Earnings Call Transcript - MGPI Q2 2024

Operator, Operator

Good day, and welcome to the MGP Ingredients Second Quarter 2024 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Amit Sharma, VP of Investor Relations. Please go ahead.

Amit Sharma, VP of Investor Relations

Thank you. I'm Amit Sharma, Vice President of Investor Relations. Joining me are members of the management team, including David Bratcher, Chief Executive Officer and President; and Brandon Gall, Chief Financial Officer. We will begin the call with management's prepared remarks and then open the call to questions. As a reminder, this call may include certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements made today due to various factors, including the risk factors described in the company's most recent annual report filed with the SEC. The company assumes no obligation to update any forward-looking statements made during the call, except as required by 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 directly comparable GAAP measures is included in today's earnings release, which is available on MGPI's website at www.mgpingredients.com. This call is being webcast, and a replay will be available on our website. With that, I would like to turn the call over to MGP's Chief Executive Officer and President, David Bratcher. David?

David Bratcher, CEO

Thank you, Amit. We are excited to have you on board to lead our Investor Relations efforts as we continue to add strong talent throughout our organization, including two other recent hires, David Colyott as EVP of Operations; and Paul Lux as VP of Sales for Distilling Solutions. Good morning, everyone. I will begin with an overview of our second quarter performance and provide updates on key performance metrics and initiatives. I will then turn it over to Brandon to discuss our quarterly results in greater detail. We delivered another quarter of strong operating results as we continue to make consistent progress towards becoming a premier branded spirits company. We successfully recommissioned our Lux Row distillery, giving us additional distilling capacity in Bardstown, Kentucky to continue supporting our branded whiskey growth. Our first half 2024 results were in line with our expectations, enabling us to reaffirm our full-year sales, EBITDA, and EPS guidance. Specific to second quarter 2024, on a pro forma basis when factoring in the Atchison distillery closure, consolidated sales increased by 7%, driven by the ongoing momentum of our Branded Spirits business and solid brown goods sales within our Distilling Solutions segment. As a reminder, prior year reported sales included Atchison distillery related sales. At the segment level, Distilling Solutions pro forma sales grew by 9%. We posted our highest-ever quarterly brown goods sales, driven by new distillate. As expected, sales of brown goods during the first half of 2024 were more heavily weighted toward the second quarter, and we expect the same ordering pattern to play out in the second half of 2024. I am proud of our sales team for their nimbleness as they continue to work with our brown goods customers to help them successfully adapt to the current consumption and inventory patterns at distributor and retailer levels. I believe we are uniquely positioned to thrive in the current environment, given our competitive facility footprint, long track record of producing high-quality aged and new distillate, and our extensive roster of large multinational and craft customers. Turning to the Branded Spirits segment, quarterly sales increased by 11%, driven by strong innovation, focused execution, higher investments behind our key brands, and contributions from M&A. Our strong branded trends reflect our continued shift to a premium portfolio as our premium plus portfolio now accounts for 48% of Branded Spirits segment sales, well above its 30% contribution for the full year 2021. It's a testament to our focused strategy of premiumizing our portfolio to align it with the evolving consumer taste across the alcoholic beverage industry and to leverage our improving capabilities and talent throughout our branded organization. As expected, quarterly sales for the rest of the Branded Spirits segment declined modestly. Distributor inventory for our branded portfolio remained relatively stable, even below historical levels in some cases. We continue to work closely with our partners to invest behind our premium plus brands and innovation to drive impactful retail execution, increased brand awareness, and field distribution whitespace in targeted markets. Our Ingredient Solutions segment sales declined 3% as lower commodity starts and specialty protein sales were partially offset by a strong double-digit increase in our specialty starch sales. While our stronger U.S. dollar impacted our quarterly sales, our Fibersym branded specialty starches, which provide FDA-approved dietary fiber, continue to benefit from the long-term consumer-driven tailwinds across several large food categories. Turning to gross margin, quarterly gross margins increased to 43.6%, which is an all-time high for MGP. Branded Spirits segment gross margins exceeded 50% for the first time since the Luxco merger, while Distilling Solutions gross margins increased to 45.5% as we continued to benefit from our decision to close the Atchison distillery. I am very pleased with our gross margin trajectory as it validates our strategic actions and reflects tangible progress in our objective to become a higher-margin branded spirits company. Our continued focus on execution and cost discipline enabled quarterly adjusted EBITDA growth of 7%, even though A&P expenses increased by 35% as we continue to invest behind our premium plus price brands. Second quarter adjusted earnings per share increased by nearly 15% to $1.71 per share. Our first half results were in line with our expectations, enabling us to reaffirm our full-year top line and profit guidance for the year. I believe we remain well positioned to deliver even stronger profits and earnings growth for the second half of 2024. In summary, we are executing on our strategic priorities to build a premier branded spirits company. I believe we are uniquely positioned with the right mix of distilling assets, growing brands, and a strong team to deliver long-term growth and shareholder value. With that, let me turn it over to Brandon for a review of our quarterly financial results and full-year outlook in greater detail. Brandon?

Brandon Gall, CFO

Thanks, David. For the second quarter of 2024, consolidated sales decreased 9% compared to the prior year period to $190.8 million, primarily due to the Atchison distillery closure. Excluding the impact of the Atchison distillery, consolidated sales increased by 7%, driven by higher Distilling Solutions sales and the continued momentum in our premium plus branded portfolio. Within the Distilling Solutions segment, sales decreased 20% to $93.4 million due to the Atchison distillery closure. Excluding the impact of the Atchison distillery in both periods, segment sales increased 9% from the prior year quarter. Brown goods sales were up 3%, driven primarily by the planned strong increase in our new distillate sales and the timing of customer purchases, as David mentioned in his comments. Warehouse-related sales increased by 24% to their highest-ever second quarter level, reflecting a higher proportion of new distillate sales volumes. Branded Spirits segment sales increased by 11%, mainly due to our premium plus portfolio. Including the contribution from last year's Penelope acquisition, premium plus portfolio sales increased 29%, while lapping 29% growth in the year-ago quarter, reflecting strong performance of our premium-priced brands. Our mid and value branded sales were relatively flat due to easier year-ago comparisons. Consolidated gross profit increased 9% to $83.2 million, representing 43.6% of sales. Excluding the impact of the Atchison distillery, second quarter consolidated gross margin improved approximately 80 basis points from the prior year period as we delivered record gross margins of 52.5% in the Branded Spirits segment and continued to benefit from higher margins in the Distilling Solutions segment. Excluding the impact of the Atchison distillery, Ingredient Solutions gross margin declined nearly 800 basis points from prior year, primarily due to incremental costs incurred to commercialize the waste starch stream. However, on a sequential basis, segment gross margin increased 400 basis points from the first quarter, primarily due to sequentially higher specialty protein sales. Advertising and promotion expenses increased $3 million to $11.7 million due to increased support of our premium plus portfolio. Branded Spirits related A&P totaled $10.8 million and represented 17% of segment sales. We remain committed to investing behind our faster-growing, higher-margin premium plus price tier brands in our effort to capture a greater share of the American whiskey and tequila categories. Operating income for the second quarter decreased 2% to $43.4 million, while adjusted operating income increased 12% to $51.3 million as higher gross profits and lower SG&A costs more than offset higher A&P investments. Net income for the second quarter remained flat at $32 million, while adjusted net income increased 15% to $38 million. Basic and diluted earnings per share decreased to $1.43 per share from $1.44 per share. Adjusted basic and diluted EPS increased to $1.71 per share from $1.49 per share. Adjusted EBITDA increased 7% compared to the year-ago period to $57.5 million. Moving to cash flow, year-to-date cash flow from operations was $29.6 million, up from $20.2 million in the prior year period, mainly due to favorable working capital, including lower barrel put away. Our balance sheet remains healthy, and we remain well-capitalized with debt totaling $309.4 million and a cash position of $21 million. Our net debt leverage ratio remained largely stable at approximately 1.4x at the end of the quarter. Capital expenditures were $9.4 million during the quarter and $22.6 million during the first half. We continue to expect full-year capital expenditures of approximately $85 million for maintenance and initiatives to support our future growth. These initiatives include additional whiskey warehouses, dryer investment at the Lux Row distillery, a mini fuel plant in Atchison to better monetize the waste starch stream in our Ingredient Solutions segment. Recall that with the closure of the Atchison distillery, we expect to incur $4 million to $6 million of additional costs in 2024 related to treatment and disposal of the waste starch stream. The mini fuel plant should eliminate these costs by converting the waste starch stream into a commercial product. As part of our overall capital allocation strategy, we remain focused on organic and acquisitive growth opportunities that align with our long-term strategy of becoming a premier branded spirits company. To that effect, we continue to evaluate M&A opportunities while investing in whiskey put away to support our Distilling Solutions and Branded Spirits segment sales. During the second quarter, our net whiskey put away was $16.3 million at cost, and we continue to expect net put away to be between $25 million and $30 million for 2024 or roughly half of the 2023 amount. During the second quarter, we repurchased approximately $2.5 million of our common stock, bringing the year-to-date share repurchase amount to $7.5 million. We currently have more than $90 million remaining under the $100 million share repurchase program authorized by the Board of Directors in the first quarter. The Board of Directors also authorized a quarterly dividend of $0.12 per share, which is payable on August 30 to stockholders of record as of August 16. The Board continues to view dividends as an important way to share the success of the company with stockholders. Turning to our outlook for the full year, given our first-half performance, we are reiterating our full-year guidance with sales in the range of $742 million to $756 million, adjusted EBITDA in the range of $218 million to $222 million. Adjusted basic earnings per share is forecasted to be in the range of $6.12 to $6.23 per share, assuming basic shares outstanding of approximately 22.3 million at year-end. As David mentioned, we expect stronger profit and earnings growth in the second half of 2024, weighted more towards the fourth quarter. Underpinning our confidence in stronger second half and fourth quarter growth are a few key points. First, we expect our premium plus brands momentum to continue. Distributor inventory levels for our brands are in good shape, and positive impact from mix shift to premium brands should enable us to deliver branded gross margins at the higher end of our mid- to upper 40s percent range. Second, we continue to have good visibility for our second half brown goods sales with committed contracts for a vast majority of expected volumes. As mentioned earlier, our customers are adjusting their purchasing and shipments in response to changing market trends in an effort to manage their working capital in the current higher interest rate environment. Given that, similar to the first half, we expect the Distilling Solutions sales and profits to continue to be lumpy and disproportionately more weighted toward the fourth quarter. Third, Ingredient Solutions segment gross margin improved by nearly 400 basis points sequentially from the first quarter, and we expect this trajectory to continue in the second half as our specialty protein business ramps up and additional specialty product opportunities take form in the second half. And now let me turn things back over to David for concluding remarks.

David Bratcher, CEO

Thanks, Brandon. I would like to close by thanking and congratulating the talented and resilient MGP team for another quarter of strong operating performance as they continue to adapt and execute at a high level in a dynamic environment. Notwithstanding near-term trends, we remain optimistic about the long-term health and growth potential of the alcoholic beverage industry. We are fully committed. And even more importantly, we are making consistent progress on our long-term strategy of becoming a premier branded spirits company and delivering attractive shareholder returns. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.

Operator, Operator

And the first question will be from Robert Moskow from TD Cowen.

Seamus Cassidy, Analyst

This is Seamus Cassidy on for Rob Moskow. I was hoping sort of just given the strong volume growth in brown goods, if you could help contextualize the minus 18% price/mix result. Maybe just directionally, how much of this reflects incremental new distillate mix shift versus sort of like-for-like change in aged versus new pricing? And then on that note, the gross margins for the segment came in ahead of our expectations. So just curious how this trended relative to your expectations, given sort of this intentional mix shift to new fill.

Brandon Gall, CFO

Yes, this is Brandon. Thanks for the question, Seamus. Yes, that's exactly right. Brown goods sales were up 3% in the quarter, led by volume. And to your point, the volume increase was driven by new distillate. As we've shared over the last couple of quarters, we have increased and heightened our focus on new distillate sales, and we shared that we expect them to be the majority proportionately of our brown goods sales this year, and that is, in fact, playing out. So although the volumes are much greater there, the price/mix has declined as a result. So that's where you see the shift there. I will also add that it is mix-driven. In that pricing within new distillate was up year-over-year. Aged pricing too was in line with expectations, but it was slightly down for the reason being that the average age of the barrels we sold during the quarter was younger than the same period last year. So the pricing moved as we would have expected with that. So the underlying very strong played out the way we anticipated and the way we planned.

Operator, Operator

And the next question will be from Bill Chappell from Truist Securities.

Bill Chappell, Analyst

Could you share what feedback you are receiving from your customers regarding the Distilling Solutions segment, particularly in relation to 2025? There seems to be some concern about a slowdown in spirits consumption, especially as larger global brands are taking a more cautious approach. Are you also hearing similar concerns affecting your outlook for 2025, and has this influenced your guidance for the second half of the year?

David Bratcher, CEO

It's a good question. As we've mentioned several times, the advantage of the new distillate is the established contract basis. We're hearing similar feedback to what you would hear on other investor calls, but as we've stated repeatedly, our larger multinational customers purchasing on the new distillate basis remain optimistic about the future. The positive aspect of that business, as we've always emphasized, is that it is contracted. As we approach 2025, we also have an ongoing contract renewal process. We're continually in contact with our customers as we navigate through that. Overall, I think we are very optimistic and pleased with our strategy on new distillate because of these factors.

Bill Chappell, Analyst

Got it. For my second question, are you still progressing on the branded side? I remember you had plans to streamline some of the sub-premium brands and potentially exit that market. Is that still the case? I’d like to understand the strength of the business—is it mainly driven by Penelope or are there other premium brands like Yellowstone contributing as well? Additionally, is the rationalization still being managed as you had planned?

David Bratcher, CEO

Our premium plus category is still growing, as indicated by our gross margin percentage. This growth comes from brands like Penelope, Rebel, El Mayor, and Yellowstone. This focus will remain as we aim to become a branded spirits company. However, we will continue to offer a variety of products across different categories and price points. When we discuss rationalization, we generally refer to the value price point, rather than the mid-tier, although we are actively reworking and repricing many mid-tier products to move them into at least the premium category. To address your question, we have made rationalizations and will keep concentrating on the value segment, though progress has slowed recently, and we are beginning to see the results of these efforts.

Brandon Gall, CFO

Yes. And just to add to that a little bit, Bill. So yes, in the quarter, mid and value were flattish, which is an improvement relative to what we typically see for those two price points. And the reason for that is it was a very weak comp last year. And so as you recall, in Q1 of 2023, we had our national distributor realignment. And in March, there was a pipeline fill for mid and value. And so the result was Q2 of last year, for mid was down 27% and value is down 10%. So that's what we were cycling through. We do not expect or anticipate mid and value to show this type of growth or holding serve from that perspective for the rest of the year.

David Bratcher, CEO

Yes. And Bill, just to add one more piece to that. As we look forward and our evolution as a company, what we will focus on developing and innovation, M&A, all the things that are necessary at that premium plus price point category. But it doesn't necessarily mean we're going to shed every mid that we have and stuff because I think part of what makes us unique and part of what's real in our industry is that you have to service customers across multiple price points.

Bill Chappell, Analyst

Got it. And just a follow-up to the follow-up to the follow-up. It doesn't sound like you're seeing or saw much inventory destock from distributors this quarter, certainly compared to last year, but even from the first quarter.

David Bratcher, CEO

Yes. Our inventory levels, which we monitor at our distributors, are remaining stable. It's interesting to see others beginning to discuss inventory consistency, now focusing more on the retail level. For our company, our inventory is exactly where we need it to be, and we continue to monitor it daily.

Operator, Operator

And the next question will be from Marc Torrente from Wells Fargo.

Marc Torrente, Analyst

Just a couple here. Back to the branded side, total sales were up strong double digits, premium plus nearly 30%. You anniversaried the Penelope acquisition during the quarter, which provided some support to sales, maybe like mid-single digits contribution to the segment over the last few quarters. What's your level of confidence that you can continue to grow this segment given the category and macro backdrop? Maybe some of the near-term opportunities you're seeing in terms of brand distribution?

Brandon Gall, CFO

Yes. Thanks for the question, Marc. This is Brandon. I'll start and let David then fill in my gaps. But it's just continued execution in the quarter, you're exactly right. So just for everybody else, June 1 was the anniversary of the Penelope acquisition when that closed. So we did get a couple of months of benefit in the quarter. But the rest of the premium plus portfolio did show robust growth, even if you take out Penelope. So we're very, very proud of that. And that's being led by the brands that David mentioned, and including our tequila portfolio and premium plus also did very well. We also had a nice uptick in our allocated items of premium plus offerings, and we expect that to sequentially improve as the year goes on as well. So the way we see the rest of the year playing out and what gives us optimism is just what we talked about. It's just continued focus on gaining penetration in the points of distribution and growing that way organically within the United States.

David Bratcher, CEO

I want to add that what sets us apart, especially in the Branded Spirits segment, is the significant opportunity we have ahead of us. Even if there's a perception of lower consumption, our current position and the brands in our portfolio present vast potential. This is evident in our ongoing growth. For example, Penelope expanded into seven additional states this quarter. As we look ahead, our focus will be on innovation, targeted brands, and opportunities for mergers and acquisitions, which differentiate us from our competitors.

Marc Torrente, Analyst

Okay. And then just building on the branded opportunity, you saw record gross margins during the quarter. How much of that was shipment timing versus just underlying mix momentum? And how do you see that playing out through the rest of the year?

Brandon Gall, CFO

Yes. We were not surprised by this. When the merger between MGP and Luxco occurred in 2021, gross margins were in the mid-30s. Since then, our quarterly results have shown a consistent increase, reaching a record 52.5% this quarter. This is a result of our ongoing execution, focus, and investment in advertising and promotions for our premium brands, which naturally have much higher margins. We have maintained our execution in this area.

David Bratcher, CEO

Yes, Marc, I think the best way to say it is if you look at what I just said earlier, our inventory remained level. If we were outweighing shipments, you would see a climb in it versus depletions. We monitor our shipment depletions very closely. I think I've indicated it in the past. Even if we look at the internal compensation system for our own sales team and stuff, they're all depletion-based, not shipment-based. And again, I think that what makes us unique, and it doesn't encourage channel stuffing or loading and allows us to better manage that inventory.

Marc Torrente, Analyst

Okay. And then if I could squeeze in one more. You've talked about the opportunity over time to improve free cash flow conversion as you shift more to a new distillate model and branded strategy. You're finishing up a few larger capital projects this year that require elevated CapEx. Maybe help contextualize the longer-term opportunity here and maybe sort of progress we may be see into next year?

Brandon Gall, CFO

Yes, that's a great question. There are two main factors that will change our free cash flow profile. The first is capital expenditure. This year, we are at a peak level for capital spending, with an expected investment of about $85 million in CapEx projects, primarily related to warehouses. We have made significant improvements that have increased our throughput at our distilleries, and now the warehouses need to catch up to support that growth. This will extend into 2025, though not at the same high level. We anticipate a reduction in CapEx to around $60 million next year and even less in the following years. This is where we expect to see an increase in free cash flow from capital. The second significant factor is our inventory. Last year, our inventory increased by more than $50 million, but this year, we expect that number to be about half. This is due to our allocation of production to new distillate customers. We are still investing, but we are confident in our inventory levels and believe we can continue to invest without the same urgency. These adjustments in capital allocation will lead to more free cash flow available for investors, enabling us to invest in other areas of the business.

Operator, Operator

And the next question will be from Ben Klieve from Lake Street.

Ben Klieve, Analyst

Congratulations on a nice quarter, guys. First, I got a question, David, following your comment on Penelope and the distribution. You said that Penelope moved into seven new states here in Q2. I'm wondering if you can remind us what the distribution was at this point last year and what the overall distribution levels are right now. Kind of trying to understand the level of year-over-year growth we could still see from Penelope now that it's lapped in the second half of the year.

Brandon Gall, CFO

Yes. This is Brandon. Thanks for your question, Ben. Yes. So when we closed the Penelope acquisition in June, they were right around 30 states, maybe a couple more than that. And then we finished 2023 at 37 states in total. We added two more states in Q1 and seven in Q2. Probably about this time next year, we expect to be in about all 50. Not all states and all the markets are equal. I do want to remind you that some states are much larger and can have more of an impact than others. But yes, we're trying to be very thoughtful and deliberate about how we roll this out. We don't want to move too fast. We want to make sure that the market support is there when we do our marketing state.

David Bratcher, CEO

And Ben, I think to add to that, moving into a state is just step one. That opens up a whole new area of white space as we expand pods. You might go into a state and align with someone and come out of the gate with a specific number of pods. But once you're in there and able to benchmark other competitors, the real opportunity as we move forward is expansion in that state. It's not only true for Penelope, it's true for any of our products that we do. As we enter something, we try to find the right pods to expand at a competitive level.

Ben Klieve, Analyst

Got it. Got it. I appreciate that. That's helpful. One other big picture question, I'll get back in queue. You talked about selectively pursuing M&A. In this environment where the spirit segment is facing its share of dynamics, how has your view of M&A evolved here of late? Are you seeing more brands become available in your targeted categories? Are those targets moving? Are valuations coming down? Any insights on the M&A environment would be great.

David Bratcher, CEO

I would call the deal flow choppy just a little because you got to think about the whole environment, the dynamic environment and where people are sitting back and trying to really understand what's going on. Now, having said that, we are seeing opportunities, but we've reinforced this for a few quarters in a row that we want to make sure it's the right opportunity, that is margin accretive, that gets us closer to our peers on our gross margin percentage and all. So we are seeing deal flow increase, but that's different than actually being able to pick one that we want to do the right thing on. I expect that we'll continue to see increased deal flow over the rest of this year and into '25.

Operator, Operator

The next question is from Mitchell Pinheiro from Sturdivant & Company.

Mitchell Pinheiro, Analyst

I'm curious if there was any difference in revenue within the Distilling Solutions segment among your multinational, national, and craft segments.

Brandon Gall, CFO

Yes. Great question. So if you go back to how we talked about that business, new distillate customers tend to be more multinational, whereas our aged customers tend to be more craft and regional. And so as we focus more on the new distillate, those are going to be the types of customers we're going to be dealing with more so on a relative basis. On the aged side, that's where we have experienced some choppiness. However, we entered the year having looked through a cycle like this before, expecting that, which is why we positioned the business the way we did, more toward new distillate. The aged customer, the more craft and regional customer, and you talked about this as well, has shifted from buying just in case to more so buying just in time. We expect that to continue throughout the rest of this year at least. But we feel like we've done a good job in managing the business to still be predictable in the way we have.

David Bratcher, CEO

I'd add to that. If you think about the Distilling Solutions segment of our business, what makes it unique, speaking as a long-term brand guy, is the offerings that we offer. There are people who could sell other whiskies. But to the level that MGP does it and the uniqueness of the mash bills, our ability to convert very quickly in response to those customers at a super competitive price for them, I think it sets us apart. Even in maybe a choppy period of time, they're going to continue to come back. As you've heard from others, we still have confidence in the American whiskey category. Has it been choppy? Has it slowed some? Yes. But it's still there. It's still rising. The opportunity we said over and over is not only in the U.S., it's in Europe and in a lot of other categories that we can do, which offers us expansion opportunity because we do have that business segment, whereas a lot of peers that we have don't necessarily compete in that area.

Mitchell Pinheiro, Analyst

And that's very helpful. How does that look when you consider the barrel distillate that you're setting aside? I assume more of that distillate is going to be allocated for your own brands. Are you holding back more now for third-party customers, or is most of the new distillate in the aged category or the new barrel distillate intended for your own brands?

Brandon Gall, CFO

Yes. Last year, we set aside a significant amount of whiskey, primarily for Distilling Solutions customers. This year, that volume has decreased slightly, leading to a more balanced distribution between our own brands and Distilling Solutions customers. However, we continue to invest in both areas. We have strong confidence in both segments. As I mentioned, we've experienced these mini cycles previously, and we anticipate that consumer behavior and interest rates will return to a more normalized growth trajectory.

David Bratcher, CEO

I would add to that too. If you think about it, and we've said this in prior quarters, what makes us again unique is our ability to take new entrants into the category and bridge them from today to four years from today. With that, we are always going to be putting up layaway or put away for future customers. That is what we offer that's unique. There may be other entrants into the category in the distillation business. But when they have zero on it, it's very hard. A customer can come to us today, paint a vision for us. We help them develop their products, provide unique products to them and say, not only can we do that, I can get you and get you in the market today and continue to push your brand and help you grow your brand to become a new larger new distillate customer.

Mitchell Pinheiro, Analyst

And just one follow-up is just would love to hear your thoughts or any update on potential international sales.

David Bratcher, CEO

It continues to be a focus area. I mean, I've said for a long time, even for a very long time, that, that is the opportunity market. American whiskey in Europe has lagged. Typically on some of these categories, they continue to lag. I'll even call out to tequila. You're starting to see a little tequila rise in the European markets. I do believe that the long-term opportunity is in Europe. We do have feet on the ground. As a matter of fact, I've got a team over there today in Europe. They left the U.S. yesterday to go in, explore opportunities, build those relationships, look at how the channels are different, what price points they're entering on to totally understand the market. I feel like that is a real opportunity, a real white space for the Distilling Solutions.

Operator, Operator

The next question is from Sean McGowan from ROTH Capital Partners.

Sean McGowan, Analyst

Two quick things. Can you give us a sense of whether the advertising levels you're expecting in the second half should be in terms of percentage of revenue, about the same as what you've seen so far in the first half? Will it moderate at all? I know you said you're committed to continuing to advertise, but just trying to get a sense of what the level is going to be.

Brandon Gall, CFO

Thank you for the question and the chance to elaborate. Our advertising and promotional spending exceeded $11 million in the quarter. We anticipate that the second quarter will be the peak for ad and promotional expenses this year. This is largely due to our shift in advertising around March Madness this year, compared to a heavier focus on the fourth quarter last year. We expect Q2 to be the highest spending quarter, especially for our branded spirits promotion. Additionally, as I mentioned earlier, we foresee our brown goods sales being disproportionately higher in the fourth quarter compared to the third quarter. We observed a similar pattern from the first quarter to the second quarter. Many contracts stipulate that customers must purchase a certain amount in the first half and a specific amount in the second half. Due to the current higher interest rates, customers are choosing to delay their transactions, which is why we expect Q2 and Q4 to have more significant sales.

David Bratcher, CEO

I want to emphasize that this also applies to brands. As we approach Q4, which includes the holiday season, we anticipate a greater demand for the product, leading to slightly stronger performance. Based on our guidance and what we've experienced in Q1 and Q2, I expect Q3 and Q4 to show a trend in profitability similar to what we saw in Q1 and Q2 when making comparisons.

Brandon Gall, CFO

Yes. A significant portion of the growth in premium plus was attributed to Penelope. However, I want to highlight that our other brands also experienced strong growth. For example, Tequila, as David noted, El Mayor is performing well, and we are seeing positive results with Rebel due to substantial marketing investments in that brand. Overall, we saw balanced growth across the portfolio outside of Penelope. Additionally, our allocated offerings increased this quarter, and we anticipate continued growth in this area as the year progresses.

Operator, Operator

Ladies and gentlemen, this now concludes our question-and-answer session. I would like to turn the conference back over to David Bratcher for any closing remarks.

David Bratcher, CEO

Thanks, everyone, for the confidence you've placed in our team as we continue to transition into a premier branded spirits company. I would also like to thank Mike Houston and the Lambert team for their support in helping driving our investor engagements over the last several years. We are pleased with our first half performance and look forward to meeting many of you at investor conferences over the next several months.

Operator, Operator

And thank you, sir. The conference has now concluded. Thank you for joining today's presentation. You may now disconnect your lines.