Good morning, and welcome to the MGP Ingredients Third Quarter of 2025 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Amit Sharma, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to MGP's Third Quarter Earnings Conference Call. I'm Amit Sharma, Vice President of Investor Relations. And this morning, I'm joined on the call by Julie Francis, our Chief Executive Officer; and Brandon Gall, our Chief Financial Officer. We will begin the call with management's prepared remarks and then open to your 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 due to a number of factors, including the risk factors described in the company's annual report filed with the SEC. The company assumes no obligation to update any forward-looking statements made during the call, except as required by 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 comparable GAAP measures is included in today's earnings release, which was issued this morning before the markets opened and is available on our website, www.mgpingredients.com. At this time, I would like to turn the call over to Julie for her opening remarks.

Thank you, Amit. Good morning, everyone. As we review our third quarter results, I want to begin by sharing reflections from my time in the business and how it's shaping our priorities and actions. I will then provide an update of our 5 key initiatives before handing it over to Brandon for a deeper review of our third quarter results and updated guidance. These first few months truly have been a whirlwind as I've traveled around the country to visit our distilleries, bottling facilities, manufacturing plants, as well as to meet with our distribution partners and retailers in the market. Most importantly, I've had honest and candid conversations with a broad cross-section of our organization, hosting more than 60 one-on-ones and several town hall meetings. I'm also appreciative of the feedback and conversations I've had with investors and analysts as well. MGP is a company with a proud heritage, strong brands and amazing people who are passionate about our business. What I've seen is inspiring and the opportunity now is to harness that passion with greater focus, performance and accountability to drive meaningful progress. While we fully recognize the challenges facing our industry and our company, we are committed to improving our strategic clarity, taking decisive actions, controlling the controllables and emerging stronger. This will not be an overnight fix. Some initiatives will bear fruit quickly, while others will take a bit longer, but the work is already underway. While it's too early to get into specifics, let me share a few highlights. First, we are conducting an exhaustive strategic review of our business and using a thorough approach that takes the time to ask these hard questions. What capabilities will differentiate us in the future? How do we allocate resources that ensure both growth and discipline? Where can we…

Thank you, Julie. For the third quarter of 2025, consolidated sales decreased 19% to $131 million compared to the year-ago period. Within our segments, third quarter sales for the Branded Spirits segment decreased by 3%. Our premium plus sales posted a third consecutive quarter of positive growth, driven by the continued momentum of the Penelope Bourbon brand. However, premium plus performance was more than offset by the expected softness in the rest of this segment, including a 7% collective decline in the mid and value brands. Distilling Solutions segment sales declined by 43% compared to the prior year period. Although our brown goods sales decreased by 50%, our year-to-date sales and margin are trending above our initial outlook, reflecting higher aged whiskey sales and the success of our proactive partnership approach with key customers. Given that, we now expect 2025 Distilling Solutions sales and gross profit to be down 46% and 55%, respectively, from prior year relative to our previous outlook of down 50% and 65%. Ingredient Solutions sales increased by 9% compared to the prior year quarter, primarily due to higher specialty and commodity wheat protein sales. Third quarter gross profit, however, declined by 36% due to equipment outage and other operational reliability issues that Julie mentioned earlier. While we have a good line of sight to resolving these issues, they'll remain a headwind in the fourth quarter. As a result, we now expect Ingredient Solutions segment sales and gross profit to be down mid- to high single digits and approximately 40% for the full year, respectively. Consolidated gross profit decreased 25% to $49 million, primarily due to lower gross profits in the Distilling Solutions and Ingredient Solutions operating segments. Gross margin declined by 300 basis points to 37.8%. Third quarter SG&A expenses increased by 10%. But on an…

Thank you, Brandon. As we look ahead, our focus remains on delivering results with the confidence and credibility. We're working to create a more resilient business model, one that can weather industry cycles and still deliver sustained growth. That means making the tough decisions, prioritizing the highest return opportunities, driving operational excellence and supporting our businesses with the right level of investment. There is still work ahead. But what encourages me most is how aligned our team has become around the company's direction and purpose. That alignment, combined with our strong balance sheet, differentiated capabilities and growing brand momentum gives me confidence that MGP is on a stronger, steadier path towards creating lasting value for our shareholders, customers and organization. Thank you. Brandon and I will now take your questions.

[Operator Instructions] And our first question for today will come from Sean McGowan with ROTH Capital.

First question is, I guess, a broad one on industry trends. You talked about the reduction in production, but what are you seeing? What are you hearing from your customers regarding channel inventory and how much further work needs to be done?

Yes. Thanks for the question, Sean. What we're hearing from our customers is really the need and the willingness to stay close. There's a lot of changes going on in the industry. There's still elevated inventory. There's obviously reduced production, as you mentioned. There's also distilleries that are closing their doors or furloughing employees. And the general response that we're seeing from our customers is increasingly wanting to communicate and have open dialogue. But what we're also seeing, Sean, is a lot of our historically indirect customers that usually purchase from third parties, our product want to deal directly with MGP. They want to have that relationship. They want to be close to us because they know that we're committed to the space and going to be there over the long term.

Okay. Maybe that ties into a follow-up. A lot of the numbers in the quarter were a little better than I had thought. So congrats on that. But the gross margin in distilling was especially strong. Is that kind of related to what you just mentioned of staying close to the customer? Or can you talk generally about how you were able to hold up those margins?

Yes. The margins definitely came in even better than our expectations in the quarter. And there's really 2 reasons for that. A larger volume of aged sales than we had anticipated. Again, it's the customers working very closely with the team. And we're seeing orders from customers who predominantly historically have only purchased new distillate. But like everyone else in the space, they're looking for ways to innovate and to differentiate further on the shelf. And we're getting calls from customers like those that want to buy aged for the first time. They want to put out a new limited time-only product on the shelf, maybe at a different price point from their core portfolio. And we're really well set up for that, as you know, due to the breadth and scale of our aged offerings and our ability to help them innovate, whether that's through blending, through picking out the right match fill or the right age profile. So it's things like these that are really improving our aged performance over our initial expectations. The second thing, Sean, is the team operationally is doing a tremendous job in managing the cost structure of the facility. That's a top 4, 5 volume-producing bourbon facility in the United States. So while ramping up is difficult, like we've had to do in previous years, ramping down is even more complex. And the team has done a really nice job from a productivity initiative point of view in executing the cost side.

And our next question will come from Robert Moskow with TD Cowen.

This is Seamus Cassidy on for Rob Moskow. Julie, you mentioned in your prepared remarks sort of more active portfolio management around the Branded Spirits portfolio. Since the Luxco acquisition, MGPI has focused its ad spend and acquisitions on more premium brands. And you've said you're comfortable letting mid and value decline as a result of this. So I guess my question is, could you walk us through some of the pros and cons between sort of trimming some of these lower-performing brands? Because while they may be slower growing, I imagine they still add scale to your portfolio and provide positive cash flow.

Yes. Thanks for that question. I appreciate it. Listen, Branded Spirits certainly is our true north on our strategic growth platform. We're certainly pleased with the premium plus performance, focusing on those core 3 Penelope, El Mayor and Rebel certainly have been paying off. We're up 4% on the premium plus versus a category that's not showing the same results. And then Penelope is certainly growing very fast. But I think your point is interesting because the mid- to value, certainly, we are heavily weighted still in that area. So I would tell you, and I think as I've talked to analysts throughout the first few months that I do think there's an opportunity for us to be -- take some of the core focus that we've had in the premium plus and be precise in the mid- to value because there are some brands, as you know, that have some pretty good density, and there are some regional and channel opportunities that we certainly could bed out a little bit more with some flavor innovations with some regional brands that may make sense. So I'd tell you that we are reevaluating that because I do see some strong brands in there that we could certainly provide a little bit of ignition to and to help us offset some of that mid- to value decline. But again, if you look at it, we're certainly focused on mid first, and I think you're seeing some progress there and value we should start looking at very shortly into 2026.

Our next question will come from Marc Torrente with Wells Fargo.

I guess first on billings, with the larger customers that have paused their purchases you've referenced this call in the past, have there been any incremental pauses or maybe even restarts out of those customers? And then how is planning progressing with those customers? Any, I guess, additional commentary on your visibility into 2026?

Marc, it's Julie. Thanks for the question. A couple of things. I think we've said in the past, and we still feel this way that our large multinationals certainly have communicated with us that they're paused. We do expect to hear more about 2026 near spring of next year. But we're staying close. And I think you saw -- you heard in the prepared comments that we were acknowledged by Diageo as they -- one of their more distinguished suppliers. So I think you're seeing our customers and our team's ability to engage and stay close. We've been really accommodating to the crafts. They're certainly going from kind of like just-in-case to just-in-time buying, where cash really is and availability of cash really is playing in a role into how they're purchasing and when they're purchasing. But we've also seen, as Brandon said, it's been interesting to see some craft customers that have only been in new distillate come to us for aged whiskey because that certainly is where the demand is. And we're known for our unique mash builds, our variety, our master distillery. So that certainly has been an area that we were pleasantly surprised with. And it goes back to the approach the team took probably 6 months ago where we went to really engaging with our customers, being accommodating, showing agility and most importantly, the larger folks certainly know we're here to stay. The Distilling segment is extraordinarily part -- important part of our business. You probably recall that Penelope started in that area, right? They're a customer of our Ross & Squibb distillery. We noticed that they were putting out some good juice, choosing some good juice and they're very innovative and coming together and acquiring Penelope in 2023, certainly, we're very pleased with those results. But we do expect the headwinds into the first half of 2026 with hopefully some moderation in the back half.

Okay. Great. Appreciate that. And then on the ingredients side, it sounds like there's a combination of headwinds in the quarter, sales perhaps a bit lighter versus expectations, but then also some execution issues. Maybe just some more color on the recovery timing here. It sounds like would be ongoing impact into Q4. Will this all be contained in 2025? And you also started to report some biofuel sales. Maybe any other detail on the expected ramp there and cost offsets?

Yes. Thanks, Marc. First, obviously, we're not satisfied with the results we saw in Ingredient Solutions, both from a year-to-date and then in particular, in Q3. I tell you, first, it's important to note that it's not a commercial demand issue. These are platforms that are in high demand, and we've ramped up our R&D department, which really is paying off dividends. We've got some large customers that have come on board that are expanding their products. So the demand is there. And where we fell short, we're in a few different areas. One, there was an equipment outage, and I'll take full responsibility for that. As I've got in the business, Marc, it became clear that one of our more important dryers had had significant operational reliability issues, downtime, yield, waste. And in my experience, it was best for us to take that equipment offline, rebuild it. It did come offline a couple of months ago, and it will be online by the end of this month and we will see better performance. So that is a discrete event, but I did want to make sure that people understood that our expectation is for it to have headwinds into Q4. But after that, we certainly will be on a better path to full productivity coming out of that dryer. But we have had continuous operational reliability across the plant as we closed down that Atchison distillery. And we've taken a few discrete decisive actions. One, I did bring in a project engineering team, boots in the plant, I'd like to say. They're well-known for working alongside management and leadership to bring a plant back to performance. We've invested 15% more in adding staffing. We're increasing maintenance CapEx. And also, we're bringing back predictive analytics and some of the enhanced preventive maintenance that we are known for. And then certainly bringing in a leader that has extensive operational turnaround experience that's led manufacturing, production, engineering and also some of the other key safety and quality metrics, bringing Chris on board is an important part. So we do believe and expect to see continuous improvement heading into next year. And the teams are working really hard. So I'm going to turn it over to Brandon on biofuel. But I do want to say one area we're pleased to see is our ProTerra line in extrusion. We did get online our larger customer that we've been talking about. A little bit higher start-up costs, which could be expected with all the different R&D and test runs that you do. But that is starting up mid-November with salable product. And so, we're pleased to get that online. And now I'll turn it over to Brandon for biofuel.

Yes. Before I get into biofuel, all these actions, Marc, that Julie just listed, and there's a lot of very positive actions that she and the team are taking. We do not expect it to be fully contained. Maybe the dryer will be that specific discrete issue. But when you're hiring new people, when you're investing capital, when you're building in new processes, that does take a bit of time. So we do expect to return to our historical high level of performance, but probably not until the first part of next year or the first half of next year. So more to come on that, Marc. But yes, to your question around biofuel. So that project was commissioned in the quarter. Proud to say that the team shipped out their first tanker biofuel in September. You saw some of that in the numbers. But these things do take time. And so, whether it's getting it efficiently started up, whether it's hitting customer spec, rebuilding the customer network for this type of facility and a couple of other things, they do take time. But over time, we do expect this to offset a large part of the disposal costs we're currently incurring in addition to some of the other initiatives we have going to dispose of some of the other byproduct. So while Julie said very well, we're not pleased with the performance to date. We do believe that we're doing the right things to correct that going forward.

And our next question will come from Ben Klieve with Lake Street Capital Markets.

First, I want to see if you guys can double down a bit on the success of Penelope of late. I mean, it seems quite impressive that, that growth is accelerating even as that business has really, I think, developed some scale. I'm wondering if you can kind of isolate any of the variables behind this growth. I mean, is it -- are you guys seeing any accelerated growth from greater velocity, increased household penetration, distribution gains? Anything to specifically call out behind the growth numbers over the last 6 months or so?

Ben, it's Julie. I appreciate the call. Yes, Penelope certainly is performing quite nicely. We're pleased to say we're the second fastest-growing brand out there in the last 52 weeks. So we're pleased on that. But I would tell you this, if you think about Penelope and the positioning, it's kind of like an [ unbourbon bourbon ]. So it's attracting a broader range of folks across the spectrum. It's a brand that's built on innovation. So we're very purposeful on sending out innovation. It's also very tight on the releases. I was out in the market the last couple of weeks and talking to retailers and how the excitement that they generally have around Penelope, and they definitely said that our approach to limiting the number of cases with each launch. One guy was saying that he's got 60 people on his bourbon list and a lot of the releases are sold out and don't even come on to shelf. So we think that's a key part of it. And then knowing our consumers. We just launched the Penelope Old Fashioned line. We started with Peach, which was highly successful. We're just out with Black Walnut. And some of the brand insights that we saw there was that we had an opportunity to engage with females. Females who were curious about bourbon and entering into this category, and they were looking for a lower proof, attractive price point. And also, they're about image and visual appeal. So if you've ever seen that bottle, it's a beautiful bottle. So we think that that hit on bringing in new consumers. And then certainly, from a distribution standpoint, our independents certainly are doing a great job of launching Penelope and having a significant number of average items. Our opportunity still does lie with a national footprint across on-premise and national accounts. So we do feel bullish that there's some upside on getting more distribution across the nation, in particular, in some of those national accounts.

Great. That's all very helpful. And then for my follow-up, I'm curious, Julie, about one of the comments you made about the dynamic where your Distilling Solutions customers are shifting from just-in-case to just-in-time. In that context, how are you guys -- how was that context contemplated within your updated full year guidance? I mean, are you banking on some just-in-time orders still here to come in, in the next month or 2 that you have real visibility of? Or is this something that you're kind of looking for given historic conversations with customers that don't really have locked in yet?

No. I would just say in Q4, you've heard us talk about our guidance. And so, we certainly are confident on what we reaffirmed and where we took some of the levels. And listen, the biggest thing we did was in the past 8 months is go out there and truly engage the customers, right? And we're only a phone call away, and we're very accommodating. And so, as they have money availability, we're willing to take any order that they're willing to give us. So I think that's important. But our -- we've been pretty tight to hitting our forecast the past few quarters. So we believe that the planning and the forecast that we have out there represents the demand. And certainly, if there's these intermittent customers coming to us, that's just a slight net positive upside. But understand these are craft customers where the number of barrels that they're taking are on the lower end.

Yes. And what I'd add to that, Ben, is this is -- we're now approaching 1,000 customers that have bought whiskey from us over the years. And the just-in-time versus just-in-case, what that means is, they're not willing to necessarily contract out. So it does limit visibility to a specific customer necessarily. But because of the breadth and size of our book of customers, what we do see, especially at the craft level is the market effect, which is, we can see the overall trend that they're moving toward -- more toward this. And we are seeing greater demand for aged, which is obviously a positive. So while it's hard to really visibly measure when a certain craft is going to purchase, the breadth and size of the number that we serve gives us that added confidence that as a collective, these trends are taking place, and we expect to continue.

Very good. I appreciate that from both of you. Congratulations on a good quarter here and a healthy outlook for the rest of the year.

And our next question will come from Mitch Pinheiro with Sturdivant.

So when you look at the data, both for Branded Spirits and even the TTB data, we see inventory, both barrels and also in the retail side and the distributor level kind of full, still full. But pricing data is still much better than I would have expected, holding up. You might expect to see more discounting and pricing actions, but we're not. And I'm just curious as your view on this. Is it saying something larger about the category? Is it saying anything about consumer preferences and/or consumer value?

Mitch, Julie, thanks for the question. First and foremost, we certainly believe strongly as most folks, American whiskey and tequila, our really strong long-term outlook is really healthy. And as we talk about the pricing environment, yes, it's largely remained rational across all core categories. And certainly, there are pockets, regional pockets of greater competitive intensity. And we're certainly seeing in the nonpremium end some investment and some pricing in the value brands in particular, but nothing that causes us concern. And as you called out, it's been pretty rational. So I think that to me, it shows that people are bullish on the strength of the categories and the health of the categories for long-term value, and they don't want to do anything rash to destroy any of the value that they can capture.

And I guess then just sort of a follow-up. So you've always talked about your revenue in the Distillery Solutions business being 1/3, the multinationals, 1/3, your larger regionals or nationals and then 1/3 craft. Is that still there? Or with the sort of decline, it seems like there's a greater decline in craft. Is that now a smaller portion of your business? And yes, let's leave it at that.

And Mitch, you were breaking up in the middle. Can you repeat that, please?

I was just curious about your Distillery Solutions sort of revenue breakdown. It was typically 1/3, 1/3, 1/3, multinational, but your larger regionals or nationals and then your craft. And I'm curious if that's changed.

Yes. I'd say, Mitch, I'll start on that one. We are seeing, generally speaking, a larger proportion of aged sales relative to new distillate than we had expected coming into the year. And so, broadly speaking, like you said, it's typically 1/3, 1/3, 1/3. Age customers tend to skew much more towards the craft. So -- and that is where we're seeing the incremental demand, and that is where we're seeing the improved performance as the year has gone on. So a lot of those larger national, multinational customers that typically buy new distillate, a lot of them still are, but some of them have paused, and we've talked about that. And so, because of that pause the proportionality of our sales mix has moved in that direction.

And our next question is a follow-up from Sean McGowan with ROTH Capital Partners.

A quick question first. What is your expectation for the margin profile on the biofuel? And then more broadly, again, I'm a little surprised with this deep into the call and the word tariff hasn't come up. So could you give us your latest thoughts on that?

Yes. I'll start on the biofuel. Margin -- gross margin profile, we're going to maybe get a little further along until we share our expectations there. But generally speaking, we believe that the biofuel facility, once it's fully ramped up, once it's efficient and selling at the prices that we think it will hit and get all the tax accreditations that are going to come with it over time. We expect that to offset a large part of the disposal costs we're currently incurring. And -- but let us get a little bit further in, let us see what the market pricing is, where the expectations are for next year, and we'd be happy to share more. And on the tariff front, yes, we are seeing some tariff pressure, not to the extent of probably some of our peers. That's the benefit of being mostly domestic. So a lot of the tariffs we're seeing are mostly on dry goods, some of the product and other materials that we're bringing in. But what's harder to quantify, Sean, is the impact it's having on some of our customers that do have more of an international business. We can see the export data. It's been very volatile this year, especially in terms of American whiskey specifically going out of the country. And so, we do think that it is causing some near-in volatility in patterns as it relates to that.

And it's included in our guidance.

Yes. Great point. And the incremental tariff exposure that we are experiencing is contemplated in our full year guide.

And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Julie Francis for any closing remarks.

Thank you, Joe. I'd like to thank everyone for joining us today on our quarterly earnings call. I look forward to engaging with all of you in the very near future and playing a much more active role in the next earnings call. So good luck, everyone, and we'll talk soon. Cheers.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.