MGP Ingredients, Inc.

Good morning and welcome to the MGP Ingredients First Quarter 2026 Earnings Conference Call with Julie Francis, President and CEO, and Brandon Gall, CFO. All participants will be in listen-only mode. Should you need assistance, 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 1 on a touchtone phone. To withdraw your question, please press star then 2. Please also note that 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.

Good morning. I'd like to thank you all for joining us today on our first quarter 2026 earnings call. Let's kick it off with a review of some of our quarterly results and progress made against our key initiatives, and then Brandon can go into the financial metrics during his comments. Sales in the first quarter of 2026 came in at $106.4 million, down versus the prior year, but in line with our expectations. Adjusted EBITDA of $15 million and adjusted basic EPS of 15 cents also declined versus the first quarter of last year. However, both of these key metrics were ahead of expectations. We are pleased with this performance as it helps to validate the work we've been doing to drive progress in our business while simultaneously navigating a challenging industry backdrop. In the first quarter, we continue to focus our energy on the areas we can control and to sharpen our strategic focus and strengthen execution across the organization. For brand experience, we maintained momentum in our Premium Plus portfolio in the first quarter, which was led by Penelope Bourbon and benefited from improved demand for select mid-price offerings. We also delivered solid growth in ingredient solutions, as the improvement the team has made in operational reliability are taking hold and delivering results. While I plan to talk more about our segment performance later, I'd like to share a few recent actions we have taken. As you know, we've been strengthening and revamping our strategy, marketing, and supply chain functions in order to add specific capabilities to address new and existing opportunities and to build out best-in-class processes designed to balance improved commercial planning while driving disciplined execution and long-term success. As part of these efforts, we recently announced there will be a temporary idling of our distilling operations in Kentucky at Limestone Branch and Lux Road starting in May. Like many companies across the industry, we are navigating this challenging environment and taking the steps we believe are necessary to better align our operations and inventory. While this temporary idling will unfortunately affect 33 employees, it is not expected to impact the availability of our products or our services to our customers, and it is necessary to adjust our production to align with current inventory levels. We'd like to remind everyone that our largest facility in Lawrenceburg, Indiana, remains fully operational and will continue to operate to serve our brands, clients, and customers. Shifting to our business segments, I'll begin with Brand and Spirits, which remains the focus as our primary long-term growth driver. As expected, first quarter sales were down year over year. However, we continue to see constructive progress, particularly within the premium plus and mid-price tiers. We view these price tiers as critical to the long-term health of our portfolio, and we are pleased to see they both saw growth in the quarter. Importantly, gross margin expanded 180 basis points to 47.8%, reflecting improved mix and early benefits from our revenue growth management initiatives. Gross profit of $21.1 million was down versus the prior year and primarily driven by an expected decline in sales of private label products within our other categories. Premium plus sales increased 1.5% supported by continuous consumer demand for our differentiated, high-quality offerings and the increasing effectiveness of our focused growth strategies. Penelope bourbon once again delivered strong performance, with sales up 10% year over year. As you recall, this brand is cycling the highly successful launch of Penelope we did in the first quarter of last year. Even against this comparison, we saw growth driven by sustained and growing momentum in our core SKU Penelope 4 grain, along with strong consumer response to limited time releases such as Havana, Rio, and American Light Whiskey. We are also encouraged by the early traction from our new ready-to-pour offerings, including our black walnut and apple cinnamon old-fashioned products, which continue to expand Penelope's consumption occasions. Turning to Yellowstone, despite a year-over-year decline for the first quarter, we are seeing early signs of stabilization and recovery, supported by deliberate investments in innovation and digital capabilities. Our ultra-premium limited release Yellowstone recollection has been exceptionally well received, earning strong critical acclaim and press coverage with consumer demand exceeding our initial expectations. As discussed in our last earnings call, we continue to increase our investment in digital marketing and media capabilities. Yellowstone is the first brand we've deployed a fully integrated digital activation strategy, combining best-in-class social media execution with targeted paid media in focused states, including select control states. In Pennsylvania and California, for example, this approach, combined with revenue growth management initiatives, drove robust double-digit growth for Yellowstone in the first quarter versus the prior year. Turning to tequila, where our Elmayer brand delivered year-over-year growth driven by continued progress in price pack architecture efforts. This included expanded 1.75 liter offerings and the introduction of 375 milliliter sizes as consumers increasingly adopt cream and tequila across a broader range of occasions and price points. Similarly, Exotico Tequila was up strong double digits, fueled by the addition of a one-liter offering, which is enabling continued gains in on-premise distribution alongside price optimization. Additionally, the 375-milliliter size is allowing consumers to trade up from mixed-o tequila to high-quality, 100% agave tequila at an attractive price point in off-premise channels. For mid and value price portfolios, combined sales declined 3% in the first quarter. These are improving trends as we continue to prioritize our strongest performing SKUs and channels. Revenue growth management and price pack channel optimization remain critical levers in these categories, and we are encouraged by early results as we execute against this strategy. Looking ahead, we are intentionally concentrating resources behind approximately 10 of our most promising brands with a clear focus on purposeful differentiation and innovation to support sustainable long-term growth. At the same time, we are managing the portfolio with discipline. As discussed on our prior call, we have initiated comprehensive portfolio review and rationalization. During the first quarter of 2026, we discontinued more than 30 tail brands with approximately 15 additional brands planned to be discontinued by the end of this year. Combined, these brands represent approximately 1% of segment net sales, and we expect, when annualized, will represent an estimated 20 basis point of improvement to the segment's gross margin profile. For our branded spirit segment, we are excited about the opportunities ahead across our broader portfolio. As with all growth trajectories, we will take many steps forward, some bigger and some smaller. We also will likely alternate between some really healthy quarters and some softer ones as we continue to successfully prioritize our best-performing offerings and ramp up our investments in these brands while continuing to cycle new product introductions. Turning to distilling solutions, where despite the challenging domestic whiskey supply environment, our first quarter results came in as expected. Segment sales of $28 million decreased 40% over a year, while gross profit of $8.6 million declined 54% as elevated inventory levels continued. In the first quarter, we maintain our focus on creating a differentiated value proposition to better position MGP as a long-term strategic partner for both large and small customers. Our Brown Good customers expansion efforts are taking hold, as demonstrated by growth of 9% in age sales and the addition of more than 20 new customers in the first quarter, including a significant national private label whiskey customer. We are proud of the customer expansion progress we are making, particularly given the current industry backdrop. As discussed on our last earnings call, we are also broadening our premium white good offerings, and these efforts are focused on complementing our brown goods portfolio. During the quarter, we transacted our first customer sale under this new, highly customized initiative. While we are pleased with the progress we are making, given the unique and highly customized nature of these product offerings, these projects will take time to fully commercialize and scale. That said, we now expect growth from this initiative to be picking up in the second half of this year. Our focus on premium white goods is designed to leverage the scale, heritage, and quality of our Indiana distillery to produce premium gin and grain neutral spirits. which can then be customized to meet each customer's specific needs. We expect that this effort will allow us to move beyond commoditized offerings, generate more attractive economics, and better asset utilization rates, and also serve as a bridge to longer term and deeper relationships with strategic customers. Our efforts are also focused on driving cash generation by increasing our value-added service offerings as we look to attract and retain a wider pool of customers. Warehouse services made up approximately 30% of our distilling solution segment sales in the first quarter, and both sales and gross profit were up versus the prior year. Turning now to our ingredient solution segment, where sales of $34.2 million increased 29% versus the prior year. This growth was primarily driven by higher sales volume, price, and mix for our specialty wheat, proteins, and starches. Gross profit of $3.8 million was up 56%, with gross margin of 11.2%, up nearly 200 basis points, as higher sales of specialty protein and starch products were partially offset by higher waste disposal costs. This successful first quarter was driven by continued improvements in operational reliability, with each month better than the past one. For the quarter, efficiency was up 14% year-over-year, with a slower start to the year firmly offset by a solid March. We plan to continue to move towards greater efficiency as we improve overall and as we begin to cycle previous throughput issues. And fluid disposal has been more complex and more costly than initially projected. Reducing waste and disposal costs are a key priority, and we're implementing additional measures by year end and continue to expect to remove these costs over the long term. At the end of the second quarter and into the third, we have a planned shutdown for scheduled maintenance and capital projects designed to further improve reliability and throughput and to provide some relief in our waste stream disposal costs. Brandon will share the related financial impacts in a moment. Despite the affluent challenge, we are moving in the right direction in green solutions. We are pleased with the momentum as better operational reliability means we have more product to sell. And this is key as we continue to see increasing demand for our proprietary and unique products. We will remain focused on driving growth through our specialty fiber, Fibersyn, our specialty protein, Arise, and our extrusion protein, Proterra. Now I'd like to highlight the progress we're making in driving an ownership cost management mindset that is supporting growth and our bottom line by eliminating waste, driving efficiencies, and maximizing effectiveness. One reinvestment example of this is the work we completed to streamline marketing services and to reduce our non-working media spend while reinvesting those savings into our Yellowstone digital marketing programs. Going forward, we will continue to reinforce this mindset by embedding productivity and cost discipline into our operating routines, performance management, and compensation metrics. Productivity and a cost management focus are becoming a part of our regular manager teams, helping us to uncover and track opportunities to eliminate waste and driving us to operate more efficiently and effectively across the entire organization. And with that, I'd like to turn the call over to Brandon.

Thank you, Julie. Turning now to our financial results. For the first quarter of 2026, we reported consolidated sales of $106 million. While sales decreased 13% compared to the year-ago period, they were in line with expectations. Gross profit of $33.6 million was down 22%, while gross margin of 31.6% declined by approximately 400 basis points. Our total SG&A spend declined by approximately 1% in the first quarter, while adjusted SG&A declined by approximately 2%. As expected, Branded Spirits advertising and promotion expenses were 13.6% of Branded Spirits sales, a reduction of approximately 24% year-over-year as we cycled the final period of elevated marketing spend prior to our current, more disciplined and efficient realignment efforts. We continue to expect full-year Branded Spirits sales A&P to be 13% to 14% of Branded Spirits sales. Net income decreased to a loss of $134.8 million, primarily due to a discrete non-cash adjustment of $179.5 million to reduce the carrying amount of Goodwill and other long-lived assets in the Branded Spirits segment. This also included approximately $27 million for equipment unrelated to the distillation process at our Lux Row facility in Kentucky. Adjusted net income of $3.3 million decreased 57% on a year-over-year basis. On a per share basis, we had a loss of $6.30 for the first quarter versus a loss of 14 cents in the prior year, primarily due to the adjustments I just noted. On an adjusted basis, earnings per share of 15 cents decreased 58% year-over-year. Adjusted EBITDA of $15 million decreased 31% over the same period. Capital expenditures declined 75% to $2 million in the first quarter, and we continue to estimate CapEx of approximately $20 million for the full year as we look to optimize our capital deployment in the current industry environment. Finally, as of March 31st, our net debt leverage ratio was approximately 2.1 times Turning to annual guidance for 2026, which we are reaffirming, we continue to expect net sales between $480 million to $500 million. Adjusted EBITDA is projected to range from $90 million to $98 million. This is consistent with previous expectations as the efficiencies and savings from our recently implemented Ownership Cost Management Mindset Initiative. is expected to offset our reduced gross profit outlook in ingredient solutions. Our adjusted basic earnings per share range remains between $1.50 and $1.80, and average shares outstanding should be approximately 21.4 million shares for the full year. Our annual tax rate is expected to be approximately 27%. Turning to our balance sheet and cash flow outlook, As Julie shared, the decision to temporarily idle our Kentucky distilling operations beginning in May was difficult. However, given the current environment, it is an additional example of the capital prudence necessary to position us for long-term success. As a result, we expect four-year improvement in cash flows of $10 million versus previous expectations. Excluding the impact of the Penelope earn-out payment, We now anticipate 2026 four-year operating cash flow of $50 million to $55 million in free cash flows of $30 million to $35 million. We also anticipate an improvement in our net leverage ratio as a result of the temporary idling and expect it to peak at approximately three and a half times down from the 3.75 times figure we provided on our fourth quarter earnings call. We continue to estimate NEDWSKI put-away in the $13 million to $18 million range for 2026, which represents our second consecutive year of meaningful capital investment optimization and stewardship. This target includes both new production and procurement of barrels and is consistent with prior expectations, as much of the temporary isling was factored into the previously provided outlook. From a business segment perspective, Our four-year segment outlook for distilling solution sales and gross profit is consistent with previously shared estimates. However, our white goods sales outlook for 2026 has been reduced and is now expected to be up mid-single digits, largely due to the time needed to fully commercialize and scale these customized new projects. Much of this reduction is expected to be offset by improved sales within other product lines. Our full-year sales outlook for ingredient solutions is consistent with previously shared estimates. However, we now expect full-year segment gross margins to be in the mid-teens as a result of the increased effluent costs and planned shutdown at the end of the second quarter and end of the third quarter. Our full-year segment outlook for branded spirits is unchanged from previously shared estimates. To close, I'd like to stress Julie's comments regarding our performance to date. as it helps to validate the work we've been doing to drive progress in our business while simultaneously navigating the challenging industry backdrop. And with that, I'd like to turn the call back over to Julie.