MGP Ingredients, Inc.

Good morning and welcome to the MGP Ingredients Third Quarter 2026 Earnings Conference Call with Julie Francis, President and CEO, and Brandon Gall, CFO. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 39 cents also declined versus the third quarter of last year. However, both of these key metrics were ahead of our expectations. This quarter reinforces three things about our company. First, we have a right to win each of our three 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 roadmap 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 3.6 times, 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 three important updates. As we announced on October 15th, we will become SEMPRA on this Monday, November 2nd, and our shares will begin training on NASDAQ under our new ticker symbol, CASC. This is an important milestone for our company. Since 1941, we have grown from a single distillery into a business spanning three separate segments, branded spirits, distilling solutions, and ingredient solutions. Sempriam brings these three 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 three reportable segments, how we report our results, our 2026 guidance or our leadership team. Our next earnings call will be our first at Semprion. 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 four leadership attributes, EPIC, which stands for execution, performance, impact, and care, and four shared values, MASH, mindset, accountability, shift paradigm, and highest standards. At Semper Am, we will continue building on the strengths of our three 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 six 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 brand and spirit sales volumes in these territories, but we are pleased that our third quarter brand and spirit sales, excluding our other category, which is primarily composed of international sales of private label bottle products, were consistent with prior year and ahead of our expectations. Now turning to our business segments, I will begin with Brand 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 system's cutover pressures, This performance is consistent with Nielsen Industry Trends, which were flat for the 13 weeks ending October 3, 2026, and exceeds NAPCA Trends, which were down 2% for the three months ending August 31st. 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 position of Ezra Brooks Bourbon, which has moved into the mid-price tier with a reintroduction of a consumer favorite, Ezra 90 Proof. Excluding Ezra Brooks, Premium Plus would have grown by 1.5%. Penelope's 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 foregrain and weeded, grew by 35%. Other launches in the quarter included seasonal limited-time offerings, Architects of Golf, Cigar Sessions, Chapter 2, 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 price brands collectively grew 1% for the second consecutive quarter, comparing favorably to Nielsen-reported declines of 5% and 6% declines reported by NACA for these categories. Our mid-price 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 St. Brennan'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 brand and 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 G&S 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 texture 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 waste start 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 three businesses, our ownership cost management mindset continues to deliver savings that help 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'll turn the call over to Brandon.

Thank you, Julie. Turning now to our financial results. For the third quarter of 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 search stream costs in ingredient solutions, higher costs in bread and spirits, in lower brown goods sales volumes. Advertising and 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 non-working 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 32 cents versus 71 cents in the prior year. On an adjusted basis, earnings per share of 39 cents 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 in the balance sheet, year-to-date operating cash flows, excluding the Penelope Arnott 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 put-away was $18.9 million, down from $23.9 million as of June 30th. Year-to-date capital expenditures were $11 million. We continue to estimate four-year net whiskey put-away in the range of $13 million to $18 million in 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 3.6 times, 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 16th. 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 note's 1.875% coupon, we continue to expect fourth quarter interest expense to be sequentially higher than Q3 in 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 four-year outlook for all three 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%. Brand Spirit 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 de-levering, cost management, capital stewardship, Thank you, Brandon. Before we wrap up, I want to thank the entire MGP team for another quarter of execution, performance, impact, and care.