MGP Ingredients, Inc.

Good morning and welcome to the MGP Ingredients first quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Amit Sharma, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to MGP's first quarter earnings conference call. I'm Amit Sharma, Vice President of Investor Relations. And joining me is Brandon Gall, Interim President and Chief Executive Officer and Chief Financial Officer, and Mark Davidson, Vice President, Corporate Controller, and Head of Treasury. We will begin the call with management's prepared remarks before opening the call to analyst questions. Before we begin, this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in in the company's annual and quarterly reports filed with the SEC. The company assumes no obligations to upgrade any forward-looking statements made during the call, except as required by the law. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most comparable GAAP measures is included in today's earnings release, which was issued this morning before the market opened and is available on our website at www.mgpingredients.com. At this time, I would like to turn the call over to Brandon Gall. Brandon.

Thank you, Amit. Good morning, everyone. I'd like to begin by offering a few highlights from our first quarter results. I'll then share some comments on the progress we're making on the key initiatives shared on our last earnings call to stabilize our brown goods business, reposition our branded spirits and ingredients businesses for growth, accelerate our company-wide productivity agenda, and fortify our balance sheet. I'll then turn things over to Mark for a detailed review of our quarterly financials. Our first quarter results delivered an encouraging start to the year and set us on course to meet our four-year guidance. While industry-wide barrel whiskey inventories remain elevated and consumers are more cautious in the current environment, we saw signs of positive progress across all three of our businesses as our teams are focusing on our most impactful initiatives in executing with great discipline. These early signs of stabilization are encouraging and give us confidence that the proactive steps we're taking are beginning to take hold. Our productivity initiatives are off to a strong start, and we are leaning harder on our competitive strengths and positioning, enabling us to reaffirm our 2025 outlook. At the same time, we also took meaningful steps to fortify our balance sheet and further increase our financial flexibility during the first half of the year. As for the first quarter of 2025, results were in line with our expectations. We believe this sets us up for improved performance throughout the rest of the year. Consolidated sales and adjusted EBITDA decreased 29% and 46% respectively from the prior year period, primarily due to the expected decline in the distilling solutions performance and cadence of the planned rebound in ingredient solutions results. Branded spirits segment sales declined by 4%. but our premium plus portfolio posted solid growth. Adjusted earnings per common share declined to 36 cents per share, while operating cash flows increased by nearly 82% to $44.7 million. I'll now take a moment to highlight the current operating environment and the progress we're making against each of our key initiatives. Starting with the Branded Spirits segment, our key initiative for our Branded Spirits segment this year is focus, to focus on fewer, but more attractive growth opportunities within our branded portfolio. Our Premium Plus portfolio continues to be the growth engine of the Branded Spirits segment. And we believe our Penelope, El Mayor, and Rebel 100 brands are particularly well positioned to benefit from our focused initiative. After demonstrated strong growth in 2024, these brands were the primary drivers of the 7% growth in our Premium Plus portfolio during the first quarter, as we refocused our brand investments behind our best opportunities. These actions, which include targeted digital campaigns, key sponsorship and sampling activations, and sharper in-store execution, are expected to expand consumer and trade awareness and engagement for these brands. Penelope's momentum continued with another quarter of strong growth. Innovation is a key component of the Penelope brand, and that trend continued with the launches of Penelope Weeded and Penelope Ready to Serve cocktails during the quarter. Penelope Wheated Bourbon is off to a strong start in several key markets with plans to further expand distribution over the coming months. Penelope Ready to Serve is the brand's first foray into the fast-growing prepared cocktail segment. It's now available in select markets in the Penelope Peach Old Fashioned flavor with plans to expand to additional markets and flavors throughout the summer. Our Rebel 100 premium offering also continues to gain momentum as we realign our Rebel brand. Our partnership with Richard Childress Racing and the number eight Kyle Busch race car is enabling Rebel 100 to expand into markets and channels that are aligned with targeted consumer cohorts for this brand. Tequila continues to expand its share of the Total Spirits category, and our premium tequila brand El Mayor is well positioned to benefit from this trend. We're launching updated packaging for El Mayor, including a new bottle in expanded sizes to complement our 750 ml offering. The updated packaging is based on feedback and collaboration with our key partners. It is expected to lift El Mayor's shelf presence in in-store merchandising activities. As we look ahead, we have a pipeline of exciting innovation to further strengthen our tequila portfolio and amplify our portfolio's rich heritage and craftsmanship. At the same time, and as expected, sales of our mid and value-tier brands declined during the quarter. This ongoing decline is consistent with overall consumer trends. However, we are taking appropriate actions intended to reduce this rate of decline while opportunistically meeting consumers where they are in the current economic environment. For our distilling solution segment, the main initiative is to strengthen our partnerships with customers. While brown goods volumes and pricing were down during the quarter, they were consistent with our expectations. As I mentioned on the fourth quarter conference call, we're taking decisive proactive actions designed to de-risk our brown goods business. These actions, which include working with customers to align on their volume needs at market-based pricing, are resonating. Our partnership-first approach is leading to more collaborative and constructive discussions, and in many cases, amending and extending supply contracts. This is an encouraging trend that seemed less likely just a few months ago. We're also taking steps to improve our partnership with Kraft customers, which has long been the foundation of MGP's brown goods heritage. We're tailoring solutions to attract new and past customers and to establish MGP as their preferred brown goods partner. At the same time, our efforts to optimize our distillery cost structure are off to a good start, helping us cushion the impact of lower brown goods volumes and enabling us to manage margins and offer more competitive prices to our customers. We continue to be disciplined with our brown goods production and inventories. Our net whiskey put away is expected to be down materially in 2025 as compared to 2024, reflecting our decision to right-size excess inventory and further improve cash flows. The overall American whiskey category is also responding to the current environment with deeper production cuts. The most recent TTB production data, which was released after our fourth quarter earnings call, is through the end of December 2024. This production data shows an increasing rate of decline in industry production volumes, with total whiskey production down 4% for the full year, down 8% for the last six months of 2024, and down 15% in the last three months of 2024. These declines are consistent with several recent news articles about closures or furloughs by a number of whiskey distilleries. While it's difficult to accurately predict the timing and extent of the production reset, we believe the actions we are seeing across the industry are a clear signal that rationalization is underway We believe the combination of scale, quality, reliability, and customization that we bring to our Brown Goods customers is unmatched in the industry. We also believe that our proactive actions position us well to emerge with a stronger competitive position and give us confidence in our four-year sales and profitability outlook for the distilling solution segment. Turning to our ingredient solution segment, our key initiative here is execution. As expected, quarterly sales were impacted by supply disruption resulting from adverse weather and complexities associated with the closure of the Atchison Distillery, as well as the commercialization of new customers. That said, the quarter was largely in line with our expectations, and we expect sequential improvement in the second quarter as projects come online and customer order patterns normalize. Underlying demand for our specialty ingredients remains strong, and we're executing with great urgency. Our Fibrosyn branded specialty starch continues to gain traction with food manufacturers seeking FDA-approved dietary fiber solutions. In specialty proteins, we're making good headway with new customers in North America, especially in the plant-based and functional food categories. Operationally, we're executing several key initiatives. Our deep well project is fully operational, and our new biofuel facility is on track to go live in the second half of 2025. We believe these investments will reduce disposal costs, improve efficiency, and further differentiate our capabilities in a competitive market. At the same time, we're increasing investments in our ingredients facility that are designed to increase throughput, improve reliability, and further streamline operations. Our teams are energized, our customer pipeline is growing, and our commercial execution is improving. We're fostering operational execution with greater cross-functional collaboration to increase transparency accountability, and responsiveness. We believe these actions will help to unlock additional growth opportunities and further solidify our position as a leading specialty wheat ingredient supplier. Despite the soft quarter, we believe the ingredient solution segment is well positioned for stronger performance for the remainder of the year. Turning now to our financial position, we made substantial progress in our initiative to fortify our balance sheet and enhance our liquidity with the upsizing of our credit facility. and the extension of our private placement shelf on favorable terms. Mark will provide more details on this in a moment, but I'm encouraged by the liquidity and financial flexibility the amended facilities provide in support of our growth agenda and other capital needs. Our balance sheet remains strong with net debt leverage well within our target range. We continue to generate solid operating cash flow, and we remain disciplined in our capital allocation, including working capital and CapEx. Our initiative to drive greater productivity across the enterprise is also taking hold. We have high productivity targets for the quarter and full year, and I'm pleased with our team's dedication and progress on this initiative. Our teams are identifying new efficiencies throughout the supply chain, streamlining processes, and working to leverage our scaling capabilities to generate additional savings. While it's early days, we believe these efforts are laying the foundation for stronger execution of our strategic initiatives. With respect to tariffs, At present, based on what has been formally announced, we do not expect tariffs to have a material impact on our four-year results. We will continue to closely monitor the tariff environment, particularly related to its potential impact on consumer confidence and purchasing behavior. Similar to our industry peers, we're not completely immune to tariff impacts and are looking across our supply chain for additional opportunities to mitigate any potential headwinds. Given the encouraging first quarter results, we are reaffirming our 2025 guidance as we continue to expect net sales in the $520 million to $540 million range, adjusted EBITDA in the $105 million to $115 million range, and adjusted basic EPS in the $2.45 to $2.75 range, with average shares outstanding of approximately $21.3 million and four-year effective tax rate of approximately 25%. Let me now hand it over to Mark for a review of our first quarter results.

Thank you, Brandon. For the first quarter of 2025, consolidated sales decreased 29% to $121.7 million compared to the year-ago period. Within our segments, branded spirits sales decreased by 4%. Our minimum value price brands declined by double digits during the quarter due to lower sales of certain tequila, liqueur, and cordial brands within those price tiers, while our premium plus sales increased by 7%, reflecting continued momentum and select American whiskey and tequila brains. Distilling solution segment sales declined by 45%, primarily driven by a 49% decline in brown goods sales. First quarter warehouse service sales increased by 2%, while white goods sales declined by 51% 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 dried distiller's grain. Ingredient solution sales decreased by 26% during the first quarter, driven by decreased sales volume of specialty wheat starches and decreased net price mix of specialty wheat proteins. The declines in specialty wheat starches and proteins were impacted by supply challenges resulting from adverse weather and complexities associated with the closure of the Atchison distillery, as well as the timing of commercialization of new customers. Consolidated gross profit decreased 31% to $43.3 million, primarily due to lower gross profits in the distilling solutions and ingredient solutions operating segments. Gross margin declined by 120 basis points to 35.6%. First quarter SG&A expense was relatively flat, up just 1% compared to the prior year period, with a modest decline on an adjusted basis. Branded Spirits segment advertising a promotion expense of $7.7 million declined 1% from the year-ago period. As we streamline our brand investments, we continue to expect our full-year A&P to be down in 2025 compared to 2024. However, during the first quarter, A&P spend for our Penelope, El Mayor, and Rebel brands collectively was higher than the year-ago period as we are intentionally focusing on our most impactful opportunities within the segment. We expect A&P spend for these three key brains collectively to be higher for the full year 2025 compared to 2024. First quarter adjusted EBITDA decreased 46% to $21.8 million as lower gross profits more than offset reductions in adjusted SG&A and advertising and promotion costs. Net income for the first quarter decreased to a loss of $3.1 million due to lower gross profit and a $10.6 million increase in the fair value of the contingent consideration liability, reflecting the stronger than expected performance of the Penelope brand. On an adjusted basis, net income decreased 68% to $7.8 million. Basic earnings per common share decreased to a loss of 14 cents per share, while adjusted basic EPS decreased 66% to 36 cents per share. Please note that our adjusted basic EPS included a $0.07 per share unfavorable tax impact related to the vesting of share-based awards granted in prior years during periods of higher stock prices. We continue to prioritize strong cash generation by managing our working capital and reducing our barrel inventory put-away. Our first quarter cash flow from operations was $44.7 million, up from $24.6 million during the prior year period. driven primarily by favorable working capital changes. Our net whiskey put-away was $12 million during the quarter, which was up versus the prior year period due primarily to the timing of whiskey production within the year, as our planned reductions in production volume are more heavily weighted towards the remainder of the year. We continue to expect full-year net whiskey put-away of $15 to $20 million, down significantly from $33 million in 2024. Capital expenditures declined 38% versus the prior year period to $8.1 million for the first quarter. We continue to expect full year 2025 capital expenditures of $36 million, representing a nearly 50% decline compared to 2024. Our balance sheet remains healthy, and we are well capitalized with debt totaling $297.1 million as of the end of the first quarter. After net payments on debt, $26.6 million during the quarter, leaving us with $548.4 million in availability under our debt facilities. We ended the quarter with a cash position of $20.1 million, and our net debt leverage ratio remained largely stable approximately 1.6 times. On April 24, 2025, we successfully upsized our credit facility from $400 million to $500 million and extended its maturity from 2026 to 2030. We also increased the size of the accordion feature from $100 million to $200 million. In addition, we extended our shelf for issuing up to $250 million of senior secured promissory notes from 2026 to 2028. These increased commitments at competitive terms are a testament to the strength of our balance sheet and give us additional financial flexibility to address our cash needs. which include the expected settlement of our contingent consideration liability related to the Penelope acquisition, the refinancing of our convertible notes, if desired, and the execution of our strategic growth agenda. With that, let me hand it over to Brandon before opening for your questions. Thanks, Mark.

To close, we are pleased with our start to 2025. The first quarter unfolded as expected, with early signs of stabilization across all three segments. We're executing our strategy with discipline and agility, leaning into our premium brand focus, enhancing customer partnerships and distilling solutions, and revitalizing ingredient solutions. Branded Spirits is now our largest segment, and we believe it'll be the foundation of our growth as we continue to move forward on our journey toward becoming a premier Branded Spirits company. Earlier this month, with a focus on long-term shareholder value creation, our board of directors took steps to strengthen its ranks in anticipation of our next chapter of growth. Finally, I want to thank the entire MGP team for their hard work and agility. We're confident in our team, our strategy, and our ability to navigate the current environment while building long-term shareholder value. That concludes our prepared remarks. Operator, we're ready to begin the question and answer portion of the call.

Thank you. We will now begin the question and answer session. And to ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. And our first question comes from Mark Torrent from Wells Fargo. Please go ahead.

Hey, good morning. Good morning, Mark. Thanks for answering my questions. First, just on your visibility into the outlook, I guess, specifically on distilling solutions, you've talked about proactively working with your customers to recalibrate pricing and order volumes. Maybe how much of your customer base have you made those adjustments with? What's been the general feedback and how does that flow through to your outlook in terms of volume cadence and also any pricing research for the year?

Yeah, thanks for the question, Mark. Yeah, we introduced this concept of leaning into partnership for Distilling Solutions last quarter. And very, very, very pleased to say that the team has reached out to and had discussions with 100% of our contracted customers this year. The vast majority of those discussions has led to either the customer confirming their current orders for volume, price, and timing, or modifying them in some way. So the vast majority of those customers have given us feedback. They have come back to us and said, you know what, I need this volume, not that volume. Or, you know what, I need more of this match bill, not that match bill. My pricing is a little high compared to what I'm seeing. We'd appreciate it if you can, you know, maybe give us a more competitive price. In other cases, Mark, they've asked us, say, hey, I know I'm due to purchase it this quarter. Can I maybe do it in a later quarter or vice versa? So any combination of those three or four opportunities we're seeing, and it's been a game changer, to use our sales team's word for it, because it's changed the tenor of the conversation and the tone, and it's really opened things up. In fact, not only does it give us greater visibility for 2025, But some of these conversations have even led to extensions beyond 25. So on that latter point, we still have more work to do and a lot more conversations to have. But the signs are very encouraging and the team's doing a great job.

Okay, I appreciate the color there. And then I guess, is your outlook for the segment still in line with prior expectations? And then just any additional color on margins? specifically for distilling solutions, they're well ahead of expectations, at least from our end. How did those come in versus your own expectations? How much of that is from your cost savings actions versus maybe baseline business performing better? And how do you see that progressing through the year?

Thanks. Yeah, so firstly, I'll start and I'll let Mark chime in with some of the details. But So firstly, the vast majority of those discussions that have resulted into either confirmed or modifications, and most of those have been modifications, that's all contemplated in our forward guide marks. So when we put those numbers together back in February and last spoke, the team really took a hard pause to think, okay, what is going to get it done in the market? And so we are still seeing things within those expectations. So everything that the pricing volume, everything I just mentioned is contemplated And then as far as, Mark, I'll let you take the numbers here for how it relates to the year.

Yeah, as far as our full year expectations for the distilling solution segment, those still remain. You know, we communicated we expect sales for the year to be down 50%, gross profit to be down 65% for the year for the segment. That's still what we're expecting. You know, when you look at the first quarter, sales and gross profit were only down 45%. But again, I believe, as we mentioned in February, that's a cadence. We expect the distilling solution segment to have stronger first half results than second due to timing contracts and how those play out and fall off in the back half of the year.

And just to add to that, the modifications we're speaking of in a lot of cases weren't adjusted in Q1, but they will be adjusted as the year goes on, too. So that's what we're seeing for that segment in 2025, Mark.

Understood. Thanks.

Thank you, Mark. The next question comes from Bill Chappell from Truist Securities. Please go ahead.

Thanks. Good morning. Good morning, Bill. Just some questions. maybe quantification on, on a few of the issues and I'll kind of rapid fire one, you know, what percentage or where are we in terms of the new distillate negotiations? And when do you think that to be, you know, at 99% to you talked about a, we're taking steps to, to stabilize or improve our branded spirits, the mid and lower tier. Can you maybe give us some examples of what you're doing and what you're doing differently and how that's, you know, how that should change in the near term. And then three, on ingredient solutions, I guess I didn't really understand, or maybe you could explain to us why after this quarter you're more optimistic that things will improve later this year. So, some examples or something behind that just to give us confidence because that's the business we have kind of least visibility into. Thanks so much.

Yeah, thanks for the question, Bill. So, So on displaying solutions, let's start there. That's where you started. You know, we expect to come to this conclusion as soon as we can on, you know, the remaining, you know, 25% or so of customers that we're still negotiating for this year's contract. But the good news is, is that, you know, we're not hearing anything. That's making us think differently about our guide at this point in time. So we feel that's very, very encouraging. So we'll wait until next quarter's call, but I think if we continue to make the progress we're making, we're going to have a good answer by then. So secondly, on branded spirits, minimum value stabilization. Yes, a lot of the Q1 softness was anticipated by us, but we do know that we've got to take measures to reduce the decel of those sales declines. So what we're doing is what we've already talked about, is putting in more discount pricing and price support for some of the mid-in-value brands. It's very competitive in some of those areas, specifically for tequilas, cordials, and the cores. And so a lot of that price support was contemplated, and it's still making its way through the market, and we expect that to take hold in subsequent quarters. And then finally, Bill, on your ingredients question, yeah, so the quarter, as tough as it was, it came in largely within our expectations, and we called out the whys. on the Q4 call, namely the weather impact from the cold and snow we saw in early January. We also talked about the customer choppiness, both those things played out. What we also had additionally was some operational uptime issues of which we are addressing and solving through our CapEx programs this year. So what gives us confidence on that front is first let's start with operations. You know, operationally, we have two really important projects that we need to complete this year. The first one is the deep well project that was completed in the first quarter. The second one being the biofuel facility that is still on schedule to be up and running and having an impact on the second half of the year for that business. In fact, I was in Atchison with the team last week. The still was delivered, and a ceremony was had for the employees there. So we are making great progress on those projects. Additionally, staying with operations, we need to have more reliability, and we need to improve our overall equipment effectiveness. And that said, we've got the largest amount of maintenance and reliability CapEx, budgeted for this year than we have in the last five or more years. So the team is very focused there on solving for those two projects and improving our reliability to get the product we need. Okay, on the commercialization front, you know, for specialty wheat starches, the demand is there. It's been the production issues that we've had that have kept our inventories low and has been a fulfillment challenge for the team. So as we improve our operations and our reliability, that should take care of itself. Secondly, on specialty protein, for the second quarter in a row, we saw a rise growth from a volume standpoint. However, due to the customer onboarding choppiness that we mentioned, the customer mix in the quarter wasn't the optimal level and where we expect it to be. That being said, we expect Q2 in the subsequent quarters to get better. In fact, you're already seeing orders from those right customers in April and May for ARISE specialty protein. And then for our Proterra specialty protein, the team continues to make a lot of progress there. I mentioned the three inclusions that the R&D team was developing. Those are ready to go in our undergoing trial with potential customers as we speak. And the team is still very, very dedicated and focused on bringing in customers mostly for the second half of this year, Bill. So there's a lot that gets us excited. We've got to execute. The theme for this segment is execution, both operationally and commercially. This team is more than capable of doing it. They've done it in the past. But operationally and commercially, they've been throwing some curveballs. But I'm very proud with how they're responding, and that's what gives us confidence.

Got it. And then just second, just kind of follow up on the kind of new distillate business. I mean, if we're looking at it kind of as a trailing 12-month EBITDA, you know, and it's coming down as you're renegotiating and lowering the volumes, like when do we hit a plateau? I mean, when does that – okay, this is the trough. We now know what the base case is and we can start growing from here. Is that end of this year? Does that move into next year? Do you understand what I'm asking? And just trying to look at that business particular with the negotiation of how then we can model and say, okay, this is the base case and here's where we go.

Yeah, great question. And that's what we talk about internally quite a bit. And we shared on our last call that the elevated inventory of barrels in the industry, we expect that overhang to persist into 2026. That being said, we're not waiting for that to take care of itself. We're taking the proactive actions that we've been discussing. And so our goal there is to bring that plateau forward as quickly as possible. We're making great progress there. We still have more work to do. The team is operating with that partnership approach, and it's resonating. We need a little bit more time, Bill, to keep doing what we're doing, but we are seeing good signs both internally and externally. We shared some of the TTB data that's updated through the end of 2024, and the production – deceleration over the course of the year was pretty dramatic, which isn't necessarily anything you'd expect to want to see, but it's the rational behavior that we're looking for in our industry. So we're starting to see the right signs of progress and stabilization, Bill. It's still a little bit too early to make a definitive call, so just give us some more time. We know we're doing the right things.

Great. Thanks so much.

Thank you, Bill. The next question comes from Robert Moscow from TD Cowan. Please go ahead.

Hi, this is Seamus Cassidy on for Rob Moscow, and thanks for the question. So on your last call, you noted that you expected premium plus sales within branded for the year to be roughly flattish, partially due to a cutback on sort of the allocated barrel offerings where demand has slowed. Given the plus 7% in OneQ and you sort of noted that innovation had performed well, is it fair to say that things came in a little ahead of expectation or is it sort of just a timing element with regards to innovation?

Yeah, I think, great question. It was a very encouraging quarter for Premium Plus. It was led by Penelope's great growth and its ability to continue using innovation as its platform to resonate with customers. But also El Mayor and Rebel 100 and Rebel Premium also showed growth in the quarter. So a lot of that was expected, and we were very encouraged by it. But, you know, Penelope for the quarter did come in a bit above expectations, which is why we took the contingent liability up, you know, in the quarter on our balance sheet. which is a great sign. So it's too early to revise our four-year outlook on where we think premium plus is going to come in, Seamus. But, you know, like you said, we're off to a really good start.

Understood. Thanks. And then given sort of like the pricing actions within branded that you called out on mid and value, how should we think about the evolution of the margin profile for the segment? You know, for a while now, there's sort of been this structural tailwind of the growing premium plus mix. But presumably, if you take some of those pricing actions, that would also boost volume on your mid and value brands. So just sort of how you're thinking about that and balancing the profit and margin implications. Thanks.

Yeah, it sounds like you've been sitting around our table internally. That's what we're talking about quite a bit. Yeah, the price support we mentioned on the Q4 call is rolling out. It's not necessarily taking effect on the shelf as quickly as we'd anticipated, but it's still making its way out to the shelf and to the consumer. And, you know, I mentioned tequila being one of those categories within our mid-end value. brand portfolio that's seeing some of the headwind. And I think a lot of the pricing we're seeing out in the market that's being reduced at the shelf is a result of reduction in costs, particularly agave costs. So it's really that's part of the competitive race that we're all in. And so, you know, what I'm trying to say, Seamus, is at least in some cases, reducing price doesn't necessarily mean there's going to be a one-for-one tradeoff of margin in this environment.

Understood. Thanks.

Thanks, Seamus. The next question comes from Sean McGowan from Roth Capital. Please go ahead.

Thank you very much. Appreciate it.

Two questions. Hey, Sean. Hey, Sean.

Yeah, two questions. Can you talk about whether or not you think there was any impact in terms of customer demand from anticipated tariffs? Are there any customers that work in Europe, are they ordering more because they think there might be an increase in tariffs later, even if it's not there now?

Are you talking for distilling solutions, Sean? Can you help me answer?

Yeah, distilling solutions. I know it's kind of indirect and you don't have a clear view of what they're doing, but do you think there might have been any kind of a pull forward?

Not that we're seeing. A lot of our conversations have been around contracts, as we mentioned, and a lot of the volume and timing on those were put in place well before the tariffs in a lot of senses. you know, we're not necessarily seeing that. Definitely didn't see it in the quarter. But that doesn't mean that, you know, potentially finished goods by our customers or other industry participants didn't move around, but we don't have as much insight into that.

Okay. All right, thanks. And then the other question was, you know, you noted the improved or, you know, kind of a better than expected performance of Penelope. That seems like a bit of a turnaround. Weren't you talking last quarter about how maybe Penelope you weren't expecting to see as much upside in Penelope as you had earlier thought? Or can you talk a little bit about that?

Yeah, I appreciate that. So, yeah, two things. Number one, we never, you know, said that we don't have strong expectations for Penelope. In fact, you know, the expectations we have going into this year were very high. We did temper them back a little bit, you know, coming into Q4. But then two things have happened. Number one, the brand really performed well in the quarter. And so that, you know, that's not necessarily changing our full outlook, but it's definitely, like I said to Seamus, it's a good start for the brand and for Premium Plus for us. But what it also does, because Q1 came in so strong, the accounting will say that you've got to now accelerate your contingent liability, which is what we did in the quarter. So, you know, we are still very, very, very optimistic about this brand. You know, it's performing really, really well in a very difficult consumer backdrop. And, you know, we're excited for the things to come as it relates to Penelope. Great.

Okay. Thank you very much.

Thanks, Alan. The next question comes from Mitch Pinheiro from Dirt Event. Please go ahead.

Yeah, hey, good morning. Good morning. Most of my questions have been asked, just a couple here. One, when I look at the barrel distillate, you know, it was up 16% year over year, even up sequentially. Is that rise solely from your own you know, your branded spirits business, or is there any of that coming from the distilling solutions?

Yeah, when you talk about that increase, are you talking about on the put-away side?

Yeah. Correct.

Yeah, so that is solely in support of our branded spirits business. And that, you know, the reason that has increased in Q1, despite what we've indicated is going to be a decrease for the full year, we're expecting 15 to 20 million for the full year down from 33 million last year. So the reason that's heavy in Q1 is just due to timing of production. So our planned production reductions out of our distilleries for the year have been more heavily weighted to the remainder of the year. And so as a result, our Q1 production was higher than it will be the rest of the year. And as a result, our put-away in support of our brands was higher.

And that's all part of our productivity initiative, Mitch. where we had to move around our scheduling to maximize efficiency and keep costs competitive. And so that's the way it played out. And I could get into a lot more detail, but I'll spare you all from that. But yeah, so the takeaway is it was up in the quarter, but we're still expecting 15 to 20 million in total net put away this year, which is down from the 33 million last year. And that 15 to 20 million is for Brandon Spirits.

So if you were to disclose the barrel distillate for your distillery products versus your branded spirits, is it fair to say the distillery products business put away was down? Not even the put away, but the actual level of distillate, is that down?

Yeah, because there were age sales in the quarter. So those age sales would be a reduction in the distilling solutions inventory. And given the inventory that was added in the quarter was for brands, yep, that's right. Distilling solutions overall position would be reduced by that amount.

Okay. And then based on your comment prior about production and productivity and the timings, When you're putting away this age distillate, is it going to have a higher cost just because your throughput for fixed cost is lower? Or is the embedded margin in the distillate that you're putting away consistent with prior years?

Yeah, great question. Yeah, so any, you know, any overhead, you know, absorption is going to be impacted by the volume we produce. And, yeah, the assumption there is right, Mitch, is that, you know, the less we produce, the more that overhead has to get spread over fewer barrels. which is why we were very vocal about the productivity initiatives we were putting in place for the year on the Q4 call. So a lot of that has to do with scheduling, as we mentioned. A lot of it has to do with going back to our suppliers and vendors and having the same partnership conversation we're having with our customers. And so we're doing all the right things, I think, to make our cost structure as competitive as possible. And because we know that's what our customers need. And we feel like we're well suited from an operational standpoint, you know, to do that in a lot of ways. So we like our positioning there as well as the tax we're taking.

Okay. And those cost into the guidance numbers that we've given as well.

Yep. Thanks. And then when I... you know, it looks like we're starting to see a little more promotional pricing in the whiskey category, just both anecdotally and what I've seen on some of my data. But it appears it's more tame than I would have thought. Is there, are producers not only, you know, well, industry-wide, are they kind of hanging on to price or are we, what seems to be, we're starting to see a little more value being driven, you know, instead of getting, you're seeing older product getting, you know, some six-year, eight-year kind of product out there as opposed to four-year. Are we starting to see sort of like the pricing almost inherent being given to consumers in the form of better value product. Is that, is that how the industry thinks going to approach, um, like promotion and, and, and, and holding onto price?

Yeah, I think, uh, yeah, that's the challenge, uh, in the spirits industry is, you know, that our, our product can last on the shelf at retail or even the shelf at home, uh, for quite a while. So I think, you know, A lot of consumers, rather than, you know, buying that incremental bottle, even for a slightly reduced price, a lot of them are just maybe drinking more of what they have at home. And so it's really hard to draw that direct correlation necessarily as it relates to spirits and American whiskey. But that could explain maybe part of the behavior you're seeing now, Mitch, and that we're seeing maybe more generally. But, you know, what I will say, you know, with, you know, one example is, you know, could be, you know, our Penelope brand. And what the team is doing such a great job there of doing is when they are coming forward with innovation, it is with an eye to where the consumer is today. And there's a lot of the macro headwinds that are affecting consumers in the United States and outside the United States, as we're all aware. And when we bring forward a brand or an innovation like Penelope Weeded at that $35 to $39 price point, That's now making one of our Penelope products more approachable for our consumer that shops in that price range, which is exactly where we want them to be. So now we're giving them that gateway into not only the American Whiskey category, but our Penelope brand. And just one more example, and we mentioned it on the prepared remarks, Mitch, is our Penelope Peach Dull Fashion. This is our first ready-to-serve, ready-to-pour product for Penelope. It came out in the quarter. And this is going to retail more in the $20 to $30 range. So, again, it's going to be even more approachable from a consumer standpoint and also a great entry point and on-ramp into the category and into the Penelope family for consumers.

Thank you. All right, that's all I have. Thanks for the question, Mitch.

Again, if you have a question, please press star, then 1. Our next question comes from Ben Cleave from Lake Street Capital Markets. Please go ahead.

All right, thanks for taking my questions. How about just a quick one regarding the ongoing CEO search? And so curious, Juan, if you could just provide any kind of general updates. But specifically, I'm also wondering the degree to which all of the kind of strategic initiatives that you have embarked on of late are, you know, if any of these strategic initiatives you considered are being held back given the ongoing CEO search. Apologies for the poorly worded question there.

No, no worries, Ben. Great question. So, CEO search is still underway. These searches take time. And, you know, we've even shared from the start that it's not uncommon for CEO public company searches to last four to eight months. And I've also read that, you know, the smaller the market cap, the longer it can take. But that doesn't mean that the board is not very focused on this. And it is a top priority. But what we're also seeing, though, is other changes in leadership at the board level and, you know, in re-evaluating the individuals on the board at the director level and positioning that board. to make important decisions and to guide us in the future. So just because the CEO search is still ongoing, it doesn't mean that we're not making great strides from a leadership perspective as a company. Yeah, and as it relates to strategic initiatives, Ben, hopefully you're picking up the fact that we're not just waiting around. We don't have that luxury right now. And so the team is taking action. I could not be more proud of the team throughout the organization. This has been an absolute pleasure of mine to be able to work even more closely and cross-functionally with them over the last few months. And so, yeah, we are taking action. We are seeing things through the same lens and aligning. And we don't have a choice, Ben. And the time is now. And I'm very, very proud with the decisive actions the team is taking.

Very good. I appreciate that. Thanks for taking my question. I'll get back to you.

Thank you. Thank you, Ben.

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Brandon Gull for any closing remarks.

Thank you for your interest in our company and for joining us today for our first quarter earnings call. We look forward to meeting with many of you over the next few weeks.

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