Good morning, and welcome to the MGP Ingredients Third Quarter 2024 Financial Results Conference Call. Please note this event is being recorded. I will now hand the conference over to Amit Sharma, Vice President of Investor Relations. Please proceed.

Thank you. I'm Amit Sharma, Vice President of Investor Relations. And joining me are members of the management team, including David Bratcher, Chief Executive Officer and President; and Brandon Gall, Vice President of Finance and Chief Financial Officer. We'll begin the call with management's prepared remarks and then open the call to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including risk factors described in the company's most recent annual report filed with the Securities and Exchange Commission. 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 directly comparable GAAP measures is included in today's earnings release. If anyone does not already have a copy of the earnings release issued by MGP today, you can access it at our website at www.mgpingredients.com. At this time, I would like to turn the call over to MGP's Chief Executive Officer and President, David Bratcher. David?

Thank you, Amit. Good morning, everyone. I would like to begin with an overview of our third quarter performance and provide updates on key initiatives. I will then turn it over to Brandon to discuss our quarterly results in greater detail. Lastly, we will wrap up with discussions for our outlook for the full year, as well as brief comments on 2025, before opening it up for your questions. As for the third quarter, results were in line with the preliminary results we provided 2 weeks ago and below our prior expectations. Like many in the industry, we are facing challenges in our Distilling Solutions segment in regard to the American whiskey category. Consolidated sales decreased 24% from the prior year period. On a pro forma basis, when factoring in the Atchison distillery closure, consolidated sales decreased by 14%, primarily due to the combination of our weak brown goods performance and export headwinds in our Ingredient Solutions business. Brandon will discuss our quarterly results in greater detail, but let me spend a few minutes outlining the actions we are taking to strengthen our brown goods business as the market corrects for excess whiskey inventories and increased distilling capacity. As we shared with you on our fourth quarter call at the start of the year, part of our strategic plan has been to actively reduce our exposure to aged sales by increasing our new distillate business. Although our efforts are working, as aged whiskey accounted for less than 20% of our consolidated gross profit in the third quarter, down from nearly half in Q1 of 2021, the aged market appears to be weakening at a faster pace than we originally anticipated. Softening whiskey consumption and elevated industry-wide barrel whiskey inventories are having a larger and quicker-than-expected impact on not only our aged whiskey spot sales but also on our new distillate volumes. As we moved through the third quarter, our spot sales slowed, and we saw some customers having difficulties meeting their contractual obligations to purchase whiskey. This dynamic is more pronounced in our sales to smaller craft customers who are likely to be more impacted by slower retail sales and ongoing destocking at a wholesale and retail level. To be clear, the American whiskey category is still growing, but slower growth and higher inventories are leading to lower demand, lower prices, and reduced visibility on our contract distilling sales. We believe that the underlying environment will remain challenging and likely put even more pressure on our brown goods sales and profitability in 2025. We are disappointed by the impact this faster-than-expected deterioration is having on our financial results. Although the American whiskey category has successfully navigated periods of temporary supply-demand imbalance over the years, we are not sitting idle and waiting for the industry dynamics to improve. Let me highlight four proactive actions to stabilize our brown goods business. First, let me begin by reaffirming our commitment to remain a leading supplier of American whiskey to our craft and multinational customers. Our whiskey inventories remain an important part of the still expanding American whiskey category, and we believe our ability to provide high-quality aged and new distillate with unique batch builds at our scale is unmatched in the industry, evident in our partnership with several high-profile brands. Second, we are reducing our whiskey production and aging whiskey put-aways in 2025 to better align with lower category demand. While we were optimizing our distillery cost structures to mitigate the impact of low production volumes, it likely will be a margin headwind in the near term. Third, we are enhancing our efforts to expand into international markets, particularly Europe and Asia, to leverage the American whiskey category's strong growth potential outside of the United States. Fourth, and lastly, our exposure to spot aged sales is down substantially, and we continue to reduce it further by focusing on multiyear new distillate contracts. We believe this is the right strategy in the current environment as we optimize our brown goods profits by increasing our volume share at market-based pricing. I am confident that our actions will put our Distilling Solutions segment on solid footing over the longer term. However, given the pace of the changes in the brown goods contract distilling category, we expect it to be an even bigger headwind in our 2025 results. With respect to brands, I am happy to report that our progress towards becoming a premier branded spirits company remains on track. We continue to focus on expanding our premium plus price tier portfolio to better align it with consumer preferences and structurally lift our margin profile. In fact, year-to-date, our premium plus sales were up 13% compared to last year. Premium plus now accounts for approximately half of our Branded Spirits segment sales, which is up from 30% for the full year 2021. Though our premium plus sales growth slowed down to 1% in the third quarter as we cycled the launch of Penelope in many key markets in the prior year period, the rest of our premium plus brands continue to post solid growth. As I look ahead, I expect further inventory tightening at the distributor level to be a headwind in the near term. While days on-hand inventory for our unit cases remain stable, our shift to higher-priced premium plus brands adds cost to the distributors' balance sheet, leading to further tightening. That aside, I expect our premium plus portfolio, including Penelope, to continue to gain traction with our customers. With that, let me hand it over to Brandon for a review of our quarterly results and revised full-year guidance.

Thanks, David. For the third quarter of 2024, consolidated sales decreased 24% from the prior year period to $161.5 million. Excluding the impact of the Atchison distillery in both periods, consolidated sales decreased by 14%, reflecting lower sales in all three operating segments. Within the Distilling Solutions segment, reported sales declined by 36%. Excluding the impact of the Atchison distillery in both periods, segment sales declined by 18%. Grounded sales declined by 22% as compared to the prior year quarter due to lower aged handy distillate sales. Our warehouse-related sales increased by 12%. Our Branded Spirits segment sales decreased by 6%, primarily due to the planned optimization of our mid and value tier brands. Sales for our mid and value portfolio collectively declined by double digits, largely consistent with year-to-date trends. This decline was driven by lower sales volumes as we increased pricing on certain lower-margin mid and value brands. Our premium plus sales increased by 1% as our brands in the American whiskey and tequila categories within this price tier continue to perform well. Our premium plus growth decelerated from the second quarter as we cycled the initial launch of the Penelope brand in key large markets during the third quarter of last year. Ingredient Solutions sales declined by 18%, driven primarily by decreased sales volumes of specialty protein as well as lower commodity and specialty starch sales. Specialty protein sales were negatively impacted by the stronger U.S. dollar. We expect specialty protein sales to return to growth in the fourth quarter as we onboard new domestic customers to offset lower export sales. Our specialty starch sales, which provide FDA-approved dietary fibers under the Fibersym brand, continue to benefit from the long-term consumer-driven tailwinds across several large food categories. Third quarter consolidated gross profit decreased by 10% to $65.8 million, representing 40.8% of sales. Excluding the impact of the Atchison distillery in both periods, third quarter consolidated gross margin improved approximately 30 basis points from the prior year period as we delivered a second consecutive quarter of higher than 50% gross margins in our Branded Spirits segment. Distilling Solutions and Ingredient Solutions gross profit declined to $28.6 million and $4.7 million, respectively. Distilling Solutions segment gross margin increased by 10 percentage points and Ingredient Solutions gross margin declined by 16 percentage points. Excluding the impact of the Atchison distillery in both periods, Distilling Solutions gross margin declined by 3 percentage points due to lower brown goods sales, while Ingredient Solutions gross margin declined by 11 percentage points, primarily due to lower specialty protein sales and incremental costs to commercialize the waste starch processing. Advertising and promotion expenses for the third quarter increased modestly to $9.6 million, reflecting ongoing investment behind our premium plus portfolio. Branded Spirits related A&P totaled $8.7 million for the quarter and represented 14% of segment sales. We remain committed to investing behind our faster-growing, higher-margin premium plus price tier brands as we seek to capture a greater share of the American whiskey and tequila categories. Third quarter operating income increased 64% to $32.6 million, while adjusted operating income decreased 9% to $39 million as lower gross profits more than offset lower SG&A costs. Net income for the third quarter increased 82% to $23.9 million, while adjusted net income decreased 5% to $28.8 million. Basic earnings per common share increased to $1.07 per share from $0.59 per share in the prior year period, while adjusted basic earnings per share decreased to $1.29 per share from $1.36 per share in the prior year period. Adjusted EBITDA decreased 9% compared to the year-ago period to $45.7 million. Moving to cash flow. Cash flow from operations was $73.5 million for the year-to-date period, up from $48.6 million in the prior year period. I'm proud of our cash generation in a tough quarter as we continue to focus on managing our working capital, including lower accounts receivable and barrel inventory put-away. Our balance sheet remains healthy, and we remain well capitalized with debt totaling $290 million and a cash position of $20.8 million at the end of the third quarter. Our net debt leverage ratio remained largely stable at approximately 1.3x at the end of the quarter. Capital expenditures were $20.9 million during the quarter and $43.5 million year-to-date. We now expect full-year 2024 CapEx of approximately $78 million as work on some projects is now expected to carry into 2025 to reduce overall costs and better align with our needs. The mini fuel plant, which is expected to mitigate additional costs related to treatment and disposal of waste wheat starch is an example of such carryover and is now likely to come online by the end of the first quarter of 2025. We continue to expect 2025 CapEx to be below 2024 levels, and we'll share more on our Q4 earnings call. Net whiskey put-away was $12.1 million during the quarter and $32.7 million year-to-date, well below year-ago levels. During the first quarter, the Board approved a $100 million share repurchase program. And during the third quarter, we repurchased approximately $2.5 million of our common stock, bringing the year-to-date share repurchase amount to approximately $10 million. The Board of Directors also authorized a quarterly dividend of $0.12 per share, which is payable on November 29th to stockholders of record as of November 15th. The Board continues to view dividends as an important way to share the success of the company with stockholders. Turning to the outlook for the full year. We are reiterating the updated full-year guidance provided along with our preliminary third quarter results 2 weeks ago. The updated 2024 guidance includes full-year sales in the range of $695 million to $705 million, adjusted EBITDA in the range of $196 million to $200 million. Adjusted basic earnings per share in the $5.55 to $5.65 range with basic weighted average shares outstanding expected to be approximately 22.1 million at year-end, an effective tax rate of approximately 24%. As we look to the fourth quarter, we continue to expect our brown goods sales and profit to remain under pressure as unfavorable category supply-demand dynamics will lead to lower spot and contracted whiskey sales than previously anticipated. While retail trends for our premium plus portfolio continue to improve, further inventory tightening at distributors is expected to pressure our branded spirits shipments in the fourth quarter. We expect the Ingredient Solutions segment to return to positive sales growth in the fourth quarter as we continue to win new specialty protein business. While we will provide 2025 guidance with our fourth quarter results, I'd like to provide some additional color. As David mentioned, given the current category dynamics, we are significantly reducing our brown goods production to better align with demand in 2025. At the same time, softer American whiskey growth and elevated barrel inventories continue to constrain demand for aged whiskey and increasingly our new distillate. While we are optimizing our cost structure to mitigate the impact of lower production, lower aged and new distillate sales are expected to drive a nearly 35% decline in Distilling Solutions segment sales and a nearly 50% decline in Distilling Solutions segment gross profits in 2025. On the other hand, we expect our Ingredient Solutions segment to stabilize and return to profitable growth in 2025. Additionally, we expect our Branded Spirits segment to deliver top-line growth and margin expansion in 2025. And now, let me turn things back over to David for concluding remarks.

Thanks, Brandon. While I am not pleased with our 2025 outlook for the brown goods business, this reset reflects current market conditions and, more importantly, our proactive actions I discussed earlier to stabilize our brown goods business. We are actively engaging our customer list, tightening our contract terms, and further reducing our exposure to spot and aged sales, which I believe will rightsize and mitigate risk in our contract distilling business. Our Ingredient Solutions segment continues to be well positioned to thrive independently post the Atchison distillery closure. Though unexpected complexities from that transition have impacted recent performance, we expect this segment to return to positive growth next year. Finally, I am most enthusiastic about our progress towards becoming a premier branded spirits company. The Luxco acquisition firmly puts us on that path. I anticipate 2025 could mark the first year in which our Branded Spirits business not only becomes our biggest segment by sales but also our primary growth engine. Most importantly, our key premium plus brands continue to have growth runway ahead, positioning us to deliver attractive growth for years to come. I would like to close by thanking the MGP team for their hard work and focus in this challenging environment. I'd also like to welcome Kathleen Molamphy to our MGP team. Kate joins us as General Counsel and will continue to add strong talent throughout our organization. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

First question comes from Bill Chappell with Truist Securities.

I want to begin by discussing this year and then ask a couple of questions about visibility for next year. First, for this quarter, would you say that Ingredient and Branded met expectations, and that most of the shortfall came from Distilling Solutions, particularly from aged? Or was there more to the quarter's performance in relation to the guidance?

Yes. I'll start with the numbers, Bill, and then Dave can chime in. But, yes, the miss and the reduction in our expectations for the year are brown goods Distilling Solutions driven. However, Q3 performance for Ingredients was under our initial expectations as we, as you know, are trying to repurpose sales from export markets domestically. And a couple of those large sales that we had planned on this quarter actually got pushed through to the fourth quarter. So Ingredients came in under for Q3, but we expect that to rebound in Q4 for our remarks. The other change, and this isn't necessarily a Q3 change, it's more of a Q4 change, is the distributor tightening that we're now seeing in the Branded Spirits segment, which has resulted in our Q4 outlook for brands to now be taken down a little bit in our recent numbers with sales for this segment to be down in the high single digits.

Yes, Bill, I think you're absolutely right. The disappointing aspect is the contractor's performance in the brown goods business. As I reflect on my discussions with Brandon, the Ingredients segment aligns closely with our expectations. There is significant transformation happening in that business right now, along with a lot of noise that we plan to resolve very quickly, as mentioned in our script. Our brands are positioned well where they need to be. As we continue to enhance our portfolio, even though our inventory levels remain the same, the valuation set for inventory at wholesalers is making them reassess their balance sheets, not just in relation to us, but across the board. This is why we're hearing about destocking, as their teams are focused on financial assessments. We keep a close eye on this. But the key point to take away from our script is that the American whiskey category has declined faster than we anticipated. We had always expected fluctuations, as is typical in any beverage alcohol category, but this drop occurred a bit quicker than we thought.

I understand. Just to follow up, regarding visibility, a common question I receive is about consumer trends as reflected in Nielsen, government data, or DISCUS. We've observed a decline in American whiskey consumption for nearly 12 to 18 months. It seems surprising that this realization is coming now. Do you lack visibility, particularly concerning the newer distillate contracts? What gives us confidence in your approach? Specifically, why continue producing aged whiskey for next year if demand is decreasing? Why not simply reduce production to focus only on new whiskey? Please help us understand your visibility and confidence, especially for the upcoming year.

Bill, that's an excellent question. Regarding the new distillate contract business, we mentioned in our script that we have encountered some contractual challenges with a few smaller craft regional customers. However, the multinationals are fulfilling their obligations and providing us with stable business visibility. Looking ahead, I believe that many in the industry remain very optimistic about American whiskey. We're actively purchasing inventory and new distillate at a fast pace, which has been very rewarding. However, we are starting to see some softening in the market, particularly within the branded American whiskey category, even though it still shows growth. This shift is prompting everyone to reassess their positions. Currently, there’s a tendency to hold back some products, which has stalled our aged and spot business for the time being. As to your second question regarding our plans for 2025, the short answer is that we are not planning to put away aged inventory for next year. Our focus has been on building a solid inventory for future aged sales over the past two years, as we believe that aged sales will always be in demand. However, in stabilizing our business, we've reassessed our operations to determine the appropriate inventory levels, how to reduce costs, and how to generate cash. One of our major cash expenditures is maintaining inventory, and for 2025, we have effectively reduced our inventory put-away for future sales to zero.

Got it. And then just one last one. As I'm looking to '25, and I just want to clarify, it sounds like the majority of, when you're saying that distillery profit is down 50%, is aged because the other question I get is, with so much supply out there, nobody needs to buy new. And even your existing contracts are going to see massive pricing pressure and you're going to have to give concessions of what you're making it for. Can you maybe just address that?

Yes, I'll start. You're correct. The primary reason for the reduction next year is age, which was also a significant factor this year. Regarding pricing, we pay close attention to it, as you can imagine. Most of the new distillate contracts are established in advance, so we are not seeing price decreases on the existing contracts. The aged sales we're making are still achieving good pricing levels, but it's mainly about volume at this stage. Looking ahead to next year, we have accounted for some pricing in the aged sales included in our outlook.

Yes. I think, Bill, let me add to that a little bit. So as we look at today, we’re not seeing that price compression today. We do, though, it’s a law of supply and demand. When you have excess inventories and excess capacity over time, we do expect pricing pressure. So within the color commentary that we gave you on revenue and profitability for brown goods, we did factor in price compression.

The next question comes from Robert Moskow with TD Cowen.

I appreciate the effort to address 2025. I'm curious about what percentage of your distillate customers you have discussed this with, considering you have hundreds of them. I assume they're sharing their current outlook with you. Have you managed to speak with all of them? That's my first question. My second question is whether you think the smaller customers will remain in business. Do you anticipate another setback in 2025 due to the smaller customers that might not survive?

Great question. I can confidently say that all of our customers have been fully engaged with our commercial team. Either they are reaching out to us or we are contacting them, as we wanted to provide you with solid insights. Although we haven't provided fiscal guidance for 2025 yet, we have delivered strong commentary. Part of that involves our active engagement with every customer. As for speculation regarding certain crafts and their future, I can't provide specific insights. It makes logical sense that if they can't succeed in the retail market, they might fade away. However, I want to emphasize that this aligns with what we've been stating for a few quarters—this is why we believe that securing multiyear contracts for new distillate provides stability to our business. The future of our company lies in brands. We consistently view our contract distilling and ingredient businesses as the sources of cash to expand our most profitable segment. Yes, we have reached out to all our customers. While I can't speculate on their future, the customers we have in 2025 are larger multinational contract customers, and we have engaged with those even on a spot basis who have expressed intent to move forward.

Okay. And maybe I'll pivot to the branded side. You said yourself that things slowed in the third quarter, but you're forecasting growth on the branded side in 2025. Given that the distributors are cutting back and are facing higher costs of carrying inventory, and also that you've lapped this major launch on Penelope, like what's the path to further growth in 2025 for that branded business? What are the tactics to get there?

It's about aligning with customer preferences. Currently, our premium plus portfolio is mostly whiskey, but we are actively incorporating high-quality, premium tequilas. This is just the start; we will not solely concentrate on whiskey. The market has softened and returned to pre-COVID levels. We’ve often mentioned that sales surged during COVID, but now the industry is adjusting, and companies are adapting. Additionally, consumer behavior changes and they will explore other products. This doesn’t mean whiskey or tequila will disappear, but we are uncertain what the next trending category will be. As Brandon and I have repeatedly stated, our focus is on diversification. The strength of the branded business lies in its variety. It’s rare to find a major company with only one product; most large multinationals offer a range of items across different price points to meet customer demands. We must continue to enhance our brand portfolio beyond just whiskey in the premium plus segment. We are introducing tequilas, gins, and other products as needed to follow customer trends. I’ve mentioned in earlier calls that our agility gives us an advantage. We’re not hindered by bureaucratic processes, allowing us to adapt swiftly to customer needs. While many companies are still determining their direction, we invest significant effort in research, enabling us to respond more quickly.

Okay. Are the major distributors showing interest in increasing their commitment to you regarding market share? I'm aware that they are cutting back, correct?

When you say cutting back, are you referring to their inventory or the rumors about them cutting heads? Or when you say cutting back?

The rumors of cutting heads.

Yes. So what you hear on that primarily is a wine focus because wine has been quite a laggard in the business. So most of what we hear on that is in their wine portfolio. You got to remember, the two major wholesalers in the U.S. tend to firewall spirit sales from wine sales. Okay? So they’ve had a bigger impact there. They’re optimizing their structure there. Once again, they’re private companies. You can only go by what you hear or gets reported. So I don’t read that as a sign. Actually, if what they’re saying or what we hear is true, I think it’s a positive thing for spirits, okay, in overall consumption because they’re going to put more energy into what drives in profit. They’re not public companies. They’re private companies, but they want that money the same way. All – both of them – the big ones are leveraged and they need to generate it. And they’re going to take their energies and put it into the business that’s still there, and that’s the spirit sector.

Our next question comes from Marc Torrente with Wells Fargo.

You are into your typical contracting season now. I think this is when you have in the past made initial comments on visibility into the next year. So I guess, how much of your plan do you think is committed at this point for '25, either through existing multiyear contracts or new contract renewals? And just on this visibility you have, how confident are you with the security of those commitments? You called out some contract nonperformance in the quarter. So just any color there would be helpful.

Yes. As we look toward 2025, we have provided insights on revenue and profitability based on our analysis of the entire business, including the customers with whom we have contracts and those we've decided to move away from. Regarding sales, as was previously asked, we have examined our customers' sales history. I am confident about 2025. The visibility we have now is strong, but if we are seeing a decline in revenue, it is partly due to the reduction in the size of the business. We have sifted through many less favorable situations to focus on our core operations because, as Brandon and I have frequently discussed, we aim to deliver results we can stand by. It is our duty to return to you and state that we have completed our due diligence. Based on our current understanding, we are confident about our brown goods for 2025. While we are not satisfied with the revenue and profit projections for brown goods in 2025, we have faith in them, and this confidence extends to our analysts, investors, Board, and employees.

Okay. And then how much inventory do you think needs to be worked through out there? Previously, it sounded like you're generally comfortable with what was sort of out there in the channel from, I guess, the selling standpoint. Any more specifics on managing production versus supply? Is this going to be temporary pullbacks? Are there more fixed costs that you can address? And I guess, what are you hearing from actions of other suppliers who have also recently brought on capacity?

Yes. The question regarding the amount of inventory is a good one. We invest a lot of time trying to understand who holds what, including brokers and multinationals, as they also have significant inventory. We are continually analyzing this situation. Do we have complete visibility into it? No, we don't. That's the truth. Do we know what we've sold and what we see in some reports? Yes. There is inventory out there, and it is being held. One reason we haven't seen significant pricing pressure yet is that everyone seems to be waiting. Many are holding off on buying right now to see how things develop, including how their own inventory will perform. I’ve mentioned before that major suppliers in our industry are brand companies. You will start noticing that they are aging up their product offerings. For years, they couldn’t sell anything older than 4 years because we couldn’t keep up. Now they have inventory, so expect to see brands offering 7-year, 10-year, and even 12-year products. I'm not speculating they will flood the market, but they may sell some barrels. What will likely enter the market are private equity-backed companies and brokers who have invested in it. However, as Brandon and I have said many times, these situations are one-offs. Once they sell that inventory, the focus returns to the brands' growth. The excess inventory was created due to high optimism in the American whiskey industry. That optimism has lessened, leading people to pause and carefully evaluate the situation. Brandon, do you have anything to add?

Yes. As far as the cost, Markus, you’re exactly right. So firstly, in 2024, we have reduced our put-away on a net basis, north of 30%. So that work has already begun this year. And as David said, it’s going to continue next year as well. And yes, there’s a number of fixed costs that will need to be absorbed, and the team has been working now for some time already on addressing that to mitigate those as much as possible.

The next question comes from Ben Klieve with Lake Street.

I've got one on the Ingredient business. You noted an expectation that this business was going to improve here in the fourth quarter as some of the exports kind of dissipated and you brought in some new domestic customers. I'm wondering if you can kind of help parse out those two parts of the business? Can you talk about the kind of success year-to-date of the domestic business that gives you a sense of optimism in the fourth quarter? And then really, how material that export headwind has been, not only in the third quarter, but year-to-date?

Yes. Ben, I'll start. Yes. So for our specialty protein business, which is a very high-margin product line for us, a lot of those sales were in exports specifically to Japan historically. And that's been due to the strength of the U.S. dollar as it relates to the yen, that's been a tremendous headwind for us year-to-date. And while we did have some success in Q1 and Q2, the life cycle of a new sale for the Ingredients business takes time. And it can take anywhere from 2 to 3 to 4 quarters to get something specified into a new product and to actually make that sale. And there were two customers we had in mind for Q3 that we are anticipating, that we've made a lot of great ground with year-to-date. And those two customers, while they're still planning to purchase, it's now gotten pushed into Q4. So the good news is we are making a lot of progress on that, and we expect it to continue in Q4 and then into next year as well. Yes. Thanks for – let me clarify them. Yes, they are domestic. That's right.

The next question comes from Sean McGowan with ROTH Capital Markets.

First, a quick one. Would you expect can you hear me?

Yes. Yes, sir.

Okay. Yes. Do you expect, given the headwinds that you've described, that advertising as a percentage of revenue in '25 would be at a higher level than what we've seen in '24 so far?

Yes. We'll provide more detailed guidance in Q4. However, I can inform you that our plan and expectation remains to continue investing in Branded Spirits, allocating between 14% and 16% of net sales towards advertising and promotion. We believe this is a solid level, considering a significant portion of that expenditure supports our premium plus portfolio, which represents about half of our Branded Spirits sales. Currently, there is no shift in our perspective. We continue to see this as the future of the company and our path for growth moving forward.

Okay. And then kind of a more general question. Given not only the change in the landscape and your outlook, but also the change in the stock price, do you see a change in your capital allocation plans regarding share repurchases or acquisitions? Just general commentary there. Has there been a shift?

Yes, great question. We have discussed some of this already, but M&A continues to be a top priority for us. We're always looking to strengthen our position in Branded Spirits. Regarding capital expenditures, we've mentioned in the past that we see 2024 as the peak year for CapEx. This year, we expect to spend $78 million. We will provide a more detailed outlook for 2025 during the Q4 call, but it will be lower than this year. We are consistent in that approach. Additionally, another significant priority for capital allocation has shifted, and David has already indicated that it will focus on what we need for our own brands next year. This means that capital expenditures and the capital set aside should contribute positively to free cash flow, all else being equal. As for the dividend, we believe that the current payout is manageable and still an effective way to reward shareholders over time. On share repurchases, the Board approved a $100 million buyback plan in the first quarter with no set end date, making it open-ended. We have purchased about $10 million in shares to date. However, as we consider the future of the company and how to enhance shareholder value, we prioritize other initiatives ahead of share buybacks, although we will continue to monitor this area.

The next question comes from Mitch Pinheiro with Sturdivant.

So getting to the barrel distillate that you've put away, it's up like $40 million roughly year-over-year, and I know there's some inflation in those numbers. But is all that related to your own Branded Spirit brands?

Yes. Just to clarify, year-to-date we've put away on a net basis, Mitch, approximately $32 million worth of inventory. Last year, for the full year of 2023, we put away north of $51 million. So we are down more than 30% this year. And we expect that year-end put away to be $30 million to $35 million, which is up a little bit from what we've talked on previous calls, but really, that has less to do with our put-away in production and more to do with our less age sales coming in on the spot market. And yes, as we move forward, we feel really good about our inventory position. We feel like we put away record amounts in the last, say, 2 to 3 years. So we feel like we're in a unique position where we can hit pause for some time, as we plan to do in 2025, for our Distilling Solutions speculative put-away and monetize some of the inventory we have. Historically, the majority of our put-away has been for Distilling Solutions. That relationship has become less of a proportion to brands put away in 2024. And as David said, next year, our plan is, any barrel we put away at this point in time is going to be for our own brand spirits portfolio.

Yes, that's a helpful observation. However, I assume you wouldn't share this information, but I imagine the average age of your barrel distillate has been increasing over the years. I know you're setting aside more now, but you still had a significant amount before your increased put-away. Generally speaking, the age only adds more value, and all your premium whiskeys are older products, which are the ones seeing growth in the premium segment. So, can we assume that the age of your barrel distillate in inventory is now higher?

Yes, it's somewhat complicated because the barrels we sell and bottle are usually 3, 4 years old or more. On the other hand, anything we put away this year starts off at 0 years old, which maintains the average age. We don't reveal that information for competitive reasons, but it's relatively low, under 4 or 3 years. As David mentioned, the current market trend is to age products. This approach effectively connects our brand with consumers and sets us apart. Additionally, these barrels typically increase in value with age, which is unique to our industry. We have experienced this before; there was a time when we reduced our put-away, but that was brief as the market can change rapidly. The advantage is that we can plan for 2025, and if circumstances shift, we will adjust accordingly.

Yes. Mitch, I'd add just one piece of that. If you look at the brand side of the business that we have, we've intentionally grown our aged, okay, because of what I said earlier, we want to be able to age it up. So what Brandon is referring to is the MG put-away for future sales. And yes, I mean, we've been fortunate that we were able to sell those off, so we can refill them as fast as we can. So you've got 2 years ago, 1 year ago in there. But I do think, to your point, that it only gets better with time. Again, this market is not going away. It's going to push down. It's going to consolidate a little, but it's there. And this is why we were able to say we remain committed to this section of our business. It's a good cash-generating piece of our business. It's just not going to be our growth engine of the future.

We consider ourselves to be one of the few contract suppliers capable of offering both aged and new distillate at the scale we do. One of our strategies includes selling barrels internationally, where there is a strong demand for aged products along with the assurance of more aged options in the future. Our capacity to provide aged stock for sale while also producing distillate to sell later truly sets us apart as we move forward.

You expanded Luxco this year. Considering the slowdown, will that result in some negative leverage on fixed costs in 2025?

Yes, good question. We reserve the right to potentially provide more information on the Q4 call, but we do not anticipate that this type of headwind will be material at this time.

Okay. I'm surprised that the entire industry seemed to overlook the slowdown. I'm wondering if this was tied to any trends related to on-premise or off-premise sales that might have gone unnoticed. Additionally, I've noticed a trend that's been happening for a while: consumers are destocking their liquor cabinets. During the COVID era, when you could find your favorite brand, you would buy several bottles because you weren't sure if you would see them again. At some point, consumers became more comfortable with the availability of their preferred brands on the shelves, and instead of continuously buying, they started going through their own stocks and reducing their inventory. Have you conducted any research regarding this aspect in relation to the slowdown in consumption? Also, could you comment on how the on-premise versus off-premise sales might have contributed to the observed slowdown?

Okay. And I’ll take that one. So in general, if you think about on-premise versus off-premise, the mix is roughly the same, but the problem post-COVID, there’s not as many on-premises there were. So you’re still seeing that being relaunched over time. I’m not going to attribute that mix to the industry’s view on why it happened. I tend to take more of a macro view on this. I tend to think that we’re in the middle of an election. We’ve had all kinds of interesting things going on in the environment. Consumer spending is a little bit slower than this. I think there’s a lot of external pressures going on here that is making that consumer make different choices, all right? And so I don’t want to speculate on they’re selling more there or not selling more there. I’m attributing it to that consumer. I also bring it back to this COVID piece. Having done this for 30 years in the brands, what we’re selling back to is about what we should be in the industry. COVID was great for our industry for the period of time. And now when we all reflect back and we look at these last few years of correction, and it is inventory destocking at a wholesaler, it is inventory destocking in a pantry. You’ve got multitudes of variables coming to a head. Those two shall pass. Now what we all are terrible at doing, myself and everybody else in the industry is telling you exactly when that’s going to pass. You know why? Because we can’t read the consumers’ minds. We can only watch what they’re doing and react to their needs.

This concludes our question-and-answer session. I would like to turn the conference back over to David Bratcher for any closing remarks.

All right. Thank you very much, everybody, for listening. As we said, we’re not pleased with our results, but what I’d like to take a moment to remind everybody, the MGP is a transformation story. All right? We’ve clearly said what we intend to be in the future. We intend to become a premier branded spirits company. Transformation for MGP is nothing new. If you go back 10 years ago, MGP was a white goods producer. The margins were thin, very skinny. They transformed it into a contract brown good distilling. Their timing was perfect. They rolled the wave up. Now, and started with the acquisition of Luxco, they were transforming it into a branded spirits company. And since the day I took the seat on January 1, we have consistently said every earnings call, everything starting with the very first release of what we believe, we will become. That is the plan for the future. Yes, our brown goods business deteriorated faster than we anticipated. I think it deteriorated to some of the questions faster than anybody across the industry anticipated. But thank goodness, we have a vision of what we want to become. And that is a premier branded spirits company. That’s what I want our analysts, our investors, our employees, our Board, everyone to know it’s a transformation story, and we’re going to accomplish that mission. So with that, thank you for your interest in our company and for joining us today for our third quarter call, and we definitely look forward to talking to you in the fourth quarter.

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