MGP Ingredients, Inc. (MGPI) Earnings Call Transcript

Good morning and welcome to the MGP Ingredients Third Quarter 2026 Earnings Conference Call with Julie Francis, President and CEO; and Brandon Gall, CFO. [Operator Instructions] Please also note this event is being recorded today. In addition, this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements due to a number of factors, including the risk factors described in the company's annual and quarterly reports filed with the SEC. The company assumes no obligation to update any forward-looking statements made during the call, except as required by law. This call will contain references to certain non-GAAP measures, which the company believes are useful in evaluating the company's performance. A reconciliation of these measures to the most comparable GAAP measures is included in today's earnings release, which was issued this morning before the markets opened and is available at www.mgpingredients.com. At this time, I would like to turn the call over to Julie Francis, President and CEO of MGP Ingredients. Please go ahead.

Good morning. I'd like to thank you all for joining us today on our third quarter 2026 earnings call. For the third quarter, sales came in at $117.9 million, down versus the prior year and in line with our expectations. Adjusted EBITDA of $21.5 million and adjusted basic EPS of $0.39 also declined versus the third quarter of last year. However, both of these key metrics were ahead of our expectations. This quarter reinforces 3 themes about our company. First, we have a right to win in each of our 3 businesses. And in a challenging industry, this means taking the actions necessary today to emerge stronger, better aligned and more resilient. Our third quarter performance shows the success of our strategic clarity and road map as our efforts are having positive impacts and are delivering results. Second, we are doing what we said we would do. As we previously shared, our ownership cost management mindset has helped offset the pressures in our businesses, and those savings, together with more efficient and effective A&P spending, are the key reasons adjusted EBITDA came in ahead of our plan. And today, we are reaffirming our full year guidance. And third, our financial strength, cash generation and cost discipline give us the staying power to win. We saw that this quarter as we reduced total debt by $28 million and ended the quarter with a leverage ratio of 3.6x. This was ahead of expectations due to better-than-anticipated adjusted EBITDA and strong operating cash flows. Before turning to our segments, I want to touch on 3 important updates. As we announced on October 15, we will become Sempreon this Monday, November 2, and our shares will begin trading on Nasdaq under our new ticker symbol CASK. This is an important milestone for our company. Since 1941, we have grown from a single distillery into a business spanning 3 separate segments: Branded Spirits, Distilling Solutions and Ingredient Solutions. Sempreon brings these 3 business segments together under one corporate identity and represents the next chapter in our company's evolution, building on the legacies of MGP Ingredients, Luxco and the many businesses, brands and teams that have joined the organization over time. Our commitment to tradition looking forward captures that well. We are building on the expertise, relationships and capabilities that have brought us to where we are today while continuing to evolve, innovate and create long-term growth and value. Importantly, our rebrand does not change the 3 reportable segments, how we report our results, our 2026 guidance or our leadership team. Our next earnings call will be our first as Sempreon. Second, we are also introducing EPIC MASH, our internal leadership and shared values framework for how we work together and lead across the company. It represents 4 leadership attributes, EPIC, which stands for Execution, Performance, Impact and Care; and 4 shared values, MASH: Mindset, Accountability, Shift paradigm and Highest standards. At Sempreon, we will continue building on the strength of our 3 businesses, investing in our capabilities and pursuing opportunities to deliver for our customers and shareholders. That commitment reflects our new mission: Creating moments that matter. Building a legacy that lasts. Finally, I want to highlight the significant progress we have made on strengthening our distribution network and route to market. During the third quarter, an additional 6 markets transitioned to new distributors. As you may recall, we transitioned 10 markets to a large new distributor in June. As is typical, these distributor transitions included system cutovers, with many of these occurring during the third quarter. As anticipated, this negatively impacted our Branded Spirits sales volumes in these territories, but we are pleased that our third quarter Branded Spirits sales, excluding our other category, which is primarily composed of international sales of private label bottled products, were consistent with prior year and ahead of our expectations. Now turning to our business segments. I will begin with Branded Spirits, our primary long-term growth platform. Third quarter segment sales were $58.2 million, down 4% versus the prior year. Excluding our other category, sales were in line with the prior year despite the distributor systems cutover pressures. This performance is consistent with Nielsen industry trends, which were flat for the 13 weeks ending October 3, 2026, and exceeds NABCA trends, which were down 2% for the 3 months ending August 31. Gross profit was $29.2 million and gross margin was 50.2%, down 280 basis points year-over-year, primarily due to higher costs, partially offset by favorable price and mix. The higher costs largely reflect bottling facility maintenance and outside contractors supporting efficiency improvements. We expect these costs to continue in the fourth quarter, but at a lower rate. Premium Plus sales were down 1% for the quarter, influenced by a planned shift on the positioning of Ezra Brooks Bourbon, which has moved into the mid-price tier with the reintroduction of a consumer favorite, Ezra 90 Proof. Excluding Ezra Brooks, Premium Plus would have grown by 1.5%. Penelope sales increased 12%, which is particularly impressive because this growth is building on Penelope's 166% sales growth in the third quarter of last year. In the quarter, Penelope's core expressions, which are composed of the recently introduced Kentucky Straight Bourbon and Rye as well as our Four Grain and Wheated, grew by 35%. Other launches in the quarter included seasonal limited-time offerings: Architects of Golf, Cigar Sessions Chapter 02 and the Estate Collection. Yellowstone declined 23% in the quarter, influenced by the shift of the single barrel program from the third quarter to the second quarter of 2026 and cycling against last year's ready-to-pour launches. However, Yellowstone's core expressions continue to show positive momentum, with Select growing 11% and Toasted growing 38% as we continue to expand digital paid media investments along with revenue growth management initiatives into more markets. Everclear grew 4%, building on the momentum shown in the second quarter and reflecting the continued strength in the brand's core positioning as well as increased consumer engagement in key consumption occasions. Our mid- and value-priced brands collectively grew 1% for the second consecutive quarter, comparing favorably to Nielsen-reported declines of 5% and 6% declines reported by NABCA for these categories. Our mid-priced brands grew by 6%, led by the successful rollout of Ezra Brooks 90 Proof, the continued expansion of Exotico and Juarez tequilas and growth in Saint Brendan's and Arrow. These results show that our stabilization efforts and select investments continue to gain traction as our mid-value portfolio growth was driven by improved execution, targeted price actions and focused brand support. The results also reflect that value-seeking consumers are turning to established brands they can trust, further demonstrating the importance of this price tier to our portfolio. Innovation remains an important growth lever. This quarter, we also released MGP Chapter 1: Out of the Shadows, a 10-year-old 111-proof straight bourbon that brings our whiskey-making expertise directly to consumers under the MGP brand name for the first time. In addition, expanding distribution remains a key strategic priority and an important source of future growth, particularly within national chains. For the third quarter, our Premium Plus portfolio added over 3,500 off-premise points of distribution, led by growing distribution of our Penelope core expressions and ready-to-pour offerings. We also expanded our on-premise chain presence during the third quarter with new programming and distribution in certain national accounts, including menu and cocktail features of our Premium Plus whiskeys and tequilas. Overall, these results reinforce our confidence that our Branded Spirits portfolio is becoming increasingly stronger, more focused, more balanced and diversified and, equally importantly, able to cater to consumers across the broad economic spectrum. Turning to Distilling Solutions. Third quarter sales were $29 million, down 29% year-over-year, and gross profit was $9.4 million, was down 34%. Gross margin was 32.4%, down 230 basis points. We continue to make gradual progress on the actions within our control and continue to believe we are well positioned to compete in a very challenging market where the industry remains oversupplied and elevated barrel inventories continue to weigh on both demand and pricing. These dynamics contributed to our own brown goods sales decline of 47% for the quarter. Despite the difficult backdrop and increased reliance on spot sales, our brown goods sales were ahead of expectations for the quarter. Our large national and multinational customers remain focused on reducing inventory and preserving working capital rather than making new long-term commitments. As a result, we continue to expand our offerings to all customers with opportunistic aged whiskey sales, white goods offerings such as premium GNS and gin, and other value-added services. Premium white goods sales to large national and multinational customers increased during the quarter, driving our 32% year-over-year increase in sales of white goods and other co-products. As industry dynamics are shifting, our strategy has evolved to focus on expanding into ready-to-drink and private label customers using the breadth of our product offerings and our differentiated value proposition. On a year-to-date basis, total product sales to this customer set have grown 90% versus prior year, representing more than 25% of total brown and white goods product sales, demonstrating the success we are having with this important and emerging customer segment. In addition, our warehouse services grew 3% compared to the prior year quarter and represented 29% of segment sales. Operationally, for the quarter, the business achieved lower distillation costs driven by higher white goods production volumes and our cost savings initiatives. We continue to believe our long-term customer relationships, reputation for quality and our diverse and expanding product offerings uniquely position us to win as the industry normalizes. Turning now to Ingredient Solutions. Third quarter sales grew 5% to $30.8 million. Specialty wheat protein sales, which include textured protein sales, grew by 15% and sales of biofuel and other byproducts also increased. Specialty wheat starch sales declined 12%, primarily due to longer-than-expected downtime following our scheduled plant shutdown. Gross profit was $1.8 million and gross margin was 6% due to continued losses in biofuel and other byproducts, where our waste starch stream costs sit. These costs were in line with our expectations for the quarter and were partially offset by an initial insurance recovery payment received during the quarter related to a 2025 equipment outage. Operational reliability continues to improve in 2026. Our third quarter production volumes were 10% higher year-over-year despite the longer-than-expected downtime during the quarter. Demand remains strong for our specialty fiber and protein products driven by consumer preferences for high-protein, high-fiber and nutrient-dense food products. We also remain confident in our ability to lower waste disposal costs, although it's taking longer than we expected. Across all 3 businesses, our ownership cost management mindset continues to deliver savings that helps fund our priorities. One example is marketing agency spend where, by the end of the year, we expect to consolidate the number of our primary agency partners, leading to an annual savings of more than $3 million versus prior year. A portion of these savings are being reinvested into working advertising, such as digital media campaigns, with the remaining savings being one of the many initiatives that is contributing to our bottom line. With that, I will turn the call over to Brandon.

Thank you, Julie. Turning now to our financial results. For the third quarter 2026, we reported consolidated sales of $117.9 million, which were down 10% versus the prior year period. Gross profit of $40.5 million was down 18%. Consolidated gross margin of 34.3% declined by approximately 350 basis points, primarily due to higher waste starch stream costs in Ingredient Solutions, higher costs in Branded Spirits and lower brown goods sales volumes. Advertising & Promotion expenses decreased 4% to $6.4 million. Branded Spirits A&P spend represented 10.9% of segment sales, a 60 basis point increase from the prior year quarter. For the full year, we now expect Branded Spirits A&P to be approximately 12% to 13% of Branded Spirits sales as we realize nonworking advertising savings from outside agency consolidation. Our total SG&A increased 14% in the third quarter, while adjusted SG&A increased 13%, primarily due to a higher incentive compensation accrual tied in part to the savings delivered by our ownership cost management mindset. When removing the impact from the incentive compensation accrual, adjusted SG&A was down mid- to high single digits. For the full year, we now expect adjusted SG&A to be approximately 16% of sales, a significant improvement from our initial outlook driven by the ownership cost mindset initiative. Net income of $6.9 million was down 55% versus the prior year, while adjusted net income was $8.6 million. Earnings per share for the third quarter were $0.32 versus $0.71 in the prior year. On an adjusted basis, earnings per share of $0.39 decreased 54% year-over-year. Adjusted EBITDA of $21.5 million decreased 33% over the same period. Our effective tax rate was 22.9% in the quarter, and we continue to expect approximately 23% for the full year. Turning to cash flow and the balance sheet. Year-to-date operating cash flows, excluding the Penelope earnout payment, were $39.8 million. Q3 operating cash flows were $31.9 million, our highest since Q3 of 2025. Our year-to-date net whiskey putaway was $18.9 million, down from $23.9 million as of June 30. Year-to-date capital expenditures were $11 million. We continue to estimate full year net whiskey putaway in the range of $13 million to $18 million and CapEx of approximately $20 million. We reduced total debt by $28.4 million during the quarter. As Julie described, we ended the quarter with a net debt leverage ratio of 3.6x, which was ahead of our expectations and in line to where we expect to be at year-end. In August, we amended our debt agreements as a precautionary step to allow us to add back up to $20 million of losses on receivables from specified customers in our covenant calculations through the end of 2027. We also have elected to take advantage of the elevated leverage ratio period that runs through the first quarter of 2027. Both were fully supported by our lending group, and we remain in compliance with our covenants. Holders of our $201 million convertible senior notes have the right to require us to repurchase their notes on November 16. We expect most, if not all, holders to exercise this right. We have ample capacity to fund these repurchases through our credit agreement, our note purchase agreement or a combination of both. And similar to what we did in Q2, we may deploy interest rate swaps to manage our exposure to rate fluctuations. Because current interest rates are well above the notes' 1.875% coupon, we continue to expect fourth quarter interest expense to be sequentially higher than Q3 and full year interest expenses of approximately $12 million. Turning to annual guidance for the full year of 2026. We are reaffirming our expectations for net sales to be between $480 million and $500 million. Adjusted EBITDA is still projected to range from $90 million to $98 million. Adjusted basic earnings per share for 2026 is still expected to be between $1.50 and $1.80 with weighted average basic shares outstanding of approximately 21.4 million. We are maintaining our expectations for full year 2026 operating cash flow of $50 million to $55 million and free cash flow of $30 million to $35 million, both excluding the impact of the Penelope earnout payment. From a business segment perspective, our full year outlook for all 3 segments is consistent with previously shared estimates. We continue to expect Distilling Solutions sales to be down approximately 35% year-over-year and gross profit to be down approximately 40%; Branded Spirits sales to decline mid-single digits with Premium Plus up low single digits; and Ingredient Solutions sales to be in the $140 million to $150 million range, with gross margins in the high single to low double-digit range for the full year. As we said last quarter, we expect the fourth quarter to be stronger than the third. And as in prior years, we will provide our 2027 outlook when we report fourth quarter and full year results in February. To close, cash generation, balance sheet delevering, cost management, capital stewardship and maintaining great support from our lending group are our financial priorities, and we are pleased with the progress we are making against each. And with that, I'd like to turn the call back over to Julie.

Thank you, Brandon. Before we wrap up, I want to thank the entire MGP team for another quarter of execution, performance, impact and care. Our strategic road map is designed to drive growth across all 3 businesses, and we are making progress in each. For Branded Spirits, we will continue to focus on winning in the Premium Plus category and across the mid and value spectrum, prioritizing our best-performing brands, including Penelope Bourbon, increasing our penetration in national accounts and strengthening our digital marketing capabilities. This quarter, Penelope grew 12% and our mid-tier portfolio grew 6%. For Distilling Solutions, we will remain focused on partnering with our customers across our diverse range of product offerings, growing our private label and ready-to-drink programs, rebuilding our aged whiskey pipeline and expanding our value-added services. This quarter, white goods and co-product sales grew 32%. And for Ingredient Solutions, our efforts remain focused on growing sales of our high-demand specialty fiber and protein products, sustaining operational reliability and reducing waste starch stream costs. This quarter, specialty protein sales grew 15%. We have the right to win in each of our businesses. We are doing what we said we would do, and we have the financial discipline and support, which gives us the staying power to win. On November 2, we are excited to begin our next chapter as Sempreon. And with that, I would like to turn the call over to the operator for any questions.

[Operator Instructions] The first question comes from Marc Torrente with Wells Fargo.

Can we start with the reaffirmed guide? Where did Q3 land versus your expectations for each of the segments? And then Q4 is implied to be stronger, with sales and EBITDA potentially up year-over-year. Any color on the building blocks and confidence there? And how should we think about exit rate into 2027?

Yes. Thanks for the question, Marc. I'll start with how the quarter came from a business standpoint versus our expectations. So Branded Spirits sales did come in ahead of where we thought for the quarter. There's a lot of transition going on with our distributor route to market, and there were puts and takes within. But largely speaking, total sales did come in above. Within Distilling Solutions, brown goods sales also came in above our expectations. A lot of that business is spot-market driven, which we feel is just an added proof point of the importance we play in the industry with our customers. Ingredient Solutions, due to the prolonged shutdown that we discussed, top-line sales came in below our expectations for the quarter. However, gross margins were still in line for 2 reasons. Number one, our starch waste stream costs were in line to slightly better than we anticipated, which is the first quarter in a little while where we can say that. And secondly, we did benefit a little bit from an insurance recovery in the quarter. So all in all, top line sales came in a bit below. But due to the cost-savings initiatives and the hard work the team is doing, we were able to come in ahead of expectations on both adjusted EPS and adjusted EBITDA. And our net leverage ratio also came in ahead of expectations, Marc.

Okay. And then just the implied sequential progress in Q4, any more color there, again, building blocks to get to the full year guide? And then any early thoughts on exit rates into 2027?

Yes. As far as building blocks go, we gave a lot of full year guidelines by business and -- for OpEx. But Q4 is a big quarter for us, which is traditionally typical. But I will say there's a lot of variables we are managing. And just as we've managed all year, the distributor transition being one within Branded Spirits. All that being said, we are very focused on execution and delivering the quarter needed to hit our goals. Within Ingredient Solutions, we do expect there to be sequential improvement, both from a waste starch cost perspective, but also from a production reliability and throughput and sales perspective. The prolonged shutdown set us back for Q3. But in August, September and month-to-date in October, the throughput and reliability has been top percentile where we want to be. So we believe that we have the right momentum going forward to deliver the quarter needed there. Within Distilling Solutions, like I already shared, a lot of this business is spot, but we are an important supplier to an expanding customer set. We shared on the call that 25% of our white goods and brown goods sales year-to-date have now gone to ready-to-drink and private label customers. And so these are areas that -- customer sets that are either historically underserved, which creates a good void for us to fill, or they're growing. Ready-to-drink spirits is the fastest-growing category in spirits, and positioning us with them, we feel is a very strategic move.

Our next question comes from Sean McGowan with ROTH Capital Partners.

Kind of following up a little bit on the previous question. You talked about branded being affected by the cutovers in distribution. When do you think that, that impact is over? And would you expect Branded Spirits to pick up when those cutovers are complete?

Yes. Sean, it's Julie. Thanks for the question. Yes, we've got 6 more markets that transitioned in Q3. That was following the 10 that did in June. So we do have a larger portion of our control states will transition in Q4. But as you probably know, those transitions are very different than system cutovers as they're NABCA, they're control states. So those are state-run systems. So the impact will be far less. So as we're exiting the year, we would expect the transition cutover and the system cutover headwinds that we're having to be disappeared. We certainly -- our largest distributor that did do the system cutovers, it was a pretty meaningful headwind in Q3. We're on the phone calls with those folks all the time. We do have plans for Q4. We are seeing sequential improvement, but there are some headwinds. But our guidance fully reflects that. But I would say, broadly speaking, that's one large distributor. We are very pleased with our branded performance for the quarter. Premium Plus up 1.5%. When you take in consideration, we did reposition Ezra. Ezra was positioned as a $24.99 brand at Ezra 99. We saw an opportunity to position it lower. We had a lot of American Whiskey brands at the same price point. And so we went to Ezra 90, which was a fan favorite, it's at $14.99. We think in this economy and with the headwinds that our consumers are experiencing, it's a well-known brand at a really nice price. And I do want to say, as we switch to the core 10, and so we have focused on core 10 across Premium Plus, mid and maybe there's a value brand in there. Year-to-date September of '25, so 1 year ago before we had this new strategic road map with clarity investments, only 1 of those 10 core brands, 1, which have been Penelope, would have been growing. Now year-to-date, 6 out of the 10 of those core 10 brands are growing. And the other 4 have shown meaningful sequential improvement. So we're very pleased. Yes, there certainly were significant headwinds in the quarter from our larger distributor, great partnership there. They're great operators, and we certainly expect that headwind to dissipate as the year goes on.

That's helpful color. Another question I had was in locations where intoxicating hemp might be expiring in terms of legality or something in limbo, would you expect to see a benefit if that legalization expires?

Yes. Listen, we definitely think there's -- I would say there's other categories that are probably more -- have higher headwinds than we do in the spirits category. But certainly, the ready-to-drink category, the ready-to-pour category, we do see that this is a switchable category for them. And as you know, we've entered into ready-to-pour and ready-to-drink. Our Penelope products are up over 100% year-to-date. And then I'd also just say from a spirits perspective, we have expanded our distribution network for best athletes. So we are on -- several of our new regional distributors are also beer. And as you know, most of that system or most of those products goes into those convenience retail, those type of outlets. And so we will now be on those trucks. And as you expect, we do have innovation coming up in 2027, which you would expect us to target at that same core consumer that we will start testing in Q1, and that certainly will be on a different route to market that we've never been on. So we're certainly prepared. We've got a test market going on the first quarter in a couple of markets on a different route-to-market truck that will go head-to-head and should compete for that consumer.

The next question comes from Seamus Cassidy with TD Cowen.

I wanted to ask on Branded Spirits' profitability. Gross margin was down 280 basis points despite sort of the continued mix shift between Premium Plus and some of the RGM and SKU rationalization initiatives you discussed. I was just hoping you could provide a bit more detail on what specifically drove that cost pressure. Is it higher barreled inventory costs flowing through the P&L, in which case it's somewhat unavoidable? Or is it more near-term inflationary pressures like freight and fuel costs? And I guess, how much of that should we expect to persist into 2027?

No problem. Very good question. These costs are actually associated to our continuous improvement efforts. I think you heard we've launched a new shared values framework and one of our attributes is highest standards. And as we've got a year into a new operations leader, we obviously rolled out a ramped-up maintenance and reliability plan in Atchison. And as we looked at our largest bottling facility, that maintenance and reliability and our downtime and attainment was nowhere near where we would expect. So what we did is, we took the same external resources that we use from Atchison. We put them in our largest bottling facility. We also have added headcount there. And so we're rebuilding a world-class maintenance and reliability program that down the road will certainly help us. And so we expect these costs to continue into Q4, but at a much lower rate. And year-to-date, the segment gross margin is still at 50.6%, and our full outlook still has us having slight gross margin improvement and is unchanged. And as you saw, we did have favorable price/mix. So again, it's the maintenance and reliability headwind. It will dissipate towards year-end and into Q1, and we are reaffirming the margins that we shared in our guidance.

Okay. Understood. So I guess maybe like all else equal, we would expect those improvement plans to sort of be a margin tailwind, I guess, for the back half of '27 once the efforts are complete?

Very well said.