MGP Ingredients, Inc.

Good morning and welcome to the MGP Ingredients Second 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 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 gap 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 second quarter 2026 earnings call. For the second quarter, sales came in at $124.4 million, down versus the prior year as expected, adjusted EBITDA of $27.6 million, and adjusted basic EPS of 72 cents also declined versus the second quarter of last year. However, both of these key metrics were ahead of our expectations. These results reflected continued momentum in our Premium Plus portfolio, led by Penelope Bourbon and Yellowstone, and an improvement in select mid and value price brands. We also delivered sales growth in Ingredient Solutions against our best quarter of 2025, which reflects continued strong customer demand, supported by improved operational reliability and inventory availability. In a challenging environment, our Distilling Solutions team delivered both lower distillation costs and favorable sales price and mix, resulting in gross margin expansion versus the prior year. We are pleased with this performance as it reflects the success of the actions we took during the second quarter to execute against our strategic roadmap. It also demonstrates the positive impact of our efforts to strengthen and revamp our sales, marketing, and supply chain functions, while adding specific capabilities across all levels of the company to address new and existing growth opportunities. We also continue to drive progress across the business by eliminating waste, driving efficiencies, and maximizing effectiveness through the implementation of our Ownership Cost Management Initiative, which I've discussed in previous calls. While we'll talk more about our segment performance later in the call, I'd like to take a few moments to update you on the progress we have made with our key initiatives. As I've mentioned previously, we've been strengthening our core by adding specific capabilities to our leadership team. Yesterday, we announced four strategic appointments designed to expand our commercial and marketing excellence across Distilling Solutions, Brandon Spirits, and overall MGP. Tom Nyhalsos joins us as Vice President to Lead Distilling Solutions Sales. For Brand Experience, Saul Clayhane is now serving as Managing Director and Leader of National Accounts, while Marilyn Chen has taken the role of Brand Director to lead the marketing efforts behind Penelope Bourbon. On the corporate side, David Sanders has joined us as vice president to lead enterprise financial planning and analysis. Together, these appointments expand our leadership and expertise across customer strategy, national retail and on-premise partnerships, brand marketing and planning, as well as reinforce our focus on driving growth across our business and executing against our strategic roadmap. Before turning to our business segments, I want to address the recent distributor news regarding RNDC's bankruptcy filings. Since the beginning of the year, we have known about RNDC's financial challenges, and while the bankruptcy has a financial impact, which Brandon will cover in his remarks, I want to highlight the significant progress we've made strengthening our national distribution network and expanding our route-to-market capabilities. The team has been executing a disciplined transition strategy, conducting extensive market by market distributor assessments, and carefully evaluating each market's unique dynamics. Through this process, they successfully identified, vetted, and validated new distribution partners to ensure business continuity and position the portfolio for future growth. That preparation is already impacting results. During June, we successfully transitioned 10 markets to raise beverage group with minimal changes to our route to market model and disruption to customers or field operations. Just as importantly, the partnership is generating early positive momentum. During the first month of operation, depletions in our premium plus and mid-tier portfolios increased 7% and 4% respectively. While we are encouraged by this early success, our work is not yet complete. We are currently progressing through various stages of distributor transition for certain open and control states, with many transitions targeted to go live later this quarter. Together with our new distributor partners, we will concentrate on expanding distribution, elevating in-store execution, and accelerating growth across our Premium Plus portfolio. Now turning to our business segments, I'll begin with Branded Spirits, our primary long-term growth platform. The second quarter provided another strong proof point that our strategy is working and our initiatives are strengthening performance despite a challenging industry backdrop. Throughout the quarter, we continue to outperform the broader spirits category by accelerating growth in our premium plus portfolio while stabilizing our mid and value tier price brands. At the same time, we remain focused on building the capabilities needed to sustain long-term growth, including digital marketing, trade marketing, national accounts, and on-premise execution. While reported sales were modestly below prior year, excluding sales of our other products category, which primarily consists of contract bottle products sold in Europe, Our Branded Spirits sales increased 3% compared to prior year. This performance exceeded both Nielsen industry trends, which declined 2% during the quarter, and NAPCA trends, which were down 3%. Our Premium Plus portfolio grew 5% in the quarter, significantly outperforming both Nielsen and NAPCA, which were down 3% and 5%, respectively. We also delivered approximately 1% growth in our mid and value price brands, comparing favorably to declines of 2% at Nielsen and 4% at NAPCA. These results reflect the strength of our portfolio and the effectiveness of our brand building and revenue growth management, or RGM, initiatives. Profitability also continued to improve. Second quarter gross margin expanded 20 basis points to 53%, driven by favorable portfolio mix and early benefits from our RGM efforts. Gross profit totaling $31.6 million was below prior years, resulting from the anticipated decline in our other products category. Overall, we are encouraged by the continued momentum in Brandon's spirits and believe our portfolio remains well-positioned to deliver differentiated growth while gaining share in a difficult operating environment. Let's take a moment to focus on our Premium Plus portfolio, which continued to be a key growth engine during the quarter, led by Penelope, Yellowstone, and Everclear. Penelope's sales increased 13% despite cycling the highly successful launch of Weeded in the prior year period. Growth was supported by continued strength in 4Grain, an original core brand, which benefited from increased media investment and expanded distribution. The quarter also benefited from recent innovation, including the introduction of two new core expressions, Penelope Kentucky Straight Bourbon, and Penelope Rye. We were also excited to add to our Ready to Pour portfolio with the launch of our new Blackberry Old Fashioned, while also staying true to our brand's ethos with newly introduced limited-time offerings of Penelope Rivera and Architects of Golf. Yellowstone delivered another exceptional quarter, with sales increasing 54%. Growth was driven by innovation, including our recent limited time release commemorating the United States' 250th anniversary, as well as improved performance of Yellowstone Select in targeted markets supported by increased marketing investment and RGM initiatives. Everclear grew 13%, reflecting increased consumer engagement in key consumption occasions and continued strength in the brand's core positioning. Turning to our mid-price portfolio, stabilization efforts continue to gain traction. Growth was led by Exotico, Juarez Tequila, and Ezra Brooks, and driven by improved distribution, targeted price actions, and successful distributor transitions and focused brand support. Overall, these results reinforce our confidence that the portfolio is becoming increasingly more balanced, with growth in premium plus brands complemented by improving performance across our larger heritage brands. Another important strategic initiative is portfolio optimization. During our last earnings call, we discussed plans to rationalize lower priority brands and SKUs to improve focus and profitability. I'm pleased to report that we've exceeded our original expectations. As of the second quarter, we have rationalized 52 brands, representing approximately 47% of our product portfolio. While these brands account for approximately 1% of sales, This effort is expected to improve analyzed gross margin by approximately 25 basis points while also enhancing top line performance estimated to be 42 basis points through improved commercial focus. Beyond the direct and readily visible P&L benefits, this initiative is creating enterprise value by simplifying operations, improving inventory management, and driving working capital efficiencies across the business. Expanding distribution remains a key strategic priority and an important source of future growth. During the quarter, we grew our national and regional chains off-premise points of distribution by 7% and on-premise points of distribution by 4% sequentially. For these same customers, our Premium Plus portfolio grew off-premise points of distribution by 14% and grew on-premise by 10% sequentially. Overall, we are encouraged by the momentum across Brandon Spirits and remain focused on expanding distribution, increasing consumer awareness, optimizing our portfolio, and accelerating growth across our highest priority brands. Turning to distilling solutions, second quarter sales were 29.2 million. Down 42% compared to prior year. Gross profit of $11.3 million declined 40%. However, gross margin improved approximately 110 basis points to 38.7%, driven by favorable ongoing cost savings initiatives and sales mix. We continue to make gradual progress and believe we remain well positioned to compete intelligently and aggressively in a very challenging market. As you know, the industry remains significantly oversupplied. with elevated inventory levels continue to pressure demand. Despite these market conditions, we remain one of the leading global providers of contracted new make and aged American whiskey and continue to focus on the actions within our control to strengthen the business and position it for long-term success. The primary focus of our larger national and multinational customers, which historically represent the majority of our new distillate demand, is reducing inventory and managing working capital. Many customers are operating under strict capital allocation guidelines and are limited in their ability to enter into long-term supply commitments as they work through existing inventory positions. Importantly, these discussions are less about production capabilities and more about balance sheet management in a market that remains oversupplied. In response, we continue to deepen customer relationships by providing solutions beyond traditional new distillate supply. This includes opportunistic aged whiskey sales, premium white goods offerings such as premium GNS and gin, and other services that help customers improve profitability, optimize inventory, and support their broader business objectives. While brown goods sales declined approximately 59% in the quarter versus the prior year, we are seeing encouraging progress in several targeted initiatives. We continue to expand our presence in private label whiskey, and the significant national private label customer we discussed last quarter has increased its business beyond the original demand levels communicated to us. We're also focused on driving cash generation by expanding our portfolio of value-added services and strengthening customer retention. Warehouse services represented approximately 30% of distilling solution sales during the quarter, with both sales and gross profit increasing versus the prior year. While industry conditions remain challenging, we believe our customer relationships, commercial capabilities, aged whiskey expertise, and expanding service offerings position us well to capitalize when the market ultimately normalizes. Turning now to ingredient solutions. Demand across our specialty ingredient portfolio remains healthy. During the quarter, specialty starch sales, including Fibersen, increased 2%, and we continue to ship all available production to meet customer demand. Our specialty protein platform, marketed under Arise, also grew, benefiting from favorable mix in pricing. These results underscore the continued demand for high protein, high fiber, and nutrient-dense food products. Trends such as GLP-1 adoption, lower net carb diets, and protein-focused nutrition continue to drive innovation across bakery, snack, and meal solution categories. For the second quarter, ingredient solution sales increased 2% to $35.5 million, despite lapping a particularly strong prior year comparison. Growth was driven by favorable pricing and mix within our specialty protein and specialty starch portfolios, as well as improved sales of biofuel and other co-products as operational performance stabilized. These results also reflected an addition of four significant new national customers. While revenue trends remain encouraging, profitability continues to be impacted by elevated waste starch disposal costs associated with the transition following the closure of the Atchison Distilling and startup of the biofuel facility. As a result, gross profit declined to $3.6 million and gross margin was 10.1% during the quarter. Since the beginning of the year, the team has significantly improved operational reliability and reduced unplanned downtime, resulting in higher production throughput. While these improvements are encouraging, they also generated greater waste start stream during the first half than initially anticipated. Through various engineering solutions, the team successfully reduced waste volumes during the second quarter. These solutions have proven to be more cost effective than traditional waste disposal methods, and reduce reliance on third-party providers. However, implementation costs were higher during the quarter than originally expected. While we expect these costs to improve over time as our processes are further optimized, the impact is reflected in our updated full-year ingredient solutions margin outlook and incorporated into our 2026 guidance. With that, I will turn the call over to Brandon.

Thank you, Julie. Turning now to our financial results. For the second quarter of 2026, we reported consolidated sales of $124.4 million, which were down 15% versus the prior year period. Gross profit of $46.5 million was down 20%. Both metrics were lower versus the prior year, primarily due to expected declines in brown goods sales and discount solutions. This was partially offset by higher ingredient solution sales. Consolidated gross margin of 37.4% declined by approximately 270 basis points as higher waste storage stream costs in ingredients solutions pressured overall profitability. Both branded spirits and distilling solutions saw gross margin expansion in the quarter relative to prior year. Branded spirits advertising and promotion expenses decreased by approximately 12% year over year and represented 9.3% of branded spirit sales. primarily due to the timing of spend throughout the year. For the full year, we continue to expect Branded Spirits A&P to be approximately 13% to 14% of Branded Spirits sales. Our total SG&A spend declined by 13% in the second quarter, while adjusted SG&A declined by 19%. with both amounts showing the benefit of our expanded cost savings efforts. These SG&A savings were partially offset by a $2.1 million credit loss provision taken in the quarter relating to the RNDC Chapter 11 filing. Net income of $12 million was down 17% versus the prior year. While adjusted net income of $15.8 million decreased 25% on a year-over-year basis. Earnings per share for the second quarter were $0.55 versus $0.67 in the prior year. On an adjusted basis, earnings per share of 72% decreased 26% year-over-year. Adjusted EBITDA of $27.6 million decreased 23% over the same period. Capital expenditures declined 66% to $6.4 million on a year-to-date basis. 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. As of June 30th, our net debt leverage ratio was approximately three and a half times, up from 2.1 times at the end of March. This expected increase was primarily due to the Penelope earn-out payment of approximately $111 million, which was made during the second quarter. Turning to annual guidance. We are reaffirming our expectations for 2026 net sales to be between $480 and $500 million. Adjusted EBITDA is still projected to range from $90 to $98 million. This is consistent with previous expectations as the efficiencies and savings from our recently implemented Ownership Cost Management Mindset Initiative are expected to offset our reduced gross profit outlook and ingredient solutions in our Branded Spirits second quarter provision for credit loss. Adjusted basic EPS for 2026 is still expected to be between $1.50 and $1.80, with weighted average shares outstanding remaining at approximately $21.4 million. We now expect our full-year 2026 effective tax rate will be approximately 23% due to a recent revision to 2025 Kansas state law, which resulted in a favorable revaluation of certain deferred tax liabilities. Turning to our balance sheet and cash flow outlook, we maintain our expectations for four-year 2026 operating cash flow of $50 million to $55 million and free cash flow of $30 million to $35 million. Both of these exclude the impact of the Penelope earn-out payment. We anticipate our net leverage ratio will peak during the third quarter. We continue to estimate net whiskey put away in the $13 million to $18 million range. for 2026, which includes both new production and procurement of barrels. From a business segment perspective, our four-year segment outlook for distilling solutions is consistent with previously shared estimates, with sales down approximately 35% and gross profit down approximately 40%. Our four-year sales outlook of $140 to $150 million for ingredient solutions reflect strong growth as we expect improved year-over-year reliability and throughput gains from our operational initiatives. However, due to increased waste start stream costs, we now anticipate Ingredients Solutions gross margins to be in the high single to low double digit range for the full year. Our four-year segment outlook for Branded Spirits is unchanged as we continue to expect sales declines of mid-single digits with slight gross margin improvement. To close, I'd like to reiterate Julie's previous comments. As we move through the second half of 2026, we will maintain our strategic roadmap and continue to drive our key growth initiatives while prioritizing our best opportunities for growth. We won't stop taking the decisive actions that are key to the company's long-term growth. and we will continue to execute with discipline. And with that, I'd like to turn it back over to Julie.