MGP Ingredients, Inc.

Good morning and welcome to the MGP Ingredients Incorporated third quarter 2020 results call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Mike Houston. Please go ahead.

Thank you, Cameron. Good morning, everyone, and thank you for joining the MGP Ingredients conference call and webcast to discuss the company's financial results for the third quarter 2020. I'm Mike Houston with Lambert & Company, MGP's investor relations firm. And joining me today are members of their management team, including Dave Colo, President and Chief Executive Officer, and Brandon Gall, Vice President of Finance and Chief Financial Officer. We will begin the call with management's prepared remarks and then open the call up 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, such as projections of sales, operating income, gross margin, and effective tax rates, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements made during the call if anyone does not already have a copy of the press release issued by MGP today. You can access it at the company's website, www.mgpingredients.com. At this time, I'd like to turn the call over to MGP's President and Chief Executive Officer, Dave Colo. Dave?

Thank you, Mike, and thank you all for joining us. On this call, we will provide an overview of our results for the quarter, updates on key financial performance metrics, and a discussion of progress against our strategy. Then we will take your questions. Now I will turn to the results for the third quarter. I am very pleased with the strong results this quarter, which highlighted the diversity of growth across our product lines and segments. Aged whiskey sales experienced a record quarter, while new distillate and specialty ingredients also yielded strong double-digit sales growth. While we anticipate continued uncertainty related to the pandemic through the end of this year, and into 2021, we believe we remain well-positioned to execute our long-term strategic plan. The overall American whiskey market remains robust. Consumer trends seeking to increase the amount of plant-based protein and dietary fiber in their diets as part of an overall healthier lifestyle are also strong. We believe our portfolio of products are well-positioned to provide sustainable long-term growth while our position within each market remains strong. Looking at each segment individually, in our distillery product segment, sales for the quarter were up 11.4% to $81.6 million. We are very pleased with the continued strength of our aged whiskey sales this quarter, which equated to record results in strong double-digit revenue growth from the prior year period. Our objective of optimizing brown goods profits continued this quarter by delivering one of our best gross profit results. However, total segment gross margins were negatively impacted by approximately 350 basis points resulting from decreased barrel put away as we continue to align our aging whiskey inventory with projected demand. Segment gross profit increased to $17.3 million while gross margin decreased 50 basis points to 21.2% of segment sales reflecting the reduced putaways this quarter. Despite this year-over-year decline, we continue to achieve brown goods pricing in line with our expectations for both new distillate and aged whiskey sales. Premium beverage sales had a strong quarter, growing 20.9% over the prior year period. The strength of our aged sales this quarter was also very encouraging and highlights both the demand for aged whiskey and our unique ability to meet that demand. In fact, we have sold more barrels of aged whiskey year-to-date than we did all of last year, and the barrels sold this year represent a healthy balance of vintages across the portfolio. This demand is driven by our customers' desire to bring new brands to market sooner, fill holes in their inventory for their existing brands, and support their growth aspirations for brands they acquire. Our prior investment in building a diverse library of aging whiskey has us well positioned to meet those needs, and we believe we are well positioned to meet projected demand while delivering sustainable growth and value creation for the company. Brown Goods premium beverage sales this quarter were up 29.2% as compared to the third quarter of last year. While we are very pleased with the results this quarter, I would like to remind our listeners that there will continue to exist an inherent quarterly unpredictability in the business due to customers' buying patterns and inventory needs, as well as the ongoing potential impacts to on-premise sales related to the COVID-19 pandemic. While the consumer trends for American whiskey remain robust, we continue to believe that the underlying growth rate for our target market is gradually slowing to come more in line with the long-term trend for the overall category. We also continue to focus on the long-term, working to improve our position in the market by consistently recruiting new customers, strengthening our relationships with existing customers, and expanding our geographic sales coverage. New customer acquisition growth for our new distillate and aged whiskey products remains strong despite the uncertainty related to the pandemic. We are doing an outstanding job recruiting new customers for our new distillate and aged whiskey offerings, adding more new customers this quarter than both the year-ago period and last quarter. While we experience strong demand across the board for new distillate and aged whiskey this quarter, our craft brand customer sales continue to remain below the historical average due to the pandemic. As a result, our aged sales during the quarter were primarily driven by our national and multinational brand customers. Internationally, we are beginning to see more activity while gaining better traction abroad. International sales were up versus the prior year and are beginning to comprise a larger percentage of aged whiskey sales. The long-term macro trends supporting the ongoing growth of the American whiskey category remain encouraging. Continuing on to the other areas of the segment, sales of premium beverage white goods increased 6.5% for the quarter. Sales of industrial alcohol were down slightly, 0.3% for the quarter. Demand for our industrial alcohol products as a result of the COVID-19 pandemic continues to remain elevated with pricing slightly increasing over the prior year quarter. However, volume sales for industrial alcohol were down slightly, to support increased optimization in sales of white goods premium beverage alcohol. As a reminder from our last quarter's call, we are currently in the midst of contracting for next year's industrial alcohol customer needs, and we are experiencing improved pricing to date. Sales of dry distillers grains, or DDGs, decreased 7.7%, reflecting short-term microfactors. Our outlook for DDG pricing continues to be based on the unchanged macro environment that led to the lower pricing in the first quarter of 2017. Revenue from warehouse services increased 8.1%, reflecting in part growth in the number of customer barrels aging in our whiskey warehouses and other services we provide. Turning to ingredient solutions, sales grew 22.7%, to $21.3 million, while gross profit increased 102.9% to $5.9 million, or 27.4% of segment sales. We are very pleased with the overall progress in this segment as we achieved double-digit sales growth in both specialty wheat starches and proteins. The continued strength of our ingredient solution segment and its diverse customer mix are reflected in the strong results this quarter. the team has made admirable progress this year to expand the specialty ingredient customer base and includes repeat and new customers, as well as brands, both large and small. In addition to recognizing efficiencies to improve throughput and profitability, we were also successful in continuing to optimize our product mix this quarter. Consumer trends seeking to increase the amount of plant-based protein and dietary fiber in their diets, as part of an overall healthier lifestyle, continue to align well with our ingredient product portfolio, and underscore our confidence in the sustainability of these improved results going forward. Overall, both of our business segments continue to benefit from favorable consumer trends. We continue to see strong demand in pricing for our products and remain very confident and encouraged about the long-term outlook. This concludes my initial remarks. Let me now turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?

Thanks, Dave. For the quarter, consolidated sales increased 13.5% to $103 million, reflecting an increase in both the distillery products and ingredient solution segments. Consolidated gross profit increased 23.3% to $23.2 million as a result of increased gross profit in both the ingredient solutions and distillery product segments. Consolidated gross margin increased approximately 180 basis points to 22.5% of sales, up from 20.7% in the prior year quarter. As Dave mentioned, the distillery products segment gross margins were negatively impacted from decreased barrel put-away as we continue to align our aging whiskey inventory with projected demand. The adverse financial impact of putting away less barrels is likely to persist in the coming quarters as we continue to evaluate the projected demand for this inventory, as well as our barrel put-away strategy on a monthly basis. On a separate note, the improved gross profit results in the quarter do not include any positive impact related to the insurance claim filed as a result of the cyber attack that temporarily disrupted production at our Atchison facilities in the second quarter. We are seeking to recover a portion, if not all, of the $1.7 million profit impact, which includes the profit associated with any loss of revenue resulting from this event. As a reminder, we have since resumed normal operations and there remains no evidence any sensitive or confidential data breach occurred. Corporate selling and general administrative expenses for the quarter were $9.5 million, up 32.3% versus prior year. The increase was due to higher incentive compensation expenses and professional service fees, which were partially offset by decreased costs related to prior year EPA settlement. As a reminder, in the last two quarters of 2019, the SG&A accrual related to incentive compensation expense was mostly reversed out as a result of that year's financial performance. We did not make the same reversing entry this quarter, and as a result, our SG&A expense related to incentive compensation was higher than the same period last year. Consolidated operating income increased 17.7% to $13.7 million, compared to $11.6 million during the prior year quarter. primarily due to strong operating results in both the ingredient solutions and distillery product segments. Non-GAAP operating income increased 17.8% to $13.7 million, exclusive to CEO transition costs. Our corporate effective tax rate for the quarter was 21.6%, compared with 26.9% in the year-ago period. The decrease quarter versus quarter was primarily due to the release of a portion of the company's valuation allowance. In 2019, There were amendments made to some tax laws at the state level, and we subsequently took a conservative tax position until these changes could be better understood. After more time with the guidance, we're now confident we can benefit from this law change, and have reflected this in our third quarter 2020 income tax provision. This impact is discrete in nature. It will not be recurring. Net income for the third quarter increased 26.4% to $10.4 million. and earnings per share increased 13 cents to 61 cents per share. These increases from prior year were primarily due to improved operating results. We discussed the strong fundamental cash generating capability of our business. I'm very pleased to announce that in this quarter, cash provided by operations totaled $23.5 million. In addition to improved operating performance, the main drivers of this fantastic result were an increase in accounts payable, reduction in accounts receivable, and a combination of record-age sales and reduced put-away for aging inventory. Although we saw a reduction in accounts receivable despite our second largest quarter of sales in recent history, we expect this will ebb and flow through the growth and evolution of our business and our customers, particularly as we develop longer sales histories with craft customers, new relationships with export customers, and new long-term supply agreements with large customers. During the period, our investment in aging whiskey inventory decreased by $4.7 million to a net $108.4 million at cost. This net decrease was driven by increased sales of aged whiskey and decreased put away during the quarter. As Dave mentioned earlier, we're realizing the long-term value of this inventory as reflected in our operating cash flows and believe we are well positioned to meet projected demand while delivering sustainable growth and value creation for the company. Despite the uncertainty related to the pandemic, We believe our library of various match bills and vintages will continue to contribute strong levels of profit for the company going forward. Although we are currently putting away less inventory for aging than in previous quarters, it's important to note that fluctuations in our quarterly investment can also be impacted by a number of factors, including customer demand for new distillate, production efficiencies, mixing capacity, and sales of aged whiskey. MGP's balance sheet and access to capital remain strong. allowing us to continue investing in our growth and drive long-term shareholder value. We remain well capitalized with debt, totaling $54.5 million, and a strong cash position of $20 million. As of September 30, 2020, approximately $285 million remained available under the $300 million revolving credit line. Our capital allocation strategy continues to contemplate sustainable growth opportunities that are consistent with long-term strategy. Recently, the board authorized a quarterly dividend in the amount of $0.12 per share, which is payable on December 4th to stockholders of record as of November 20th. The board continues to view dividends as an important way to share the success of the company with shareholders. Let me now turn things back over to Dave for concluding remarks.

Thanks, Brandon. Now I would like to touch on some additional initiatives that support our long-term strategic plan. We remain confident in our long-term strategy and our ability to align with strong macro-consumer trends, across the organization. As Brandon mentioned, our investment in aging whiskey inventory decreased this quarter to $108.4 million at cost. This decline was primarily driven by increased sales of aged whiskey and decreased putaways during the quarter. We are realizing the long-term value of this inventory as reflected in our operating and free cash flows. We remain confident in both the demand and pricing for our aged whiskey as well as our plan for maximizing the long-term economic value. We continue to progress our brand's initiative and are pleased with the strong gains we have made in our current markets. The launch of Remus Repeal Reserve Series 4, as well as our single-barrel offerings of George Remus bourbon and Rossville Union rye whiskeys during the quarter, have exceeded our expectations while infusing additional consumer excitement for our brands. We were also pleased with our results at this year's Whiskies of the World competition. George Remus Repeal Reserve Series 4 won gold best in class, while our Rossville Union Mastercrafted Rye and George Remus Straight Bourbon Whiskies each took a gold during the competition. We are proud of the many awards our brands have won over the years, which underscore the high-quality liquid our team creates. We remain focused on accelerating our brands through increased distribution and sales velocity in both existing and new markets. We are very pleased with the strong results achieved by our team this quarter, despite the uncertainty surrounding the pandemic. We continue our commitment to take the necessary measures to ensure the safety and well-being of our employees. As we navigate the effects of this pandemic, we remain focused on maintaining our strong competitive positions. Although we did not experience any significant impact this quarter from the potential headwinds we've shared during our last two calls, we wanted to provide an update on what we're seeing across the spirits industry. The first related to the potential pantry loading in the early part of the pandemic, causing off-premise sales to significantly spike. Branded distilled spirits continue to experience increased sales year over year in the off-premise channel. While the growth rates have come down a bit since March and April, they remain elevated, and we believe demand for American whiskey and distilled spirits remains strong. Second, the partial closures of bars, restaurants, and tasting rooms continue to have an immediate impact on our craft customer sales. As mentioned earlier in the call, we did experience strong demand across the board for new distillate and aged whiskey this quarter, but our craft brand customer sales continue to remain below the historical average due to the pandemic. We anticipate this headwind to continue throughout the balance of the year and into the first quarter of 2021. The third potential headwind is related to our multinational customers. While most have strong balance sheets and access to capital, it is unclear how their conservation of cash may impact our brown goods sales throughout the balance of the year and into next. We have experienced some of our multinational customers exercise prudence in their order patterns of brown goods these past few quarters and anticipate that to continue. The last potential headwind we identified was our near-term ability to grow international sales and export our distilled spirits overseas. Year-to-date results indicate some promising activity, but reduced travel and tariffs in key international markets persists, impeding our ability to further develop this opportunity in a meaningful way. We continue to believe that our investments to expand international sales will provide long-term shareholder value and continue to position ourselves to optimize that growth opportunity once the pandemic headwinds abate. We regularly monitor each of these potential headwinds and will provide additional updates as they become available. Both of our business segments continue to be aligned with strong macro consumer trends, and we believe our strategy has us well positioned for longer-term growth that will drive superior long-term shareholder value. Furthermore, we continue to evaluate M&A activity as a vehicle for growth and remain committed to assessing opportunities to strengthen our position in growing markets in concert with our financial position in the coming quarters. Operator, we are now ready to begin the question and answer portion of the call. Thank you.

To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. Thank you. Your first question comes from Mitchell Pinero from Sturdivant. Please go ahead.

Hi. Good morning. So, a question for you here. Just trying to put your last comments about multinational customers which are being a little more prudent on the brown good orders. How's that how's that foot with what you did in this quarter where you saw strong demand of new and aged distillate? Is it not coming from the multinationals? It's not coming from the craft, so where is it coming from?

Yeah. Hey, Mitch, we did see strong demand from multinational and national customers in the quarter. The headwind comment was that we have seen some customers take a conservative position with cash, which has caused them to delay or push out some of their brown good purchases. But as you can tell from the quarter, it didn't have a significant impact this quarter. We had very good results from multinational and national customers during the quarter.

And you also talked about, you added a lot more, you added some new customers in the quarter. What type of customers were they?

A lot of the new customers that we added during the quarter were primarily craft customers. Even though our craft sales are being impacted by the pandemic, we continue to experience the ability to acquire new craft customers, and that's helping to drive craft sales, albeit at a slower rate than historically due to the pandemic. But I think it demonstrates, you know, the viability of our offering of aged whiskey and the ability to attract, continue to attract craft customers.

Is there any change, you know, in the industry sort of outlook for the craft distillers? You know, we saw maybe, you know, three, four months ago there were calls that, you know, 40% of craft distillers were going to, you know, go out of business. And I'm curious to see what you're hearing and seeing three months later here.

Yeah, I mean, we're still hearing similar talk to that, Mitch. And kind of what we're seeing as well is there are some craft customers that are struggling, but there's also craft customers, businesses that are doing quite well. And it's being driven by the fact that the longer the pandemic goes on and consumers are shopping, when the pandemic initially started, consumers were going to the larger, well-known brands in large sizes. As the pandemic has continued to go on longer, what we're seeing is consumers are now starting to shop the aisle again and look for unique and different offerings. And that's helping to drive some of the more well-known craft brands to do quite well. So that's probably the most significant dynamic that we've seen playing out over the last two quarters.

Okay. And then just one final question on the ingredient solution side. So as you look forward, in terms of the demand that you've been – you know, you've had several quarters of really strong demand. Is there, is this something that's accelerating or are you seeing, does this level out the type of demand we're seeing at these levels? I mean, are you getting new customers or is this sort of category growth within your existing customer base?

It's a combination of both. But what I would say is it's, the demand is consumer driven. Our ingredients portfolio, the products that are doing extremely well right now are wheat-based specialty proteins and are wheat-based specialty fibers. And those are in line with consumers who continue to look for more plant-based proteins and fibers in their diets. So that's the primary driver of the growth. And as as our customers continue to develop products and create innovation to meet those consumer needs, we're also seeing that innovation drive some of the demand for these product lines.

Would there be any, and this is sort of a near-term thing, would there be any reason to think that the gross profit margins in that segment, is there any seasonality that would affect the fourth quarter, or is it sort of, you know, should we see similar levels to what you've been recording all year?

Yeah, Mitch, this is Brandon. That's a good question. You know, we report that we don't experience seasonality to our business. And what, you know, what we said specifically around the ingredient segment is that, you know, this has been a gradual build to where we are now. It doesn't necessarily feel like that, but I think if you look over the history of the last, say, you know, 12 to 15 quarters, you've seen it gradually get here. So, You know, we are confident, and we said this earlier, that this is sustainable growth in these levels and gross margins, as you stated, are sustainable. So we're going to continue to look to optimize the business from both the production and the sales demand side as we move forward.

Thanks for your time.

Thank you. Thank you. Your next question comes from Bill Chappell at Truist Security. Please go ahead.

Thanks. Good morning. First question, can you just help me a little bit more on the 350 basis point hit to segment margins from the, I guess, less barrel put away? And I guess, one, I'm trying to understand, seeing that if you sold more age inventory that has much higher margins, I would think the gross margins would go up. But two, how do I look at this as your goal to meaningfully reduce that inventory over the next few quarters? Will I see a similar type hit or will I see a bigger hit to gross margin going forward? Just any color there because I was certainly surprised to kind of see it.

Yeah, Bill, I'll go first. This is Brandon. Thanks for the question. So, yeah, we did see a 350 basis point impact in the quarter due to reducing our barrel put-away. Obviously, a significant number that we wanted to bring to everyone's attention. So, I guess in layman's terms in discussing it, when we produce less whiskey for put-away, as we did this quarter, it results in unfavorable operating variances, which in turn need to be absorbed by the balance of the products produced. From an accounting perspective, it's a mixed utilization issue and fixed cost absorption dynamic. So rather than those fixed overhead costs getting capitalized on the balance sheet with an aging inventory, it gets expensed through the P&L in the current period as cost of goods sold in other products, which is what we saw this quarter. So in theory, historically, as we've been putting away more than we're selling you know, gross margin percentages have probably been higher than they would be if we were at equilibrium, whereas the opposite is true this quarter, which is we actually sold more than we put away, which resulted, you know, in artificially low gross margins than we would be at if we were at equilibrium. So we also mentioned in the part of our script earlier that we do expect this dynamic to continue in the coming quarters, until we get closer to an equilibrium-type level.

Bill, the other thing we're trying to communicate there as well is that we achieved our pricing objectives for the quarter on the aged product as well as new distillate, and we wanted to communicate that the you know, the expected gross margin improvement you should see because of the increased sales we had of brown goods, that it was actually dampened by the fact that we put away less whiskey, which caused an increase in our cost of goods sold that offset the favorability and gross margin that you would have expected.

Got it. I guess... I'm trying to look at, I mean, again, I think your goal is to get down to more like closer to 50, $60 million. You only knocked off about five to 10, uh, this quarter. So it sounds like it could be much greater than a 350 basis point hit over the next couple of quarters. And is that right?

Yeah, no, our, um, we've not communicated a goal to reduce our age whiskey to the, to those levels bill. What, uh, The way that we evaluate this is the value of aged whiskey that we carry is a dynamic number, and it's based on every month we go through a sales and operations planning process where we look at our inventories, we look at our customers' near-term and long-term demand, and that's how we make decisions on the type of mash bills and the quantities of whiskey that we're going to put away. So it's a dynamic process that occurs every month So we will adjust our inventories based on the demand factors that we're seeing and how our inventory is positioned relative to demand. So I don't want you to think that there's a fixed number out there that we're targeting. It's much more dynamic than that, and it can certainly change quarter to quarter.

And to your other comment, what you're saying is don't read – the gross margin drop and the increase in age as you all of a sudden put a fire sale on and started moving inventory. You were still very comfortable with getting kind of the value out of the age inventory. Is that the right way to look at it? Yes, that's exactly right, Bill. Okay. And then switching gears to industrial alcohol, I think this is the timeframe where you would be renegotiating the contracts for next year. I thought it was interesting that you actually pulled off a little bit of industrial alcohol to switch more to premium white spirits. Can you help me understand what you're seeing and any change to expectations for next year?

As we go into the contract season, we are seeing some improved pricing versus last year. Some prior calls, we've discussed the potential for that to happen, and it is playing out. So that's looking promising as we go into this contracting season. As far as the demand for industrial alcohol, it's consistent. I mean, we have all that volume. The majority of that volume, as you well know, is contracted, and we're simply meeting our contractual commitments for the quarter. and we're also continuing to see some pretty strong demand in white goods and beverage alcohol. So nothing too dramatic to report on the change in the quarter there, and we'll continue to do our work as we contract industrial alcohol for the balance of the year.

But you continue to think industrial alcohol will be a positive in terms of pricing and margins next year?

We do, based on what we're seeing at this point.

Got it. Thanks so much.

You bet. Thanks, Bill.

Thank you. Your next question comes from Alex Furman at Craig Helen. Please go ahead.

Great. Thanks very much for taking my question. I wanted to talk a little bit about just bourbon versus rye whiskey. Can you give us a sense of which mash bills were more in demand on the age side, and do you feel that the mash bills that you currently have in inventory reflect your broad assortment, or has there been more of a focus on rye whiskey versus bourbon whiskey?

Yeah, we're seeing, you know, good demand across all of our primary mash bill types. So no significant, you know, movement in preference over one particular type over the other. We're seeing good demand across the board.

Okay, that's helpful. Thanks. And then if I could just ask on the food ingredient side, I mean, that's been a really nice consistent grower for you in terms of profit. Can you give us a sense of with the heightened growth that we're seeing this year, how many customers have been driving that growth? Is it fairly fragmented or have there been one or two customers of yours that have really taken off and brought you with them?

Yeah, it's across a broad spectrum and type of customers, which is obviously kind of where you want the growth to be coming from versus being reliant on a handful of customers. So, you know, overall we're selling to a diverse group of customers that also have a diverse product mix that's utilizing these specialty proteins and starches. So pretty good demand we're seeing across the board in all different types of customers.

Okay, great. That's really helpful. Thank you very much.

Thank you. Thank you. Your next question comes from Ben Clive at National Securities Corp. Please go ahead.

All right. Thanks for taking my questions, and congrats on a good quarter here. Just a couple questions from me. First on the ingredient segment, I'll reiterate the comments that have been made earlier. Just a fantastic quarter out of this segment. I'm curious if you can elaborate a bit on kind of the scale of the infrastructure within this segment especially on the higher value goods. I mean, what is this segment, what is your infrastructure built to be in the long term? Is there a level of revenue here that you're trending towards that you're going to have to start making investments in growth? Is that a long way away? Any comments on that front would be helpful.

Sure. Yeah, I think with our current infrastructure, And we've talked about this in the past a little bit. We have an amount of capacity, but that capacity has some flexibility between shifting to the different product types in our portfolio. And what we've been doing is obviously focusing the production on our higher margin products that are driving these results. Based on our current capacity, and some of the initiatives we have in place where we're trying to optimize the efficiency of that capacity and the utilization of that capacity. At this point, we think we've got, you know, probably a couple more years that we can support the growth of this business before we'd be in a position to start investing CapEx.

Got it. That's helpful. And then just one other question for me on the distillery side. The impact of tariffs, can you talk about kind of what you're seeing from your customers in terms of, you know, how tariffs are specifically affecting their purchasing decisions? Are these multinationals kind of, you know, waiting on the sideline for clarity on tariffs? Are they waiting for you know, potentially any, you know, any political, you know, fallout here from the election before making purchase decisions? You know, really, how are tariffs, you know, really impacting these customers across the board?

Yeah, I mean, it's a pretty punitive tariff rate, right? It's, you know, 25%. And, you I think the information in the category, I think American whiskey exports are off like 40% versus prior year due to these tariffs. So it's kind of an across-the-board impact on anyone that's trying to export products in American whiskey in particular. And what we're seeing as well is as we try to grow our international business, I'd say another thing that's impacting us, maybe equally as much as the tariffs, is just the impact of the pandemic and the inability for our customers that we're trying to sell to to travel over to see our distillery or for our team to travel to meet with customers and have the face-to-face contact that's typically required in international sales. So it's a combination of those factors that when we talk about it's impeding our ability to grow our international business that we're dealing with.

Got it. Okay. And so I didn't appreciate that dynamic. So you said in your prepared remarks that travel is an issue with this. So you're specifically referring to kind of BD purposes. rather than travel, you know, a lack of travel, like limiting demand, you know, downstream. This travel issue is really a BD issue from your perspective.

Yes, that's exactly right.

Got it. Got it. Interesting. Okay. Very good. Well, yeah, congrats again on a great quarter, and I'll jump back in queue.

Thank you. Thank you. Your next question comes from Donald McClee at Berenberg. Please go ahead.

Good morning, guys. So I had a quick follow-up on the craft customer base. Could you talk a bit about how far down craft sales are versus the prior year and maybe in comparison to what your expectations were at the start of this year prior to COVID?

Yeah, that's a great question, Donald. And, you know, we don't go into a great amount of detail within the customers except to say that, you know, historically, total brown goods sales, it's usually, you know, about a third, a third, a third between craft, national, multinational. And we've also said that, you know, with age sales, historically speaking, the craft share of age sales has been historically larger than that. What we have seen so far year to date is that the proportion of craft age purchasing as a percent of total has been down. So as the interest and the demand from the national and multinational has increased so far year to date, the craft customer has not kept up proportionally with their historical rate of purchasing. So that's what we're seeing. It's a market and a customer segment we continue to watch very closely. And as Dave said, there have been brands within that group that have been very resilient and then others that have been probably more impacted than average due to the current environment. But it's still an ongoingly very important part of our overall business and our Brown Goods business and something we're going to continue to monitor.

Okay, that's helpful. And then I may be asking at a higher level, just in terms of the channel mix, how has customer behavior changed quarter over quarter as the on-premise channel has begun to reopen a bit, at least in the U.S.?

Yeah, it's been spotty. I think in the third quarter, you know, we started to see more on-premise locations open up capacity or increase capacity. In the recent last couple of weeks, that started to be impacted again as we've seen spikes in COVID cases. So I think as we sit here today, we continue to see strong growth in off-premise. I think the syndicated data, if you look throughout COVID to date, distilled spirits were typically averaging up 25% to 30% in off-premise channels. They took a little bit of a dip as on-premise started to increase. I think it got down into the low 20% plus growth range. And then it's starting to come back up as we're seeing some more issues emerge on on-premise. But the dynamics are continuing to be relatively steady in more spirits being sold off-premise as on-premise has been impacted by COVID.

Okay. And then the last one for me, just on the ingredients solution segment. So you talked about the strength of demand for wheat specialty proteins and fibers. Are you seeing similar levels of demand for Proterra? And how is that new product progressing in the year?

Yeah, we are seeing some good demand for Proterra, albeit off of a small base. But we are seeing a lot of interest in We're seeing a lot of ideas coming in from customers in our new product development pipeline around that product platform. So a lot of strong interest, and we're starting, you know, we're growing, but off of a small base at this point. But we continue to believe that that product line has a lot of potential long term.

Understood. And then just going back to your earlier comments around, you know, being – positioned for multiple years of growth within that specialty portfolio. Does that apply, I guess, in the same way to, like, the Proterra product as it does to the broader wheat-based portfolio? Or, you know, is there some maybe limiting factor because of the different type of protein there?

No, I'd say it applies to Proterra as well. I think, you know, we have the ability to continue to expand that portfolio and for the foreseeable future. So at this point, really don't see any constraints on the supply side of the equation.

Okay, thanks. That's really helpful, and that's all my questions. Thank you, guys.

Thank you. Thank you. That concludes our question and answer session for today. I would like to now turn the conference back to David Colo.

Please go ahead. Thank you for your interest in our company and for joining us today for our third quarter call. We continue to make progress toward implementing our long-term strategic plan and remain confident that it will provide us the resources we need to create shareholder value. We look forward to talking with you again after the fourth quarter.