MGP Ingredients, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Julie Francis traveled to visit distilleries, bottling facilities, etc., and had conversations with team, investors, etc. She emphasized a strategic review of the business, active portfolio management of spirits brands, and appointment of new CMO and SVP of Operations.
• 5 key initiatives for 2025: sharpen commercial focus, strengthen key customer relationships, improve operation execution, fortify balance sheet, drive greater productivity.
• Branded Spirits: Premium plus portfolio outperformed, Penelope Bourbon exceeded expectations. New product launches in ready-to-pour cocktail segment.
• Distilling Solutions: Close engagement with key customers, some customers paused near-term purchases but committed to long-term partnership. Domestic whiskey industry production down, indicating market recalibration.
• Ingredient Solutions: Operational execution issues due to equipment outage, waste starch disposal costs, and start-up costs in textured protein business. Actions taken to strengthen operational reliability, including increasing staffing, maintenance capital, and engaging external firm; biofuel plant expected to mitigate waste starch costs; extrusion protein business gaining traction with new customer.

Segment Performance

• Branded Spirits: Third quarter sales decreased 3%. Premium plus portfolio outperformed, but mid- to value brands declined. Penelope Bourbon is a key growth driver, ranking among top premium plus American whiskey brands.
• Distilling Solutions: Sales declined 43% y-o-y. Aged whiskey sales and proactive customer partnerships helped, but still down y-o-y. Full year 2025 Distilling Solutions sales and gross profit expected to be down 46% and 55% respectively.
• Ingredient Solutions: Sales increased 9% y-o-y, but gross profit declined 36% due to equipment outage and operational reliability issues. Full year 2025 Ingredient Solutions sales and gross profit expected to be down mid- to high single digits and ~40% respectively.

Guidance

• Raised full year 2025 adjusted EBITDA to $110 million to $115 million and adjusted earnings per share to $2.60 to $2.75.
• Tightened sales guidance to $525 million to $535 million.
• For the final quarter, focus on staying close to customers, controlling costs, maintaining financial discipline, and allocating capital carefully.

Risks

• Operational issues in Ingredient Solutions segment including equipment outage, higher waste starch disposal costs, and start-up costs in textured protein business.
• Tariff impacts on customers, causing near-in volatility in export patterns for American whiskey.
• Industry inventory challenges and continued need to work through imbalance in brown goods supply and demand.

Question and Answer

Q: First question is, I guess, a broad one on industry trends. You talked about the reduction in production, but what are you seeing? What are you hearing from your customers regarding channel inventory and how much further work needs to be done?

A: Thanks for the question, Sean. What we're hearing from our customers is really the need and the willingness to stay close. There's a lot of changes going on in the industry. There's still elevated inventory. There's obviously reduced production, as you mentioned. There's also distilleries that are closing their doors or furloughing employees. And the general response that we're seeing from our customers is increasingly wanting to communicate and have open dialogue. But what we're also seeing, Sean, is a lot of our historically indirect customers that usually purchase from third parties, our product want to deal directly with MGP. They want to have that relationship. They want to be close to us because they know that we're committed to the space and going to be there over the long term.

Q: This is Seamus Cassidy on for Rob Moskow. Julie, you mentioned in your prepared remarks sort of more active portfolio management around the Branded Spirits portfolio. Since the Luxco acquisition, MGPI has focused its ad spend and acquisitions on more premium brands. And you've said you're comfortable letting mid and value decline as a result of this. So I guess my question is, could you walk us through some of the pros and cons between sort of trimming some of these lower-performing brands? Because while they may be slower growing, I imagine they still add scale to your portfolio and provide positive cash flow.

A: Thanks for that question. I appreciate it. Listen, Branded Spirits certainly is our true north on our strategic growth platform. We're certainly pleased with the premium plus performance, focusing on those core 3 Penelope, El Mayor and Rebel certainly have been paying off. We're up 4% on the premium plus versus a category that's not showing the same results. And then Penelope is certainly growing very fast. But I think your point is interesting because the mid- to value, certainly, we are heavily weighted still in that area. So I would tell you, and I think as I've talked to analysts throughout the first few months that I do think there's an opportunity for us to be -- take some of the core focus that we've had in the premium plus and be precise in the mid- to value because there are some brands, as you know, that have some pretty good density, and there are some regional and channel opportunities that we certainly could bed out a little bit more with some flavor innovations with some regional brands that may make sense. So I'd tell you that we are reevaluating that because I do see some strong brands in there that we could certainly provide a little bit of ignition to and to help us offset some of that mid- to value decline. But again, if you look at it, we're certainly focused on mid first, and I think you're seeing some progress there and value we should start looking at very shortly into 2026.

Q: Okay. Great. Appreciate that. And then on the ingredients side, it sounds like there's a combination of headwinds in the quarter, sales perhaps a bit lighter versus expectations, but then also some execution issues. Maybe just some more color on the recovery timing here. It sounds like would be ongoing impact into Q4. Will this all be contained in 2025? And you also started to report some biofuel sales. Maybe any other detail on the expected ramp there and cost offsets?

A: Yes. Thanks, Marc. First, obviously, we're not satisfied with the results we saw in Ingredient Solutions, both from a year-to-date and then in particular, in Q3. I tell you, first, it's important to note that it's not a commercial demand issue. These are platforms that are in high demand, and we've ramped up our R&D department, which really is paying off dividends. We've got some large customers that have come on board that are expanding their products. So the demand is there. And where we fell short, we're in a few different areas. One, there was an equipment outage, and I'll take full responsibility for that. As I've got in the business, Marc, it became clear that one of our more important dryers had had significant operational reliability issues, downtime, yield, waste. And in my experience, it was best for us to take that equipment offline, rebuild it. It did come offline a couple of months ago, and it will be online by the end of this month and we will see better performance. So that is a discrete event, but I did want to make sure that people understood that our expectation is for it to have headwinds into Q4. But after that, we certainly will be on a better path to full productivity coming out of that dryer. But we have had continuous operational reliability across the plant as we closed down that Atchison distillery. And we've taken a few discrete decisive actions. One, I did bring in a project engineering team, boots in the plant, I'd like to say. They're well-known for working alongside management and leadership to bring a plant back to performance. We've invested 15% more in adding staffing. We're increasing maintenance CapEx. And also, we're bringing back predictive analytics and some of the enhanced preventive maintenance that we are known for. And then certainly bringing in a leader that has extensive operational turnaround experience that's led manufacturing, production, engineering and also some of the other key safety and quality metrics, bringing Chris on board is an important part. So we do believe and expect to see continuous improvement heading into next year. And the teams are working really hard. So I'm going to turn it over to Brandon on biofuel. But I do want to say one area we're pleased to see is our ProTerra line in extrusion. We did get online our larger customer that we've been talking about. A little bit higher start-up costs, which could be expected with all the different R&D and test runs that you do. But that is starting up mid-November with salable product. And so, we're pleased to get that online. And now I'll turn it over to Brandon for biofuel.