MGP Ingredients - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $121.7M, down 29% YoY, with gross margin 35.6% (-120 bps YoY); adjusted EPS was $0.36 and adjusted EBITDA $21.8M as brown goods demand remained pressured and Ingredient Solutions faced supply challenges.
• Versus S&P Global consensus, MGPI modestly beat revenue ($121.7M vs $117.2M*) and was roughly in line on EBITDA ($21.8M adjusted vs $19.5M* for EBITDA), while adjusted EPS was slightly below ($0.36 vs $0.374*). Values with asterisks retrieved from S&P Global.
• Management reaffirmed FY2025 guidance: sales $520–$540M, adjusted EBITDA $105–$115M, adjusted EPS $2.45–$2.75, capex ~$36M; liquidity improved via upsizing the revolver to $500M and extending the notes shelf to 2028.
• Key near-term stock narrative centers on: stabilization signs in Premium Plus brands (Penelope, El Mayor, Rebel 100), proactive contract resets in Distilling Solutions, and execution-driven recovery in Ingredient Solutions; risks include elevated industry barrel inventories and a cautious consumer backdrop.

What Went Well and What Went Wrong

What Went Well

• Premium Plus portfolio sales rose 7% YoY, led by Penelope’s stronger-than-expected performance; brand innovation included Penelope Wheated and Penelope ready-to-serve cocktails, with distribution expansion planned.
• Distilling Solutions gross margin held flat YoY at 39.8% despite a sharp sales decline, reflecting cost discipline and production optimization; management highlighted partnership-first actions and amended/extended contracts with customers.
• Operating cash flow improved to $44.7M (+$20.1M YoY) and net debt leverage stayed ~1.6x; credit facility upsized to $500M with maturity extended to 2030, providing flexibility for contingent liability settlement and potential convertible note refinancing.

What Went Wrong

• Consolidated sales fell 29% YoY to $121.7M and adjusted EBITDA fell 46% YoY to $21.8M, driven by a 49% decline in brown goods and lower specialty starch/protein volumes amid supply issues and Atchison closure complexities.
• GAAP net income swung to a loss of $(3.1)M; change in fair value of the Penelope contingent consideration (+$14.7M) materially impacted GAAP results this quarter.
• Ingredient Solutions gross margin compressed to 9.3% (from 17.4%), with execution and commercialization timing headwinds; management expects sequential improvement as projects come online and order patterns normalize.

Transcript

Operator (participant)

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.

Amit Sharma (VP of Investor Relations)

Thank you. Good morning and welcome to MGP's Q1 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 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.

Brandon Gall (Interim President and CEO and CFO)

Thank you, Amit. Good morning, everyone. I'd like to begin by offering a few highlights from our Q1 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 Q1 results delivered an encouraging start to the year and set us on course to meet our full-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 and 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 H1 of the year. As for the Q1 of 2025, results were in line with our expectations, and 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 Premium Plus portfolio posted solid growth. Adjusted earnings per common share declined to $0.36 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. 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 focus initiative.

After demonstrating strong growth in 2024, these brands were the primary drivers of the 7% growth in Premium Plus portfolio during the Q1 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 Wheated 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 and expanded sizes to complement our 750 ml offering. The updated packaging is based on feedback and collaboration with our key partners and is expected to lift El Mayor's shelf presence and 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, 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 Solutions 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 Q4 conference call, we are 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 craft 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 Q4 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 full-year sales and profitability outlook for the Distilling Solutions segment. Turning to our Ingredient Solutions 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 Q2 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 Fibersym 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 H2 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 Solutions 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 scale and capability 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 full-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 Q1 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 full-year effective tax rate of approximately 25%.

Let me now hand it over to Mark for a review of our Q1 results.

Mark Davidson (VP of Corporate Controller and Head of Treasury)

Thank you, Brandon. For the Q1 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 mid and 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 in select American whiskey and tequila brands. Distilling Solution segment sales declined by 45%, primarily driven by a 49% decline in brown goods sales.

Q1 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 Solutions sales decreased by 26% during the Q1, 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%.

Q1 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 and 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 Q1, 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 brands collectively to be higher for the full year 2025 compared to 2024. Q1 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 Q1 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 $0.14 per share, while adjusted basic EPS decreased 66% to $0.36 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 Q1 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 Q1. We continue to expect full-year 2025 capital expenditures of $36 million, representing a nearly 50% decline compared to 2024.

Brandon Gall (Interim President and CEO and CFO)

Our balance sheet remains healthy, and we are well capitalized with debt totaling $297.1 million as of the end of the Q1, after net payments on debt of $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 24 `April 2025, we successfully upsized our current 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 Q1 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 in 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 D``irectors 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.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Marc Torrente from Wells Fargo. Please go ahead.

Marc Torrente (VP of Equity Research)

Hey, good morning. Thanks for taking 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 resets for the year?

Brandon Gall (Interim President and CEO and CFO)

Yeah, thanks for the question, Marc. We introduced this concept of leaning into partnership for Distilling Solutions last quarter. 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. 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. You know what? I need more of this mash bill, not that mash bill. My pricing is a little high compared to what I'm seeing. We'd appreciate it if you can maybe give us a more competitive price. In other cases, Marc, they've asked us to 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 2025. On that latter point, we still have more work to do and a lot more conversations to have. The signs are very encouraging, and the team's doing a great job.

Marc Torrente (VP of Equity Research)

Okay. I appreciate the color there. I guess, is your outlook for the segment still in line with prior expectations? 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.

Brandon Gall (Interim President and CEO and CFO)

Yeah. Firstly, I'll start, and I'll let Mark chime in with some of the details. 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, Marc. 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? We are still seeing things within those expectations. The pricing volume, everything I just mentioned, is contemplated. As far as Mark, I'll let you take the numbers here for how it relates to the year.

Mark Davidson (VP of Corporate Controller and Head of Treasury)

As far as our full-year expectations for the Distilling Solution segment, those still remain. 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. When you look at the Q1, sales and gross profit were only down 45%. Again, I believe, as we mentioned in February, that's a cadence. We expect the Distilling Solution segment to have stronger H1 results than H2 due to timing contracts and how those play out and fall off in the back half of the year.

Brandon Gall (Interim President and CEO and CFO)

Just to add to that, the modifications we were speaking of, in a lot of cases, were not adjusted in Q1, but they will be adjusted as the year goes on too. That is what we are seeing for that segment in 2025, Marc.

Marc Torrente (VP of Equity Research)

Okay. Understood. Thanks.

Brandon Gall (Interim President and CEO and CFO)

Thank you, Marc.

Operator (participant)

The next question comes from Bill Chappell from Truist Securities. Please go ahead.

Bill Chappell (Managing Director)

Thanks. Good morning. Just some maybe quantification on a few of the issues, and I will kind of rapid-fire. One, what percentage or where are we in terms of the new distillate negotiations, and when do you think that to be at 99%?

Two, you talked about, hey, we're taking steps 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 should change in the near term? 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. Some examples or something behind that just to give us context because that's the business we have kind of least visibility into. Thanks so much.

Brandon Gall (Interim President and CEO and CFO)

Yeah. Thanks for the question, Bill. On Distilling Solutions, let's start there. That's where you started. We expect to come to this conclusion as soon as we can on the remaining 25% or so of customers that we're still negotiating for this year's contract.

The good news is that we're not hearing anything that's making us think differently about our guide at this point in time. We feel that's very, very encouraging. We'll wait until next quarter's call. I think if we continue to make the progress we're making, we're going to have a good answer by then. Secondly, on Branded Spirits, minimum value stabilization. Yep. A lot of the Q1 softness was anticipated by us, but we do know that we've got to take measures to reduce the deceleration of those sales declines. What we're doing is what we've already talked about, putting in more discount pricing and price support for some of the minimum value brands. It's very competitive in some of those areas, specifically for tequilas, cordials, and liqueurs.

A lot of that price support was contemplated, and it is still making its way through the market, and we expect that to take hold in subsequent quarters. Finally, Bill, on your ingredients question, yeah, the quarter, as tough as it was, came in largely within our expectations. 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, which we are addressing and solving through our CapEx programs this year. What gives us confidence on that front is, first, let's start with operations. Operationally, we have two really important projects that we need to complete this year.

The first one's the Deep Well project that was completed in the Q1. The second one being the biofuel facility that is still on schedule to be up and running and having an impact on the H2 of the year for that business. In fact, I was in Atchison with the team last week. The still was delivered in a ceremony that was had for the employees there. 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. 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. 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, for specialty wheat starches, the demand is there. It has been the production issues that we have had that have kept our inventories low and has been a fulfillment challenge for the team. As we improve our operations and our reliability, that should take care of itself. Secondly, on specialty protein, for the Q2 in a row, we saw a rise in growth from a volume standpoint. However, due to the customer onboarding choppiness that we mentioned, the customer mix in the quarter was not at the optimal level and where we expected to be. That being said, we expect Q2 and the subsequent quarters to get better. In fact, we are already seeing orders from those right customers in April and May for a rise in specialty protein. 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 and are undergoing trial with potential customers as we speak. The team is still very, very dedicated and focused on bringing in customers mostly for the H2 of this year, Bill. There is a lot that gets us excited. We have got to execute. The theme for this segment is execution, both operationally and commercially. This team is more than capable of doing it. They have done it in the past. Operationally and commercially, they have been thrown some curveballs. I am very proud with how they are responding, and that is what gives us confidence.

Bill Chappell (Managing Director)

Got it. 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 and it's coming down as you're renegotiating and lowering the volumes, 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? 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.

Brandon Gall (Interim President and CEO and CFO)

Yeah. Great question. That's what we talk about internally quite a bit. 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. 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. We are seeing good signs both internally and externally. We shared some of the TTB data that's updated through the end of 2024. 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. 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.

Bill Chappell (Managing Director)

Great. Thanks so much.

Brandon Gall (Interim President and CEO and CFO)

Thank you, Bill.

Operator (participant)

The next question comes from Robert Moskow from TD Cowen. Please go ahead.

Seamus Cassidy (VP of Equity Research)

Hi. This is Seamus Cassidy for Rob Moskow, and thanks for the question. 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 Q1, 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?

Brandon Gall (Interim President and CEO and CFO)

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. El Mayor and Rebel 100 and Rebel Premium also showed growth in the quarter. A lot of that was expected, and we're very encouraged by it. Penelope for the quarter did come in a bit above expectations, which is why we took the contingent liability up in the quarter on our balance sheet, which is a great sign. It's too early to revise our full-year outlook on where we think Premium Plus is going to come in, Seamus. Like you said, we're off to a really good start.

Seamus Cassidy (VP of Equity Research)

Understood. Thanks. Given sort of 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? For a while now, there has 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 brand. Just sort of how you're thinking about that and balancing the profit and margin implications. Thanks.

Brandon Gall (Interim President and CEO and CFO)

Yeah. It sounds like you've been sitting around our table internally. That's what we're talking about quite a bit. I mean, 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.

I mentioned tequila being one of those categories within our mid and value brand portfolio that's seeing some of the headwind. 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. It's really that's part of the competitive race that we're all in. 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 trade-off of margin in this environment.

Seamus Cassidy (VP of Equity Research)

Understood. Thanks.

Brandon Gall (Interim President and CEO and CFO)

Thanks, Seamus.

Operator (participant)

The next question comes from Sean McGowan from ROTH Capital. Please go ahead.

Sean McGowan (Managing Director and Senior Research Analyst)

Thank you very much. Appreciate it. 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?

Brandon Gall (Interim President and CEO and CFO)

Are you talking for Distilling Solutions, Sean? Help me answer. Yeah.

Sean McGowan (Managing Director and Senior Research Analyst)

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?

Brandon Gall (Interim President and CEO and CFO)

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. We are not necessarily seeing that Definitely did not see it in the quarter, but that does not mean that potentially finished goods by our customers or other industry participants did not move around, but we do not have as much insight into that.

Sean McGowan (Managing Director and Senior Research Analyst)

Okay. All right. Thanks. The other question was you noted the improved or kind of a better-than-expected performance of Penelope. That seems like a bit of a turnaround. Were you not talking last quarter about how maybe you were not expecting to see as much upside in Penelope as you had earlier thought? Can you talk a little bit about that?

Brandon Gall (Interim President and CEO and CFO)

Yeah. I appreciate that. Two things. Number one, we never said that we do not have strong expectations for Penelope. In fact, the expectations we have going into this year were very high. We did temper them back a little bit coming into Q4. Two things have happened.

Number one, the brand really performed well in the quarter. That is not necessarily changing our full outlook, but it is definitely, like I said to Seamus, a good start for the brand and for Premium Plus for us. What it also does, because Q1 came in so strong, the accounting will say that you have to now accelerate your contingent liability, which is what we did in the quarter. We are still very, very, very optimistic about this brand. It is performing really, really well in a very difficult consumer backdrop. We are excited for the things to come as it relates to Penelope.

Sean McGowan (Managing Director and Senior Research Analyst)

Great. Okay. Thank you very much.

Brandon Gall (Interim President and CEO and CFO)

Thank you, Sean.

Operator (participant)

The next question comes from Mitch Pinheiro from Sturdivant. Please go ahead.

Mitch Pinheiro (Director of Fundamental Equity Research)

Yeah. Hey, good morning. Most of my questions have been asked. Just a couple here. One, when I look at the barrel distillate, it was up 16% year-over-year, even up sequentially. Is that rise solely from your Branded Spirits business, or is there any of that coming from the Distilling Solutions?

Mark Davidson (VP of Corporate Controller and Head of Treasury)

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

Mitch Pinheiro (Director of Fundamental Equity Research)

Yeah. Correct.

Mark Davidson (VP of Corporate Controller and Head of Treasury)

Yeah. So Mitch, that is solely for our branded in support of our Branded Spirits business. 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 million to $20 million for the full year, down from $33 million last year. The reason that's heavy in Q1 is just due to timing of production. Our planned production reductions out of our distilleries for the year have been more heavily weighted to the remainder of the year. As a result, our Q1 production was higher than it will be the rest of the year. As a result, our put-away in support of our brands was higher.

Brandon Gall (Interim President and CEO and CFO)

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

Mitch Pinheiro (Director of Fundamental Equity Research)

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?

Brandon Gall (Interim President and CEO and CFO)

Yeah. Because there were age sales in the quarter. Those age sales would be a reduction in the Distilling Solutions inventory. 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.

Mitch Pinheiro (Director of Fundamental Equity Research)

Okay. Based on your comment prior about production and productivity and the timing, when you're putting away this new age distillate, is it going to have a higher cost just because your throughput per fixed cost is lower, or is the embedded margin in the distillate that you're putting away consistent with prior years?

Brandon Gall (Interim President and CEO and CFO)

Yeah. Great question. Yeah. Any overhead absorption is going to be impacted by the volume we produce. Yeah, the assumption there is right, Mitch, that 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. 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. We are doing all the right things, I think, to make our cost structure as competitive as possible because we know that's what our customers need. We feel like we're well-suited from an operational standpoint to do that in a lot of ways.

We like our positioning there as well as the tack we're taking.

Mitch Pinheiro (Director of Fundamental Equity Research)

Okay.

Mark Davidson (VP of Corporate Controller and Head of Treasury)

Those costs tie into the guidance numbers that we've given as well.

Mitch Pinheiro (Director of Fundamental Equity Research)

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

Is that how the industry thinks going to approach promotion and holding on to price?

Brandon Gall (Interim President and CEO and CFO)

Yeah. I think that's the challenge in the spirits industry is that our product can last on the shelf at retail or even the shelf at home for quite a while. I think a lot of consumers, rather than 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. It is really hard to draw that direct correlation necessarily as it relates to spirits and American whiskey. That could explain maybe part of the behavior you're seeing now, Mitch, and that we're seeing maybe more generally. What I will say with one example could be our Penelope brand.

What the team's 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. There are a lot of the macro headwinds that are affecting consumers in the United States and outside the United States, as we're all aware. When we bring forward a brand or an innovation like Penelope we did 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. Now we're giving them that gateway into not only the American whiskey category, but our Penelope brand. Just one more example, and we mentioned it on the prepared remarks, Mitch, is our Penelope Peach Old Fashioned.

This is our first ready-to-serve, ready-to-pour product for Penelope. It came out in the quarter. This is going to retail more in the $20-$30 range. 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.

Mitch Pinheiro (Director of Fundamental Equity Research)

Okay. All right. That's all I have.

Brandon Gall (Interim President and CEO and CFO)

Thanks for the question. Thank you, Mitch.

Operator (participant)

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

Ben Klieve (Senior Equity Research Analyst)

All right. Thanks for taking my questions. How about just a quick one regarding the ongoing CEO search? Curious if you could just provide any kind of general updates.

Specifically, I'm also wondering the degree to which all of the kind of strategic initiatives that you have embarked on of late are, if any of these strategic initiatives you considered are being held back given the ongoing CEO search. Apologies for the poorly worded question there.

Brandon Gall (Interim President and CEO and CFO)

No. No worries, Ben. Great question. CEO search is still underway. These searches take time. We've even shared from the start that it's not uncommon for CEO public company searches to last four to eight months. I've also read that the smaller the market cap, the longer it can take. That doesn't mean that the board is not very focused on this. It is a top priority.

What we're also seeing, though, is other changes in leadership at the board level and in reevaluating the individuals on the board at the director level and positioning that board to make important decisions and to guide us in the future. Just because the CEO search is still ongoing, it does not mean that we're not making great strides from a leadership perspective as a company. Yeah. As it relates to strategic initiatives, Ben, hopefully you're picking up the fact that we're not just waiting around. We do not have that luxury right now. 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. Yeah, we are taking action.

We are seeing things through the same lens and aligning. Because we do not have a choice, Ben. The time is now. I am very, very proud with the decisive actions the team is taking.

Ben Klieve (Senior Equity Research Analyst)

Very good. I appreciate that. Thanks for taking my question. I will get back to you. Thank you.

Brandon Gall (Interim President and CEO and CFO)

Thank you, Ben.

Operator (participant)

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 Gall for any closing remarks.

Brandon Gall (Interim President and CEO and CFO)

Thank you for your interest in our company and for joining us today for our Q1 earnings call. We look forward to meeting with many of you over the next few weeks.

Operator (participant)

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