MGP Ingredients has been seen as a solid business in a challenged US spirits market, so the distiller’s profit warning last week has cast doubt over the company’s prospects, at least in the short term.
The Kansas-based group cut its forecasts for sales and underlying earnings last Thursday, sending its share price tumbling by more than 20%.
Home to brands including Penelope Bourbon but also a distiller for other spirits companies, MGP Ingredients issued a “preliminary” view of its third-quarter sales, which it sees falling 24% (the group is due to report its full Q3 results on 31 October).
As a consequence, the business sees its sales hitting between $695m and $705m in 2024, down from its earlier forecast of between $742m to $756m. In 2023, MGP Ingredients generated more than $836m in sales.
The company is also now forecasting its adjusted earnings per share will come in between $5.55 and $5.65 this year, down from its previous forecast $6.12 to $6.23. Adjusted EPS was $5.88 in 2023.
CEO and president David Bratcher, who took the helm at the start of the year, said the El Mayor Tequila owner was “disappointed” with its third-quarter numbers and its fourth-quarter outlook. He pointed to two macro factors he believes are weighing on the business.
“Soft alcohol spirits category trends and elevated industry-wide whiskey inventories are putting greater-than-expected pressure on our brown-goods business with a larger impact on our smaller, craft customer base,” Bratcher said.
Notably, MGP Ingredients’ preliminary third-quarter figures indicate greater pressure on its Distilling Solutions business (which accounted for 54% of sales in 2023) than on its Branded Spirits division. Both units are expected to have seen sales fall in the third quarter of the year but the decline is said to have been more pronounced in Distilling Solutions.
MGP Ingredients’ indicative numbers have sales from that side of the business dropping 36% in the quarter, with a 22% fall in sales from “brown goods”.
Sales from Branded Spirits are expected to have declined 6%, although the Yellowstone Kentucky Straight brand owner said sales of “premium-plus” products are expected to have inched up 1%.
Robert Moskow, an analyst who covers MGP Ingredients for US investment bank TD Cowen, said he had anticipated a “soft” quarter for the company but the announcement was “worse than we expected”.
In August, when MGP Ingredients had issued its second-quarter and first-half numbers, Moskow had described the business as a “bright spot in a dim spirits backdrop”, pointing to “its high-level of sales visibility and strong profit growth in an environment where larger operators are seeing declines”.
However, the group’s profit warning has dampened sentiment somewhat. As Moskow said in a note to clients last week, MGP Ingredients has more than 800 customers for its brown goods. According to the analyst, the five largest of those clients accounted for around 30% of the sales the Distilling Solutions division made last year.
“This means that the company’s brown goods business has significant exposure to a long tail of smaller craft brands,” Moskow said. “The current slowdown in US spirits has an acute impact on craft brands, as they have fewer resources to invest in advertising / promotion and are likely to be the first subject of inventory cutbacks by distributors and retailers.”
There’s no question the US spirits market is a challenging place to do business at the moment. NABCA data showed spirits volumes (sold in nine-litre cases) were up 0.4% in 2023. By value, sales grew 2.9%.
The rolling 12-month figures for August showed volumes down 1.3% and value only up slightly, with a growth rate of 0.3%. Senior figures in the spirits industry have, in recent weeks, sounded pretty downbeat on the near-term outlook for the US market.
For Moskow, the central question over MGP Ingredients’ changes to its guidance is the extent to which there could be more reductions on the horizon.
“The key question is whether this revised outlook reflects the full impact of the weaker environment, or whether we should expect another cut in 2025,” he said. “Could there be another tranche of craft customers that have yet to decide their plans for 2025 and has MGP Ingredients spoken to them or not? Are these smaller customers going out of business or just delaying commitments? Perhaps they are waiting to see what happens during the holiday season.”
Over at AllianceBernstein, MGP Ingredients’ preliminary Q3 numbers, the cuts to its fiscal 2024 guidance and Bratcher’s remarks about inventories in the US whiskey market called to mind its commentary on whether a “glut” is on the horizon.
AllianceBernstein analysts have compiled data suggesting excess supply in US whiskey is likely in the next five years. As Just Drinks columnist Richard Woodard argued recently, if the prediction comes to pass – and, he argues, that’s debatable – major distillers will be largely protected but smaller brands are likely to suffer. That, in turn, could put pressure on a manufacturing partner like MGP Ingredients.
CEO Bratcher is sanguine about the longer-term prospects of the company but he has indicated the group is working to adapt to the “headwinds” it is facing at the moment.
“We expect these industry headwinds to persist at least through the rest of the year,” he said last week. “The American whiskey category has successfully navigated periods of temporary supply-demand imbalance over the years and we are taking proactive steps to strengthen our brown goods business. Our pivot to becoming a branded spirits company continues to gain strength and I remain confident about our attractive long-term growth outlook.”
"Cloudy outlook for MGP Ingredients after distiller’s profit warning" was originally created and published by Just Drinks, a GlobalData owned brand.
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