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DATE
July 31, 2025 at 2:00 p.m. ET
Call participants
President and Chief Executive Officer — Julie Francis
Chief Financial Officer — Brandon Gall
Chief Operating Officer — Mark Davidson
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Risks
Brown goods: A fifty-four percent decline in brown goods sales within the Distilling Solutions segment led to a forty-six percent decrease in segment sales.
Mid and value brands: Management now expects mid- and value-tier branded spirits sales to decline by low double digits for fiscal 2025 versus fiscal 2024, versus an initial expectation of a mid- to high single-digit decline, due to intensified price competition and consumer caution.
Gross profit: Consolidated gross profit decreased thirty percent to $58.4 million, primarily due to lower gross profits in Distilling Solutions and Branded Spirits.
Industry inventory: Management acknowledged ongoing excess whiskey inventories and forecast the challenging environment in Distilling Solutions will persist into 2026.
Takeaways
Consolidated sales: $145.5 million, down twenty-four percent, driven by broad-based declines primarily in Distilling Solutions.
Adjusted EBITDA: Adjusted EBITDA decreased thirty-eight percent to $35.9 million, mainly due to decreased gross profits.
Net income: Net income was $14.4 million, down from the prior year period, with adjusted net income of $20.9 million, representing a forty-five percent decrease.
Branded Spirits segment sales: Branded Spirits segment sales were down five percent compared to the prior year period, with mid- and value-priced brands down double digits but Premium Plus sales were up one percent.
Premium Plus branded spirits: Premium Plus portfolio sales grew one percent compared to the prior year period, outperforming the broader category and offset by declines elsewhere in the portfolio.
Distilling Solutions sales: Distilling Solutions segment sales declined by forty-six percent, with brown goods sales declining fifty-four percent and white goods sales declining by twenty-seven percent following phased-out contracts and production reductions.
Ingredient Solutions sales: Ingredient Solutions sales increased by five percent, with specialty protein sales rising thirteen percent and a four percent decline in Fibersen specialty wheat starch sales.
Gross margin: Gross margin declined by three hundred fifty basis points to 40.1 percent, reflecting lower profitability.
SG&A expenses: SG&A expenses increased two percent compared to the prior year period, but were down eight percent when excluding higher incentive compensation accruals.
Advertising and promotion expenses: Advertising and promotion expenses declined forty-one percent compared to the prior year period, now representing ten percent of branded spirits sales and expected to reach about twelve percent of Branded Spirits segment sales.
Capital expenditures: Capital expenditures were $10.6 million; full-year capital expenditures guidance lowered to $32.5 million, more than a fifty percent reduction in capital expenditures compared to 2024.
Cash flow from operations: Cash flow from operations year-to-date was $56.4 million. Cash flow from operations was up $26.8 million compared to the prior year period, driven mainly by working capital changes.
Net barrel inventory put away: $14.7 million year-to-date net barrel inventory put away, down twenty-eight percent versus the prior year period; expected full-year range is $15 million to $20 million.
Net debt leverage ratio: Net debt leverage ratio was approximately 1.8x.
Full-year 2025 guidance reaffirmed: Net sales $520 million to $540 million, adjusted EBITDA $105 million to $115 million, adjusted basic EPS $2.45 to $2.75, and gross margins in the upper forty percent for Branded Spirits segment.
Effective tax rate: Expected to remain at approximately twenty-five percent.
Tariffs: Potential financial impacts of tariffs are not incorporated into guidance; management is actively monitoring the risk.
Distribution change: Breakthrough Beverage Group appointed for California distribution; no material impact expected on 2025 results.
Biofuel plant: New plant operational since July and expected to deliver long-term cost mitigation on waste starch disposal.
Premium Plus growth outlook: Upgraded to low single-digit growth for the Premium Plus segment compared to 2024, an improvement from initial guidance.
Mid and value portfolio outlook: Now expected to be down low double digits versus fiscal 2024, below prior expectations.
Warehouse service sales: Down five percent due to the phasing out of a number of white goods customer contracts in the wake of the Atchison Distillery closure as well as reduced production volumes of co-products.
Customer contracts: Substantially all contracts in place at the start of the year have either been confirmed or amended, with none canceled.
Summary
MGP Ingredients(MGPI 2.18%) reported double-digit declines in sales and profitability for the second quarter of 2025, with results largely in line with management expectations given anticipated headwinds in Distilling Solutions and Branded Spirits mid- and value-tiers. Sequential improvement was observed across all segments, and the company reaffirmed its full-year financial guidance, including sales, adjusted earnings, and margin targets, despite challenging market dynamics. Leadership highlighted strong working capital management, reduced capital expenditure commitments, and progress on operational and portfolio optimization, while confirming increased confidence in customer contract stability for the remainder of the year.
Management expects the industry-wide whiskey production decline—down fourteen percent over the last twelve months, twenty-four percent over the last six months, and twenty-eight percent over the last three months per TTB data through April 2025—to support eventual inventory normalization, but sees the challenging environment persisting through 2026.
Premium Plus portfolio brands, particularly Penelope, drove category outperformance and received incremental advertising and promotion investment, with new retail innovations and SKUs noted as accelerators for future growth.
Ingredient Solutions segment delivered sequential and year-over-year improvement, led by strong recovery in specialty wheat protein, successful domestic re-commercialization after lower exports, and onboarding of new North American customers.
Industry glossary
Put away: The process of transferring whiskey into barrels for aging and booking as inventory to be held for future sale, usually impacting near- and medium-term cash flows and production planning.
Brown goods: Distilled spirits such as whiskey and bourbon that are aged in barrels, as distinguished from "white goods" like vodka and gin.
Premium Plus: Premium and above tier of branded spirits, typically distinguished by higher price points, branding, and positioning; a key growth portfolio for the company.
Advertising and promotion (A&P): Advertising and promotion expenditures, a common metric for marketing investment intensity within CPG and spirits brands.
TTB: Alcohol and Tobacco Tax and Trade Bureau, the U.S. federal agency overseeing spirits production and reporting such as industry production levels.
Gross margin: Measurement of a company's gross profit as a percentage of sales revenue, representing the efficiency of production and product profitability.
Full Conference Call Transcript
Brandon Gall: Thank you, Amit. Good morning, everyone. As we announced last week, after a thorough search, our board of directors appointed Julie Francis as our next President and CEO. I strongly believe that Julie is the right person to lead us forward during this important time for the company. She brings a strong strategic lens, deep commercial expertise, and a proven ability to build and lead teams. Her fresh perspectives and track record of success at global industry-leading CPG companies, particularly in the beverage segment, will be critical as we advance our long-term vision of becoming a premier branded spirits company. Julie has taken the reins during a challenging time for our industry.
She's wasting no time diving into all aspects of our business. There is no doubt she's the right person for the job, and I look forward to partnering with her during this next chapter. Julie, welcome aboard.
Julie Francis: Thanks, Brandon. And hello, everyone. I'm thrilled to be joining the MGP Ingredients team. Let me first thank Brandon and the executive team and our MGP family for their hard work, collaboration, and dedication in delivering solid second quarter results. I've had the opportunity to attend our leadership and business meetings and to also meet individually with our broader teams last week. And what I've learned has only reinforced what drew me to this opportunity. First and foremost, MGP Ingredients' culture. There's something unique about working in the type of culture where everyone is deeply passionate and takes great pride in our business, in their teams, and our people.
MGP Ingredients has an integrated partnership approach to customers and suppliers as well as a deep commitment to the communities we serve. There is a certain responsibility we have when we're a part of these teams, and I really like and thrive in that type of culture. Second, a growth mindset. MGP Ingredients' unique capabilities, impeccable reputation, and product offerings give us the right to win in each of the industries in which we compete. More importantly, I believe that all three businesses have a significant growth runway which can be unlocked as we operate with clarity, operational, and executional excellence. With integrity, toughness, and agility across all of our platforms and functions.
I'm energized by the opportunity ahead, confident in our ability to build on our progress, and look forward to working with all of you in the investor community. With that, I will turn the call back to Brandon for the business update.
Brandon Gall: Thanks, Julie. Our second quarter 2025 performance demonstrated the strength of the foundation Julie mentioned, as all three of our segments showed sequential improvements relative to the 2025. Overall, second quarter results came in largely as expected. The distilling solutions also progressed in line with our expectations with improving stability and visibility. At a high level, we believe all three business segments are on a solid trajectory. We're seeing progress against the priorities we laid out earlier in the year. And I'm excited to build on that momentum as we move into the second half of the year.
Specifically for the 2025, as expected, consolidated sales and adjusted EBITDA decreased 24% and 38% respectively from the prior year period, primarily due to the anticipated decline in distilling solutions performance. Branded Spirits segment sales declined by 5%, but our premium plus portfolio posted positive growth. Adjusted earnings per common share declined to $0.97 per share, while year-to-date operating cash flows increased to $56.4 million versus $29.6 million in the same period last year. With another quarter of solid execution, we remain on track to achieve our full-year 2025 sales and adjusted earnings guidance. Mark will provide greater detail on our quarterly results shortly.
Let me take the next few minutes to highlight the current operating environment and the progress we're making against each of our key initiatives. The external environment remains challenging and fluid. Overall economic uncertainty, persistent inflation, and higher interest rates continue to weigh on consumer sentiment, which fell to a multi-year low during the quarter. Sentiment improved a bit last month, but consumer confidence in this backdrop continues to pressure discretionary spending leading to more cautious purchasing behaviors. Despite the setting, we continue to execute with discipline and make progress on our key initiatives. Starting with the Branded Experience segment. Our key initiative for the branded spirit segment is focus.
We believe our decision to focus on fewer but more attractive growth opportunities is working as our Premium Plus portfolio again outperformed the broader category with 1% growth for the second quarter compared to the year-ago period. Our key brands Penelope, El Mejor, and Rebel One Hundred are particularly well-positioned to benefit from our focus initiative as we continue to prioritize investments behind these brands. For the full year, we expect a healthy double-digit percentage increase in the A&P spending for these brands collectively, even as our overall A&P spend will be down as we've mentioned on the last calls.
While our focus brands delivered positive dollar sales growth in the latest thirteen-week period ending on July 12, as reported by Nielsen. Let me briefly talk about the terrific growth trajectory of Penelope, the key driver of our continued Premium Plus performance. Penelope is our flagship premium plus offering in the American whiskey category, with a brand identity that's built on innovation, craftsmanship, authenticity, and accessible price points. Attributes that resonate strongly with today's bourbon drinkers. Penelope Wheated is expanding the brand's strong foundation by capitalizing on consumer demand for more approachable bourbon with a softer, smoother taste profile. Penelope Wheated continues to build on its strong start with continued expansion into new markets.
Penelope is also expanding its ready-to-pour offerings to tap into the faster-growing cocktail segment. Penelope Peach Old Fashion is already among the top 15 750ml premium plus RTP offerings in Nielsen. And we plan to further expand in NLP's RTP offerings with the introduction of Penelope Black Walnut Old Fashioned in the third quarter. This continued momentum has made Penelope one of the fastest-growing Premium Plus American whiskey brands based on the retail dollar sales growth reported by Nielsen, for the past four, thirteen, and fifty-two-week periods ending on July 12. Penelope has been the second fastest-growing of the top 30 premium plus American whiskey brands.
With a full pipeline of planned innovation, we expect this broad-based momentum to continue through the rest of the year. Given year-to-date trends, we now expect our Premium Plus segment to grow by low single digits for the full year compared to 2024. An improvement from our initial projections. At the same time, as expected, sales of our mid and value tier brands remained softer in the second quarter due to heightened price competition in select pockets. As I mentioned last quarter, we are taking appropriate actions, including greater price support to make these offerings more appealing.
Although the rate of decline for sales in these price tiers improved sequentially in the second quarter, we believe the impact of these actions on shipments is still taking effect. While we remain encouraged, we now expect the mid and value price tier to be down low double digits for 2025 compared to 2024. Versus our initial expectations of mid to high single-digit declines. Earlier this week, we announced our decision to partner with Breakthrough Beverage Group for distribution of our products in California. Breakthrough is one of the leading beverage distributors in the country.
And their proven track record and deep expertise in the premium plus categories made them the ideal choice to drive growth for us in this market. Our NDC continues to be our distributor in many states, and they remain a valuable partner. We're currently working with both companies in an effort to minimize any potential disruptions during the transition and do not expect this transition to have a material financial impact on our 2025 results. For the Distilling Solutions segment, our key initiative to strengthen partnership with key customers continues to show positive results.
While brown goods volume and pricing were down during the quarter, compared to the second quarter of 2024, they were consistent with our expectations and more importantly, continued to show signs of stabilization. The brown goods industry is navigating a challenging environment, one that we expect to persist in 2026. We're responding by listening carefully to our customers' needs, offering them tailored solutions, and demonstrating flexibility with respect to quantities, pricing, and timing. As expected, a number of our large strategic customers after completing their existing contracts have expressed the need to temporarily pause their whiskey purchases, which continues to be reflected in our full-year guidance.
In most cases, these brands are well established with a taste profile that we are uniquely positioned to support. But importantly, these customers remain engaged with our team pertaining to their future needs for brown goods as well as other products we're able to offer, including premium gin and neutral grain spirits. As a result, we continue to expect the Distilling Solutions first half sales and profits to be stronger than the second half. We are complementing our refreshed commercial outreach by taking a disciplined approach to our brown goods production levels and optimizing our cost structure by collaborating with our suppliers and adjusting our distillery downtimes.
As I mentioned last quarter, we are also significantly reducing our whiskey put away to manage our aging whiskey inventory levels and our cash flows. More broadly, overall American whiskey production appears to be responding to the current environment. The year-over-year decline in total industry whiskey production which began late last year has picked up pace. The latest available TTV data through April 2025 shows even deeper production cuts. With total whiskey production in the U.S. now down 14% for the last twelve months, down 24% in the last six months, and down 28% in the last three months.
While challenges remain, including excess whiskey inventories and soft demand, the actions being taken across the industry are constructive and we believe that increasing industry discipline and rational behavior combined with our decisive actions, position us to emerge with a stronger competitive position. I'd like to take a moment to acknowledge the entire Distilling Solutions team for their bold actions to make difficult but necessary adjustments over the course of the year. Since our Q4 2024 earnings call, not only have no customers canceled their contracts, but substantially all have either confirmed or amended their purchases.
As a result of the commitment, we have shown our customers we're encouraged by the commitment they've shown us in return and now have higher confidence in the remainder of 2025 and increasingly 2026. Turning to our Ingredient Solutions segment. The sequential performance improvements in the second quarter give me confidence that our key initiative to achieve operational and commercial executional excellence in our Ingredient Solutions segment is on track. Although still present in the second quarter, supply challenges that impacted segment results in the first quarter moderated as our team focused on increasing manufacturing reliability, simplifying processes, and aligning resources.
We're increasing our capital investments in the Acheson plant, with the goal of further streamlining operations, unlocking additional growth capabilities, and improving operational consistency. Our commercial execution also improved during the quarter. Strong consumer demand for higher protein and fiber in their diets is a powerful driver for our specialty starch and protein offerings. Our Fibersen branded specialty starch continues to gain traction across a growing number of food categories. While our sales team continues to gain North American-based customers, for our RISE branded specialty protein offerings. As expected, our new biofuel plant came online in July.
The new plant is a key component of our efforts to mitigate costs associated with the disposal of the waste starch stream, which is a byproduct of our ingredients facility. While we continue to expect a new plant to mitigate these costs in the long term, realizing the full extent of these cost savings will take time. As we ramp up production and fully commercialize our end product. Overall, despite the soft start to the year, we believe the Ingredient Solutions segment remains well-positioned to post higher sales and profitability in the second half of the full year 2025 compared to the first half. Across the organization, our productivity initiatives remain on track.
And are expected to make substantial contributions to our full-year outlook. Our balance sheet remains a key strength, particularly given the higher liquidity and flexibility following the upsizing of our credit facility and the extension of our private placement shelf in the first half of the year. Our net debt leverage remains under two times and we continue to generate cash to support our capital allocation priorities. Given the solid results in the quarter, we are reaffirming our 2025 guidance we continue to expect net sales in the $520 to $540 million range. Adjusted EBITDA in the $105 million to $115 million range, and adjusted basic earnings per share in the $2.45 to $2.75 range.
We now expect average shares outstanding of approximately 21.4 million for the full year and capital expenditures of approximately $32.5 million. Our full-year effective tax rate remains unchanged at approximately 25%. Within our Branded Spirits segment, we now expect Premium Plus sales to be up low single digits for the year. However, we expect sales of our mid and value-priced portfolio and other to be below our initial expectations, leading to a modest decline in Branded Spirits segment sales for the full year 2025 as compared to 2024. We continue to expect Branded Spirits segment gross margins to be in the upper 40% range. Turning to tariffs, similar to our industry peers, we're not completely immune to tariff impacts.
And continue to closely monitor the tariff environment. Particularly related to exemptions for goods compliant with The U.S.-Mexico Canada agreement and the potential impact of tariffs on consumer purchasing behavior. Given the evolving situation regarding the implementation and timing of tariffs, their potential financial impacts are not included in our current outlook. And we continue to look across our supply chain for additional opportunities to mitigate any potential headwinds. Let me now hand it over to Mark for a review of the second quarter results.
Mark Davidson: Thank you, Brandon. For the 2025, consolidated sales decreased 24% to $145.5 million compared to the year-ago period. Within our segments, Branded Spirits sales decreased by 5% due to the expected double-digit decline in our mid and value-priced brands driven by lower volumes of certain tequila, liqueur, and cordial brands. Our Premium Plus sales increased by 1% reflecting continued momentum in our focused brands, in particular Penelope. Distilling Solutions segment sales declined by 46% primarily driven by a 54% decline in brown goods sales.
Second quarter warehouse service sales decreased by 5% while white goods sales declined by 27% due to the phasing out of a number of white goods customer contracts in the wake of the Atchison Distillery closure as well as reduced production volumes of co-products primarily dried distillers grains. Ingredient Solutions sales increased by 5% during the second quarter. Driven by a strong rebound in our specialty wheat protein sales. Following a 26% decline in the first quarter, specialty protein sales increased by 13% in the second quarter as we successfully commercialized new customers for these product offerings. Our Fibersen branded specialty wheat starch sales declined 4% below year-ago levels.
Consolidated gross profit decreased 30% to $58.4 million primarily due to lower gross profits in the Distilling Solutions and Branded Spirits segments. Gross margin declined by 350 basis points to 40.1%. First quarter SG&A expenses increased 2% compared to the prior year period. However, excluding the impact of a higher incentive compensation accrual in 2025 as we rebuild incentives, SG&A expense decreased by 8% driven primarily by our cost savings initiatives. Advertising and promotion expenses declined 41% compared to the prior year as we lapped elevated spend for certain advertising campaigns during the year-ago quarter, as well as continued realignment or spend behind our most attractive growth opportunities.
Although we continue to expect Branded Spirit's A&P spend to be approximately 12% of segment sales for the full year 2025, it represented 10% of branded spirits sales in the second quarter. Largely due to the timing of certain advertising campaigns within the year. Second quarter adjusted EBITDA decreased 38% to $35.9 million due primarily to lower gross profits as previously discussed. Net income for the second quarter declined to $14.4 million primarily due to a lower operating performance and an $8 million increase in the fair value of the contingent consideration liability related to the continued improved performance of the Penelope brand. On an adjusted basis, net income decreased 45% to $20.9 million.
Basic earnings per common share decreased $0.67 per share while adjusted basic EPS decreased 43% to $0.97 per share. We continue to prioritize strong cash generation by managing our working capital and reducing our barrel inventory put away. Our year-to-date cash flow from operations was $56.4 million up $26.8 million compared to the prior year period driven primarily by favorable working capital changes. Our year-to-date net barrel inventory put away of $14.7 million was down 28% versus the prior year period and we continue to expect net put away of $15 million to $20 million for the full year. Capital expenditures were $10.6 million during the second quarter and $18.7 million year-to-date.
We now expect full-year 2025 capital expenditures of approximately $32.5 million a reduction of more than 50% compared to 2024 and down from our previous expectations of $36 million due to decreased investment in certain barrel warehouse projects to better align our warehouse investment with customer demand. Our balance sheet remains healthy and we remain well with debt totaling $297.1 million as of the end of the second quarter. Leaving us with more than $600 million in availability under our debt facilities. We ended the quarter with a cash position of $17.3 million and our net debt leverage ratio remained largely stable at approximately 1.8 times as of 06/30/2025.
With that, let me hand it over to Brandon before opening for questions.
Brandon Gall: To close, given the sequential improved results in the second quarter, we remain on track to deliver our full-year outlook. Our teams are executing with purposeful focus, agility, and a targeted approach. Leading to continued momentum across key branded segments, improved execution in the ingredients business, and greater visibility and stability in the distilling solutions business. We are excited to have Julie on the team to lead us forward on our journey in becoming a premier branded spirits company. That concludes our prepared remarks. Operator, ready to begin the question and answer portion of the call.
Operator: Thank you. We will now begin the question and answer session. And our first question comes from Bill Chappell from Truist Securities. Please go ahead.
Bill Chappell: Good morning, Thanks. Hey, Bill. Morning. And welcome, Julie. Aboard to wanted to I guess, first, talk a little bit more about the new distillate contracts. And kind of where we are and visibility from that standpoint? I mean, I guess, question one, are you now through all or a high majority of the contract kind of negotiations to discussions, to can you see, assuming that they hold in place, of where we will hit a low watermark in terms of revenue? Over the next few quarters. And three, what's your sense that these are conservative enough or overly conservative in terms of kind of what they're ordering in mean, historically, yeah.
Manufacturer or brands are overly conservative until they run out and then they add more. So just trying to understand maybe a little more color on that whole process.
Brandon Gall: Yeah. So as we as we shared in the, prepared remarks, well, firstly, you know, we just couldn't be any more proud of our distilling solutions team. Their outreach and partnership-first approach is really, you know, resonating with our customers and with our business. And as of today, no contracts that we have with customers in February have been canceled. In fact, substantially all bill have been either confirmed or amended. You know, the little we have remaining are progressing well. And, a lot of, you know, maybe the holdup, if you wanna describe it as that, maybe have to do with, possibly extending the agreement, in some cases. So very, very encouraged. You know, by the team's progress there.
As far as the visibility goes, this gives us really, really great visibility for the remainder of 2025. You know, we can talk about this more in a moment, but, the back half is gonna be relatively lighter than the first half due to, some contracts that were reset. But even with that, that was expected. That was contemplated in our guide at the beginning of the year and in our current guide. So we feel that things are coming in as we had projected in some cases slightly better. So that's through 2025. We've also stated consistently that this dynamic is gonna persist in '26.
And, while some of our customers are taking temporary pauses in their purchasing as they want to balance out and work down their inventory. We're confident that we're going to remain their long-term partner and supplier. We just don't know exactly when that's gonna resume and at what type of volume. So, we need a little bit more time there in the dynamic environment to work that out with them. And then as far as conservatism goes, Bill, you know, the quarter came in really pretty much in line with our expectations.
Again, some of the renegotiations that we've had have come in slightly better collectively, and we've had a little bit better performance in age than expected at the beginning of the year. But other than that, things are playing out as we had thought. We still continue to expect distilling solution sales, excuse me, to be down 50%. On the year. And, we earlier stated that gross profit dollars for the segment are going to be down 65%. That latter number may come in a little bit better for the reasons we described.
But other than that, we feel like, we're being right down the middle in terms of our projections and we're very, very confident in the way things have come in and are playing out so far.
Bill Chappell: And so just to make sure back to the age, I mean, your original expectations were little to no aged sales this year. So maybe you can talk a little bit of why it's better other than just being conservative, like where you're seeing the orders and how you manage, I mean, I imagine everybody wants a discount. Somebody could come and buy some discounted product the back half of the year? Or are you just saying holding off because it's it's we're not going give it away? Not going to go bad?
Brandon Gall: Yeah. Great question. So we're really seeing it in a couple of pockets. Firstly, our again, going back to our partnership approach, our increased outreach to our craft and regional customers is resonating. And, you know, it's almost always their preference to deal directly with MGP and our team than to go through a third-party broker. And almost in all these cases, they're already using our liquid. And so the ability to go to them directly has been a great step forward in our relationship there. So that's part of the improvement we're seeing this year.
But additionally, if there are, in some instances, customers that are coming to market for the first time, for a number of reasons, and, they wanna buy they wanna buy aged, but they view this as a long-term plan and program. What they're trying to do. So they also want someone who can provide a new distillate. As we've said a number of times, we're unique in that we can offer both in both breadth and scale. And so we're starting to see some traction there as well, Bill.
Bill Chappell: Okay. Great. Thanks so much.
Brandon Gall: You bet. Thank you, Bill.
Operator: The next question comes from Mark Torrente from Wells Fargo. Please go ahead.
Mark Torrente: Hey, good Thanks for the question. Julie, congratulations. We look forward to working with you.
Julie Francis: Thanks, Mark. Appreciate it.
Mark Torrente: Yep. First question, brand and margin stood out. I think highest GMs and the EBITDA since that acquisition. Any additional color on gross margin phasing from here? And then advertising came down materially, perhaps from timing, but we know the strategy for this year is to be more targeted around central brands. There seems to be success. What's been working? What else do you need to adjust? And any other changes in branded to consider with price and positioning or distribution as we go forward?
Brandon Gall: Alright. I think I got most of that, Mark. You may have to help me fill out some pieces I missed. But yeah, brand, brand spirits margins were very strong in the quarter. You know, that's really reflective of our performance of our premium plus portfolio and the proportionate mix we're seeing over time there. We do think in the back half of the year, margins, may be relatively lighter than that. As we expect value to continue to be under pressure. And, the gross profit dollars associated with that, you know, are going to continue to be a bit of a headwind.
A and p was down quite a bit in the quarter, but it sticks out more only because Q2 of last year was very high due to some programming we did around college basketball. That we didn't redo again this year. We're still expecting for the year A and P for our branded spirits to be roughly 12%. Of net sales, which is down from the, you know, roughly 15% we've been seeing. However, when you take that A and P investment and do it as a percentage of our premium plus brands, which is where all that money is going, that number is actually closer to 25%. Which is which is we all know, well above the industry averages.
What's working? Focus. The key initiative here is focus. We've got a lot of great we've got a lot of great brands. And sometimes, we don't know where to where to where to begin and where to where to focus. So we've really tried to improve that this year. In both our sales and our marketing execution. And, Penelope, Elmayor, and Rebel are all are all know, reacting to that in a positive way. And so that's what we're seeing. That's what working as far as, you know, further pricing in mid and value, I think was your last question, Mark. Look, Value especially is somewhere that's getting increasingly competitive.
Whether it's in, you know, promotions, taking down line pricing, or even rebates. It seems like everything's on the table. And, you know, they're just so many things we can or want to do there. And so we'd rather use our marketing dollars in support for the higher margin premium plus brands in our portfolio. But we but we aren't afraid to adjust our line pricing to adjust to our competitive set and what they're doing.
Mark Torrente: Okay. Thanks for that color. And then, I guess, more on, just billing sales and earnings were a bit better than at least we were thinking, but seemed more in line with your own expectations. Maybe, just any more on how you're thinking about the phasing front half versus back half in the context of the full year? I guess, any upside in the front half could seem to imply more or a deeper impact in into the back half and perhaps even in the front half of '26. So if margins were to hold in better than expected as they seem to be, is that coming from more cost control?
Is that where just pricing is falling in on these contract resets? Is that mix or a combination of all of the above? Thanks.
Brandon Gall: Yeah, Mark. I'll start with that one. Yeah, you know, as we've mentioned, there's some phasing of contracts and as a result, you know, with that with the 50% decline in sales for the full year, would imply a big decrease in H from H1 on the gross profit standpoint, as Brandon mentioned, we expect that 65% decline that we previously guided to be a little bit better. And where we're seeing that benefit is in, pricing. Negotiations have gone well. And so we've seen some favorability there, again, as we've been able to successfully partner with our Distilling Solutions customers. And so we're encouraged by that. We see that show through in pricing.
And that's where we see that margin and gross profit benefit coming through in the back half.
Mark Torrente: Yes. How you know, and the only thing I'd add to that is you know, just due to the lower sales and lower production volume in the 30% margins for the segment. Which would imply that the back half is going to be probably closer to the mid-twenties levels.
Operator: The next question comes from Robert Moskow from TD Cowen. Please go ahead.
Seamus Cassidy: Hi, this is Seamus on for Rob Moskow. And thanks for the question and welcome Julie as well. So my question is on distilling. You cited the TTP data, which has pretty notable production cuts. In light of that, could you sort of help frame where we are in terms of inventory rationalization at the industry level? And then secondly, would you describe the competitive environment as sensible still especially in the context of your proactive engagement on pricing negotiations?
Brandon Gall: Yeah. So on the TTB, yeah, very encouraging signs. And you know, from an overall inventory dynamic perspective. We still have a ways to go, Seamus. This is not gonna be an overnight fix. However, know, and as we said, this is gonna this is gonna go into 2026, and we still feel that way. You know? But what we are seeing is, you know, in tough environments like these, we keep coming back to it. But partnerships matter. You know, customers and suppliers wanna line up with those that they see a long-term relationship with. And, you know, the commitment that the team is showing out in the market is demonstrating that commitment.
And, you know, I feel that know, our customers are responding, both current customers and new. We are actually adding customers in this environment. And so we're very encouraged by all that. So, you know, definitely, this dynamic is gonna persist, but we do feel you know, as a leading contract, distiller for American whiskey, We were positioned well coming into this, and we feel like we're doing all the right things, and we're controlling the controllables, you know, to be better positioned coming out of it.
Seamus Cassidy: Great. Thank you.
Operator: The next question? And the next question comes from Sean McGowan from ROTH Capital Partners. Please go ahead.
Sean McGowan: Thank you. Good to talk again. Thanks, Sean. I'll welcome to your commentary. Julie, thanks. My question is on could you give us some color on the difference in your mind between paused purchase and a canceled contract? Like how solid are those contracts if they've been paused? Is that pause like indefinite?
Brandon Gall: Yeah. Their purchasing has been paused. The contract came to an end and typically these, you know, come up for renewal and, you know, they're negotiated as all contracts are. But, you know, we got the sense when we really began our at the beginning of the year that, you know, there may be a pause coming. We have know, we can see inventory and pull rates on our customers with barrels in our warehouse. So we were able to have that open dialogue. And, look, you know, like I said, Sean, these are, especially in the cases I mentioned, and we're talking about, very large, multinational customers. With well-established very large brands.
And you know, historically, there's very little, customer churning in instances like these. Our relationship with these customers in a lot of cases goes back years and years and years and years. And the unique the uniqueness of our product and taste profile you know, we think is a very strong positive for that rep as it represents their brand. With their consumers. So, you know, we do view it that way as a temporary pause. And we're also confident that it will resume. It may not resume at the same volumes, it left off at when they when it does pick back up. But that's okay. We'll work back into it with them.
And in the meantime, we're gonna look to partner in different ways. Whether it's through other off product offerings like Gin and GNS for vodka? Or in helping them, you know, find homes for their inventory or other creative solutions for them to benefit their business.
Sean McGowan: Thanks for that clarity. And one little other clarification question. On the SG&A, in the quarter, I think you mentioned that there were some items in there related to incentive comp. That if you exclude that the SG&A was down a little bit more. Should we expect that elevated level of incentive comp to continue the subsequent quarters or was that kind of a one-time thing?
Brandon Gall: Yes. No, we expect SG&A as a percentage of sales in Q2 to persist in the back half of the year. And additionally, yes, this is a reinstatement of the incentive comps. So it is year over year gonna stick out a little bit more. But know, the important thing there is going back to controlling what we can control our cost savings initiatives and productivity initiatives at the beginning of the year. If you peel that out, it's actually showing, you know, an 8% decline in adjusted SG&A. So, very proud of the team. For coming together and driving those savings. And, yeah, we look forward to finding more as the year goes on.
Sean McGowan: Okay. Alright. Thank you very much.
Julie Francis: Thank you, Sean.
Operator: And the next question comes from Mitch Pinheiro from Sturtevant and Company. Please go ahead.
Mitch Pinheiro: And welcome, Julie. I just had a couple questions for you. Okay. So you talk about visibility. You've you've talking to your customers, you have good visibility. We do see visibility, think we're going to have significant downward pressure in sales for a while on the distilling side. Like what does the visibility do for you? I mean, we seeing it is that visibility enabling you to maintain 30% gross margin Or do you think the visibility is more advantageous than that And you know, and may maybe it will help you to improve the margins from these current levels?
Brandon Gall: Yeah. So, you know, what the visibility gives more than anything is confidence. We can see the proverbial bottom of the pool a little bit more clearly and what it also allows us to do is set ourselves up for operational success. So we know how many shifts run, you know, we know what campaigns to run product-wise, we know how many operators we need on-site and so on. So it's visibility in the numbers, but also the visibility in being able to you know, operate efficiently. And, you know, this, you know, this pullback the overall market happened pretty fast, and the team's done a very, very nice job of reacting.
But, to your gross margin question, if we're gonna be in the mid-twenties, in the back half, of, 2025, You know, we're doing what we can to, chip away at that and get those numbers up. And, whether it's through, finding greater efficiencies, or doing what makes us unique. So one of those, examples is we're one of the only contract distillers of American whiskey that can also distill GNS and premium gin for our customers. And, while it's not necessarily as high a price as brown goods, it's an excellent way to gain efficiencies and scale in our facility. So and also, it's an excellent way to further partner with our customers in these hard times.
So you know, there's even proactive commercial activities that can actually improve the margin profile. So, know, we're hopeful, Mitch, to answer your question in a long way. That, you know, we're gonna keep chipping away, and, we're gonna get those margins up over time.
Mitch Pinheiro: K. And then how I you know you know, so I think I heard you say that you expect put away net put away for 2025 to be in the 15,000,000 to $20,000,000 range. Is that correct?
Brandon Gall: That's right. That's correct.
Mitch Pinheiro: So I mean, is that I mean, how's that foot with, you know, just, you know, the overall slowdown? Is this 15,000,000 to $20,000,000 of net put away sort of specific juice for certain customers that you need to do. And there's, you'll and there's a you know, there's a chunk of your inventory that's sitting there sort of just unaccounted for.
Brandon Gall: Yeah. Most of it most of our put away is for our own brands. Okay. So those are brands like, Penelope, Rebel, and so on. So, that's where most of our 15 to 20,000,000 is going. And then, you know, the pockets of, put away that we are doing for distilling, solutions, have more to do with long-term agreements, to supply age in the future. For potential customers and for current customers. So there's some of that contemplated in there as well. But, you know, what we're all in a really unique position to do in any in any quarter or any month is, you know, find good opportunities in the market. Okay?
So we've got a we've got as good of a feel as anyone as to value. And so if there are barrels out there, that we know are not only unique in but we can also monetize, in a in a better in a better way. We'll go out and buy those. The open market and we can then resell them We could also dump them in bottle them in our own brands. So, that's also factoring into that 15 to 20,000,000 niche. So, that's just a little bit of context around, you know, what that consists of and how we approach it.
Mitch Pinheiro: Yeah. That's helpful. And then, you know, with sort of the ready to drink segment sort of really helping spirits industry. At least in terms of volume. Are you doing or are you participating in any of that growth through obviously through third-party brands?
Brandon Gall: Yeah, absolutely. And, you know, we've participated in that in white goods and GNS too. But also, you know, to your point, in American whiskey. So a lot of that know, tends to go out the door. It's it's not always aged. For very long, if at all. But, yeah, no. You can imagine that a lot of our customers who buy traditional bourbon for traditional brands would also lean on us for that capability as well.
Mitch Pinheiro: And then I guess, finally, just on the branded spirits side, So Penelope obviously has been you see SKUs increasing, you know, your distribution is increasing. Is I mean, what's the rest of the portfolio like obviously, if Penelope is doing really well, that would obviously imply some weakness there. Is there any particular brands that have been weaker than normal or also are shining besides your you've called out Rebel and well, Elmer, you're on the tequila side. So anything happening within the premium plus that's weaker than it should be or know, Love to hear that.
Brandon Gall: Yeah. So Penelope, like you said, is continuing just with tremendous momentum. The lifeblood of that brand is innovation and coming out with offerings and items that are, that resonate with consumers and meet them exactly where they are. Penelope Weeded is a great example of that, but even our recently introduced ready to ready to serve line or ready to pour line of Penelope Peach Old Fashioned. And, black walnut. Old Fashioned. Are great examples of doing exactly that. So very, very proud and pleased with the progress of Penelope. Elmayor too, you know, strong volumes in the quarter. We came out with new packaging and some new sides offerings, so we're excited for that.
And Rebel two showed sales growth, in the quarter. But there are offset offsets, Mitch, primarily in a couple of larger volume American whiskey brands. And there those are actually, you know, declines that we've been, you know, we've been dealing with in recent quarters as well. But we're not just sitting on our hands there. We are making, adjustments whether it's with line pricing to better position it with their respective competitive sets. But also with you know, innovation as well. And so, yeah, there's additional readiness serve products coming out possibly across other parts of our portfolio. Albeit at a different price points than Penelope. So, so, you know, that may round out, our premium plus.
Price tier for you better, Mitch.
Mitch Pinheiro: Alright. Well, appreciate the insight. Thank you.
Brandon Gall: Thank you, Mitch.
Operator: And the next question comes from Ben Klieve from Lake Street Capital Markets. Please go ahead.
Ben Klieve: Alright. Thanks for taking my And good morning, everybody. And Julie, congratulations on the on the new role. Couple of questions on the ingredient segment. It's great to see year over year growth both on top line and on earnings here. I have two questions. First one is, Brandon, I'm wondering if you can give us an update on the challenges in the export market specific to this segment. And both on a kind of sequential basis and year over year basis, what that impact was in the second quarter? And then kind of if you have any insights regarding the export opportunity in the back half of the year?
Brandon Gall: Yeah. So you know, as it relates to export with, ingredient solutions, what we're really talking about there is our specialty protein product line specifically our Arise specialty protein. And, as you recall, most of that for a long time has been sold, with a long-term partner into Japan. And as we've discussed last year, they started they began really slowing down their purchases. And so, was a little bit a little bit of a surprise at the time. But the team has done a great job in re you know, re commercializing that Arise line in North America. With new and existing customers. And, and, you know, the demand from Japan is still there.
Not at the same volumes that we've seen historically. But interestingly enough, as, we look into next year, they're looking to possibly increase their orders. But the, you know, the important thing is that, we've been able to find a home for that. Not quite at the same pricing that we may have been getting prior, but still at very profitable pricing. So, very proud of the team and their ability to react to what's going on internationally. And just to add to that, Ben, to the point, that's the that's the key component of the driver of the increase versus Q2 of last year, specialty protein sales increased 13%.
Due to our ability to replace that export volume with domestic customers. And then you mentioned sequential increase, you know, the ingredients segment increased significantly sequentially from Q1 sales are up 32%. The biggest driver of that increase is our specialty wheat protein offerings. Which increased $5.3 million versus Q1. Due to our ability to commercialize that loss of export business domestically as we messaged earlier this year.
Ben Klieve: Great. Great. That's, helpful from both of you. Thank you. And then, my second question on this segment, then get back in queue, is around there's a lot of things moving in the right direction here. The biofuel plants coming online for some cost savings. You've got this dynamic with the export starting to maybe weigh in that you just talked about, new customers onboarding and you expect second half to be better, both in revenue and profit than the first. I'm wondering if you can maybe help us isolate that new customer contribution element of this. Talked about a couple new customers coming online here at some point within second quarter. Wondering, one, if they came online as
Brandon Gall: Yeah. So a lot of a lot of the new customers that we've been getting as Mark just said has been on the specialty protein rise front in North America. And, you know, any new customer, especially in this there can be a load in then some choppiness, and then we've seen some of that. In fact, Q1 was choppy. As a result of this. Q2 was where we expected it to be. We expect, you know, Q3 to be strong. expect a strong Q4. So it's gonna be, maybe a slight step down in Q3, but, the choppiness is in our Proterra extruded protein facility. That came online last April.
And, you know, like I said, in this business, it can take, you know, anywhere from eight to twelve to you know, twenty-four months, to commercialize a new customer. It's a lot of work. It's a lot of commitment. And, and the team is making a lot of progress there. This is a great facility up to 10 million pounds of production capability. And, I shared earlier in the year that we had two large customers that we've been working with, we were hoping to come on in the back half of the year. And it's discussion about that just recently with the team as you'd imagine. That is still looking good. In both cases.
Could be more Q4 But the point is that we're making progress. Additionally, something we're doing to increase our customer pipeline and funnel is we're we're expanding our capabilities and our offerings at our Proterra facility. We are now we are now working with soy as an example. And the result of that has been a complete you know, inbound of new customers and new opportunities. So because this facility is located separately from our overall ingredients facility we're able to experiment with, with different brains such as this. So you know, that's really where our, our runway is for growth in terms of, you know, new customer acquisition, Ben.
And that's where the team's focused in making a lot of progress.
Ben Klieve: Very good. That's, specifically having some good momentum here and mitigating a lot of the challenge in the spirit side as well in the quarter. Thanks for taking my questions, and I'll get back in queue.
Brandon Gall: Perfect. Thank you, Ben.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Julie Francis for any closing remarks.
Julie Francis: Thank you. I'd like to thank everyone for joining our quarterly earnings call today. I look forward to engaging with all of you in the very near future and playing a much more active role in, next earnings call. So good luck, everyone. We'll talk soon. Cheers.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.