MGP INGREDIENTS INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Third Quarter Performance: Results in line with preliminary but below prior expectations. Distilling Solutions faced challenges in American whiskey category with consolidated sales down 24% Y/Y. Actions taken include reducing exposure to aged sales, cutting whiskey production and aging put-aways in 2025, expanding into international markets, and focusing on multiyear new distillate contracts.
• Branded Spirits Progress: Premium plus sales up 13% YTD, now ~50% of segment sales (up from 30% in 2021). Despite premium plus growth slowing in Q3, rest of premium plus brands continue to grow. Anticipate inventory tightening at distributors to be a near-term headwind but premium plus portfolio expected to gain traction.
• Ingredient Solutions Transformation: Undergoing transformation with focus on repurposing export sales to domestic markets. Expect stabilization and return to growth in 2025 as new domestic customers are onboarded.

Segment Performance

• Distilling Solutions: Reported sales declined 36% from prior year, excluding Atchison distillery closure, down 14%. Grounded sales down 22% due to lower aged handy distillate sales; warehouse-related sales up 12%. Revenue contribution: Impacted by brown goods challenges.
• Branded Spirits: Sales declined 6% primarily due to mid and value tier optimization. Premium plus sales increased 1%, though growth decelerated from Q2. Premium plus now accounts for approximately half of segment sales, up from 30% in 2021. Revenue contribution: Premium plus growth is a key driver.
• Ingredient Solutions: Sales declined 18% due to lower specialty protein and commodity/starch sales. Specialty protein negatively impacted by stronger U.S. dollar; expected to return to growth in Q4 as new domestic customers are onboarded. Revenue contribution: Transformation ongoing with focus on domestic sales.

Guidance

• 2024: Reiterated guidance with sales range $695M-$705M, adjusted EBITDA $196M-$200M, adjusted basic EPS $5.55-$5.65.
• 2025: Expect Distilling Solutions sales and gross profit to decline significantly due to lower aged and new distillate sales. Ingredient Solutions expected to stabilize and return to profitable growth. Branded Spirits expected to have top-line growth and margin expansion.

Risks

• Distilling Solutions Challenges: Softening whiskey consumption and elevated industry-wide barrel whiskey inventories causing slower spot sales, customer difficulties in meeting contractual obligations, and faster-than-expected deterioration of the American whiskey category impacting aged and new distillate volumes.
• Branded Spirits Inventory Tightening: Distributor inventory tightening putting pressure on branded spirits shipments in the near term as higher-priced premium plus brands add cost to distributors' balance sheets.

Question and Answer

Q: Bill Chappell asked about the miss in performance and visibility into 2025.

A: Brandon noted the miss was driven by brown goods Distilling Solutions, while Ingredients had some pushback in Q3 but expected to rebound in Q4. David added the American whiskey category deteriorated faster than expected, but Ingredients are within expectations and Brands are on track.

Q: Bill Chappell followed up on visibility and consumer takeaway.

A: David and Brandon discussed the faster-than-expected deterioration in the American whiskey category, ongoing transformation in Ingredients, and distributor inventory tightening affecting Brands.

Q: Robert Moskow asked about visibility into 2025 contracts and small craft customers.

A: David stated all customers were engaged, and while small craft customers may face challenges, multinational contract customers are stable.

Q: Robert Moskow pivoted to branded side growth.

A: David discussed diversifying the premium plus portfolio with tequilas and other products to meet customer demand, emphasizing MGP's nimbleness.

Q: Marc Torrente asked about 2025 commitments and inventory.

A: Brandon and David discussed that a significant portion of 2025 plan is committed through multiyear contracts, and there is inventory in the market with players waiting to see market dynamics play out.

Q: Ben Klieve asked about Ingredient business improvement.

A: Brandon explained specialty protein exports were impacted by dollar strength, but domestic new customers are expected to drive growth in Q4.

Q: Sean McGowan asked about advertising and capital allocation.

A: Brandon stated advertising and promotion for Branded Spirits is expected to remain 14%-16% of net sales, and capital allocation priorities include M&A, reduced CapEx in 2025, and continued dividend and share repurchases.

Q: Mitch Pinheiro asked about barrel distillate and consumer trends.

A: Brandon and David discussed barrel distillate put-away is lower, focusing on own Branded Spirit brands, and consumer trends include cabinet destocking and industry mix changes affecting sales.