MGP Ingredients, Inc.

Good day, and welcome to the MGP Ingredients fourth quarter of 2024 Financial Results Conference call. All participants will be in a listen-only mode for the duration of the call. Should you need any assistance on today's call, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Amit Sharma, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to MGP's fourth quarter earnings conference call. I'm Amit Sharma, Vice President of Investor Relations, and joining me is Brendan Gall, Interim President and Chief Executive Officer and Chief Financial Officer, and Mark Davidson, VP Corporate Controller and Head of Treasuries. We will begin the call with management's prepared remarks before opening the call to analyst questions. Before we begin, this call may involve certain forward-looking statements. 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 annual report filed with SEC. The company assumes no obligation to update any forward-looking statements made during the call except as required by the law. Additionally, this call will contain references to certain non-GAAP measures which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly compatible GAAP measures is included in today's earnings release issued this morning before the market opens. If anyone does not already have a copy of the earnings release, you can access it on our website, mgpingredients.com. With that, I would like to turn the call over to Brandon Gall. Brandon.

Thank you, Amit. Good morning, everyone. Before diving into our results and outlook for 2025, I want to take a moment to recognize our incredible team across the organization as they continue to act with speed, agility, and dedication in a difficult and volatile operating environment. Their actions ensured that our fourth quarter results were in line with our expectations. and our full year 2024 results were within our updated guidance. We've made meaningful strides across two of our three operating segments. However, this progress was more than offset by the faster than expected and larger than expected decline in our brown goods business, primarily due to elevated industry-wide barrel whiskey inventories. As we look ahead, we are committed to maintaining our position as one of the leading suppliers of high quality, differentiated, premium, American whiskey. Elevated inventories in high, albeit slowing, industry whiskey production will remain a headwind for our brown goods business, but we are taking decisive actions that are designed to navigate the current industry landscape and put us in a stronger competitive position. On the other hand, we are pleased with the trajectories of our branded spirits and ingredient solutions businesses. These two businesses on a combined basis accounted for a majority of our sales and gross profit in 2024. And we believe we are well positioned to deliver attractive growth and make them an even bigger driver of our consolidated financial performance in 2025 and beyond. As for the fourth quarter of 2024, results were in line with expectations. Consolidated sales for the fourth quarter decreased 16% from the prior year period. Factoring in the Atchison distillery closure, Consolidated sales decreased by 7% as the expected declines in the distilling solutions and branded spirits sales more than offset a return to growth in the ingredient solutions segment. Adjusted EBITDA decreased by 9% to $53.1 million as lower SG&A expenses partially offset reduced gross profits. Basic earnings per common share declined to a loss of $1.91 per share due to a one-time non-cash adjustment to Goodwill. Adjusted basic earnings per share decreased 4% to $1.57 per share. Before Mark and I discuss the results and our 2025 guidance in detail, let me take the next few minutes to highlight the current operating environment in each of our three business segments. Starting with the Branded Spirits segment, this business continues to perform well it remains a cornerstone of our long-term strategy to establish MGP as a premier branded spirits company. Across the global alcoholic beverage segment, North America is one of the most attractive markets, and American whiskey and tequila are among the most attractive categories. We are well represented across both these sectors, strongly positioning us for the long term. As we look ahead, many of our premium plus brands continue to gain traction in the marketplace. This is highlighted by the continued momentum of Penelope and El Mayor, two of our largest premium plus brands whose sales were up strong double digits in 2024. The strong sales trend for Rebel 100 is another example of the upside potential of our premium plus portfolio. Rebel 100's strong sales performance is benefiting from our realignment of a Rebel brand with the lifestyles of its targeted consumer cohort and more impactful marketing. highlighted by our sponsorship of Kyle Butch's number eight car under Richard Childress Racing for the NASCAR season. We see potential to employ a similar playbook with other brands in our portfolio. At the same time, our extensive portfolio of brands across the price spectrum positions us well to opportunistically meet consumers where they are, particularly in the current environment. We are pleased with a double-digit average annual growth of our premium plus portfolio over the last two years. And notwithstanding some near-term volatility, we believe that it remains well positioned to grow ahead of the category over the long term. Turning to our ingredients solution segment. Sequentially improving sales and gross margin performance in the fourth quarter reinforced our confidence in this business's attractive long-term growth and gross margin upside potential. Food with better functional nutrition such as high protein and high fiber, continues to meaningful outgrow overall food industry spending. Our specialty starches under the Fibersome brand and specialty protein products under the Arise brand are designed to meet these needs. Our innovation pipeline remains strong, with opportunities to expand into higher growth and markets, including plant-based foods and healthy snack categories. We continue to receive strong interest, from both existing and new customers, and we are committed to working closely with them to develop ingredient solutions that align with emerging consumer trends. We're positioning this business to take full advantage of these tailwinds by sharpening our commercial and operational execution. The recent promotion of Mike Butshaw to the ingredient solution segment president role should enable even closer cross-functional collaboration within the team. In addition, the completion of the B-Starch fuel plant should provide cost relief related to the disposal of the waste starch stream in the second half of 2025. We believe these initiatives will help to unlock additional growth potential of this business and further solidify our position as a leading specialty wheat ingredient supplier. Now, let me provide an update on our distilling solutions business. As we called out on our third quarter earnings call, soft whiskey consumption in elevated industry-wide barrel whiskey inventories are having a larger and quicker than expected impact on our brown goods results, and this pattern is continuing. Annual whiskey production in the U.S. has increased by nearly a million barrels since 2020 to nearly 4.6 million barrels, as the number of new and existing distillers have added or expanded distilling capacities to fulfill stronger demand from not just multinational and craft whiskey brands, but also private investment funds. However, with consumption normalizing from post-COVID levels, most of these demand projections turned out to be too optimistic and left brands with too much aging inventory relative to their current sales. This issue was initially more pronounced among our smaller craft brand customers, but we are now seeing similar issues from many of our other customers as well. As a result, to better align their inventories with current demand, they are cutting back their orders for both new fill and aged whiskey. These developments are putting even more pressure on distilling solutions sales and gross profit in 2025 than we previously anticipated, and we believe this dynamic will persist into 2026. The good news is that our customers remain committed to the American whiskey category, and the brown goods industry appears to be responding to this excess inventory. Industry data published by the TTB shows that after double digit increases over the last three years, total U.S. whiskey production through October is down 1% in 2024, including a 4% decline in the last six months compared to the same periods in 2023. At the same time, TTB industry usage trends are improving as total whiskey barrel dumps are down 1% in the last six months relative to a 4% decline year-to-date through October and a 10% decline in 2023. We are encouraged by this nascent improvement in the industry supply demand dynamics, even though total whiskey inventories remain elevated relative to historical levels. That said, we're not simply waiting for market conditions to improve. We're taking decisive proactive actions designed to de-risk our brown goods outlook and emerge in a stronger competitive position from this period. As we mentioned on our last earnings call, we're optimizing our distillery cost structure to mitigate the impact of lower production volumes. Now, as we plan additional production cuts in 2025 and 2026, we have identified additional cost savings opportunities and are leaning more on our key suppliers and partners to further lower our overall cost structure. At the same time, we are strengthening our key customer relationships. We have a strong reputation and a long track record. providing high quality aged and new distillate to many of the largest American whiskey brands. Our ability to produce unique and complex mash bills at scale is unmatched in the industry. We are leveraging these strengths to plan more strategic partnerships with our top customers. Let me reiterate that we remain committed to our brown goods business. We're confident that our actions will help us navigate this challenging period and position us to capture the full value of our aging whiskey inventory. over time. Putting it all together, our 2025 guidance signals that these ongoing challenges in the distilling solutions business will continue to overshadow meaningful strides in our branded spirits and ingredients solutions businesses. Specifically, for 2025, we expect net sales in the $520 to $540 million range, adjusted EBITDA in the $105 to $115 million range, and adjusted basic earnings per share in the $2.45 to $2.75 range, with average shares outstanding of approximately 21.3 million shares and full-year tax rate of approximately 25%. Due to the factors in our proactive actions I mentioned earlier, the full-year guidance now assumes approximately 50% decline in distilling solution segment sales and a 65% decline in segment gross profits. relative to our previous estimate of 35% and 50% declines, respectively. Four-year branded spirit segment sales are expected to be relatively flat, with gross margin in the high 40s, in line with 2024, as we cut back on some of our single barrel programs as consumers and retailers become a bit more selective, and as we sharpen our price points on some brands. We expect ingredient solutions to return to positive sales growth in 2025, along with improving gross margins. We've accelerated our productivity initiatives to reduce costs across the business in this challenging environment, including a double-digit percentage reduction in our corporate headcount implemented earlier this month. We believe these initiatives will help offset the reinstated incentive compensation accrual this year and will remain a tailwind for the company beyond 2025. We're committed to investing behind our brands. At the same time, we're reducing and realigning our advertising and promotion spend to our most attractive growth opportunities. As a result, Branded Spirits A&P spend as a percent of branded sales will be approximately 12% in 2025. That said, with most of our A&P spending behind our Premium Plus portfolio, Branded Spirits A&P as a percent of our Premium Plus sales will remain high at approximately 25%. well ahead of industry spending levels. As we look at the quarterly cadence, first quarter tends to be our smallest gross profit and EBITDA quarter due to the seasonality of our business. We expect this dynamic to be even more pronounced in 2025 due to weather-related disruptions and the timing of onboarding new customers in our ingredient solutions business. We remain committed to generating strong cash flows, As part of this commitment, 2025 CapEx is expected to be approximately $36 million, down from approximately $73 million in 2024. A net whiskey put-away is expected to be in the $15 million to $20 million range, down from approximately $33 million and $51 million in 2024 and 2023, respectively. Our 2025 whiskey put-away is primarily for our own brands. Given the evolving situation regarding the implementation and timing of tariffs, their potential financial impacts are not included in our current outlook. The vast majority of any impact would be from our tequila brands that are imported from Mexico, as well as other imported products. We have contingency plans in place to focus on what we can control to help mitigate the potential impact of any tariffs. With that, let me hand it over to Mark for the review of our fourth quarter results.