even though we are selling, made some limited sales of light whiskey, lightly aged whiskey, and might make them in the future, we are still investing to build that asset over the long term just as we will be investing to build our brands over the long term.

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Jon Braatz, Kansas City Capital Associates - Analyst [38]

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Is some of the aged whiskey that you are selling, the one-year-old whiskey, is that at prices that you would not have expected earlier and that it was such a good deal that you couldn't pass up?

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [39]

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I think they were certainly good prices and there is certainly nothing that is both from those sales and other things we've seen in the market, nothing that has in any way lessened our belief in the value, the return on aging whiskey for the long term. But it really goes back to it being a great strategic move for us in terms of building the partnerships and attracting and retaining customers for our new distillates.

So it was really a way, as I've said before, a way to strengthen our position in the market. We view that, the aged whiskey inventory, as an asset and a tool that we can use to strengthen our position. And this was part of that plan.

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Jon Braatz, Kansas City Capital Associates - Analyst [40]

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Okay, looking ahead into 2017 in terms of your branded strategy, you now have Till, you have the George Remus and you have Metze's and it sounded like you were working on something in the gin area. Incrementally, how much can you give us a sense how much additional costs, investments, whatever you want to call it, might be incurred in the development of the branded strategy?

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Tom Pigott, MGP Ingredients, Inc. - VP of Finance & CFO [41]

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Yes, Jon the strategy is, it's in its early phases and we've just hired a new VP of Brands, Andy Mansinne, and he is working through what the appropriate rollout strategies and investments we need to make. So we don't want to give specific numbers out there, but overall we see this as a longer-term contribution to the Company's results. In the early years we are not anticipating sizable returns from this, but over the long term we think it's got a lot of potential.

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [42]

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Let me just jump in and add to that. It is very much long term. Both the sales results and the investment results we don't think will be big enough to break out in the short term.

But we are very pleased with the steps we are going through, the progress we are making and the plans we have. And eventually they will pan out and we will break them out.

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Jon Braatz, Kansas City Capital Associates - Analyst [43]

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All right, thank you much.

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Operator [44]

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(Operator Instructions) Howie Xia, BeaconLight Capital.

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Howie Xia, BeaconLight Capital - Analyst [45]

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Hi, good morning, Tom and Gus. I just want to understand the difference of the growth rates between white goods and brown goods within the premium beverage alcohol segment and how big is that delta? Is one growing substantially faster than the other?

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [46]

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We don't break out growth rates or margins or pricing by any specific product line. So we lump that all together as premium beverage alcohol. I think you can look at the underlying category trends, so you have bourbon growing at volume last year at 6.8%.

You have gin growing at a little bit less than 1%. You had vodka growing at I think 2.4%. So, obviously, bourbon and, again, bourbon in this instance covers bourbon, rye and Tennessee whiskey, growing at an accelerated rate.

And then as I said before we have a very diverse customer portfolio. And so we are even, we are really broadly exposed to the fastest growing segments and categories. That could give you some color there.

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Howie Xia, BeaconLight Capital - Analyst [47]

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Right, thanks.

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Operator [48]

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

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Gus Griffin, MGP Ingredients, Inc. - President & CEO [49]

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Thank you. Thank you all for your interest in our Company and we look forward to talking with you again after the first quarter.

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Operator [50]

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