MGP Ingredients , Inc. (NASDAQ:MGPI), a leading producer of distilled spirits and specialty wheat proteins and starches, reported a decrease in consolidated sales and net income for the first quarter of 2024, primarily due to the closure of its Atchison distillery.
Despite the decline, the company confirmed its full-year financial outlook and remains focused on growth opportunities. MGP Ingredients emphasized its commitment to the premium plus segment and expects to see improvements in gross margins and business performance throughout the year.
Key Takeaways
- MGP Ingredients' Q1 2024 consolidated sales fell by 15% to $170.6 million, largely due to the Atchison distillery closure.
- Gross profit dropped by 10% to $62.8 million, with a gross margin of 36.8%.
- Operating income and net income also saw declines, with operating income down by 30% to $28.9 million and net income by 34% to $20.6 million.
- The company's outlook for 2024 remains positive, with sales projected between $742 million and $756 million and adjusted EBITDA between $218 million and $222 million.
- MGP Ingredients plans to invest in organic and acquisitive growth, with a capital expenditure expectation of around $85.8 million for the year.
Company Outlook
- MGP Ingredients confirmed its financial outlook for 2024, expecting sales to range from $742 million to $756 million.
- Adjusted EBITDA is projected to be between $218 million and $222 million.
- The company anticipates consumer fundamentals to support business growth throughout the year.
Bearish Highlights
- The Atchison distillery closure significantly impacted sales and gross margins.
- Operating income and net income both experienced notable decreases in Q1 2024.
Bullish Highlights
- MGP Ingredients remains optimistic about the long-term health of the spirits industry.
- The company is focusing on premium plus and higher-margin offerings, expecting volume increases and margin improvements.
- Gross margins are expected to improve over time, particularly in the Ingredients Solutions segment.
Misses
- Sales missed previous year's figures when excluding the impact of the distillery closure.
- The company faced challenges in the Ingredient Solutions segment due to the distillery closure and input costs.
Q&A Highlights
- The company addressed the proliferation of new brands in the spirits industry, seeing it as a reflection of consumer demand.
- They discussed the pricing and margins for the distillates segment, which remains strong despite some headwinds.
- A contingent liability related to the Penelope transaction will potentially lead to a cash outflow of approximately $110 million by the end of 2025.
MGP Ingredients' first quarter of 2024 was marked by challenges, particularly the closure of the Atchison distillery, which had a significant impact on sales and gross margins. However, the company has maintained a positive outlook for the year, with expectations of sales and adjusted EBITDA remaining strong.
MGP Ingredients' focus on the premium plus segment and its plans for capital expenditures reflect a strategic approach to overcoming current industry headwinds and positioning itself for future growth. Despite the temporary setbacks, the company expects to see improvements in gross margins and overall business performance as the year progresses.
InvestingPro Insights
MGP Ingredients, Inc. (MGPI) has navigated through a challenging first quarter in 2024, marked by the closure of its Atchison distillery and a subsequent impact on financial metrics. However, the company's strategic focus on premium products and growth opportunities remains steadfast. Here's what real-time data and InvestingPro Tips reveal:
InvestingPro Data:
- The company's Market Cap stands at $1.77 billion, reflecting its significant presence in the industry.
- MGP Ingredients' Price to Earnings (P/E) Ratio is currently 18.61, which adjusts to a more favorable 14.61 when considering the last twelve months as of Q1 2024.
- Revenue for the last twelve months as of Q1 2024 is reported at $806.08 million, with a Gross Profit Margin of 36.93%, indicating a solid profitability potential despite recent challenges.
InvestingPro Tips:
- Analysts' revisions point towards a downward trend in earnings for the upcoming period, which aligns with the reported decline in Q1 2024 sales.
- Despite this, MGP Ingredients' cash flows are robust enough to cover interest payments, and its liquid assets surpass short-term obligations, suggesting a strong liquidity position.
- The company is also trading near its 52-week low, which might present an opportunity for investors considering its history of profitability and high returns over the last decade.
For those looking to delve deeper into MGP Ingredients' financial health and future prospects, InvestingPro offers additional insights. With a total of 9 InvestingPro Tips available, you can gain a more comprehensive understanding of the company's performance and investment potential. Access these tips at: https://www.investing.com/pro/MGPI and remember to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - MGP Ingredients (MGPI) Q1 2024:
Operator: Good day, and welcome to the MGP Ingredients First Quarter 2024 Financial Results Conference Call. [Operator's Instructions] I would now like to turn the conference over to Mike Houston. Please go ahead, sir.
Mike Houston: Thank you. I'm Mike Houston with Lambert Global, MGP's Investor Relations firm. And joining me are members of their management team, including David Bratcher, Chief Executive Officer and President; and Brandon Gall, Vice President of Finance and Chief Financial Officer. We will begin the call with management's prepared remarks and then open the call to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements. The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in the company's most recent annual report filed with the Securities and Exchange Commission. 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 reference 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. If anyone does not already have a copy of the earnings release issued by MGP today, you can access it at the company's website, www.mgpingredients.com. At this time, I would like to turn the call over to MGP's Chief Executive Officer and President, David Bratcher. David?
David Bratcher: Thank you, Mike, and thanks, everyone, for joining the call today. On this call, we will begin with an overview of our performance for the quarter ended March 31, 2024, provide updates on key financial performance metrics and discuss the progress we have made towards our strategic plan. At the end of the call, we will open the line for Q&A. I am pleased with the results we posted this quarter and the progress we have made towards our long-term strategic plan. On a pro forma basis, when factoring in the Atchison distillery closure, our defiling Solutions segment achieved sales growth when looking at our business today compared to a prior year period without the adjusted distiller results. We also had solid sales growth in Ingredient Solutions in our Premium Plus brands within branded spirits. All in all, this quarter was in line with our financial expectations as described during our previous earnings call. Other highlights for the quarter include the promotion of Amel Pasagic to the Chief Commercial Officer role, the commissioning of our newly built textured lead protein facility and several incredible brand initiatives, each of which we will talk about on the call today. Starting with the promotion of Amal to his snowy created role, he will continue to leverage the business intelligence and predictive data insights he developed as CIO and apply them across all three business segments. Amel's wealth of experience and his unique strategic view of our business will be critical in driving the next phase of growth for MGP. We are excited about the insights we will bring to our business and as our commercial leader. Turning to our Distilling Solutions segment. We are pleased to have completed the Atchison distillery closure in December of 2023, which led to a record quarterly segment gross margin in Q1 of 2024 as well as accomplishing our strategic intent of being browned focused in our distilling solutions business. As we reported last quarter, we have the vast majority of our anticipated total brown goods volume committed for 2024. Also, as we previously indicated, we expect the last 3 quarters of 2024 will result in stronger profits as compared to Q1 due to the variation in the timing of customer demand and the timing of our Bardstown, Kentucky distillery expansion project coming online in April. Turning to branded spirits. We are very pleased with the continued growth of our Premium Plus sales as they represent 42% of segment sales this quarter. This represents a stark improvement from the 33% figure we experienced in the first quarter of 2023. This meaningful improvement was partially offset by lower volumes of our allocated Single Barrel Premium Plus brands as compared to 2023 due to the seasonal nature of these specialty programs. While the seasonal nature of these special programs put pressure on our gross profits this quarter, we were still able to expand gross margin to 44.9%, which is a testament to our continued investment in premiumization. Our branded spirits strategy remains focused on growing points of distribution by leveraging the expansion of our Premium Plus brand portfolio with particular focus on our tequila and American whiskey brands. As an example, we ship finality into 2 new states during the quarter. Our brand marketing initiatives during the first quarter included entering into a sponsorship of Power bush #8 car under Richard Solders Racing, which broadly showcases our Revelerben brand and will continue throughout the racing season. In addition, we had six brands win double gold at the San Francisco World Spirits competition and successfully launched new innovative items such as Penelope Turkey, Penelope Rio and Yellowstone Rum Cask Finish. These are just a few examples of our innovation and marketing efforts to increase the sales velocity of our Premium Plus brands portfolio. Turning to Ingredient Solutions. Sales for the quarter were a record and primarily reflect continued rising consumer preference towards high protein, low net card diets, which drove higher sales of our specialty products. We expect to see this trend continue in upcoming quarters as can be seen by anyone visiting their local grocery store and seeing the proliferation of keto and low net carb alternatives, which ties well to our Ingredient Solutions growth strategy. In addition, we are extremely proud of the grand opening of our texture protein facility, which was dedicated to the Ladd Seaberg, the late hesitant of our Chairman, Karen Seaberg. It was absolutely fabs to see Karen and her family, celebrate his memory and the indelible mark you left on the company with such a beautiful facility dedication. This concludes my initial remarks. Let me turn things over to Brandon Gall for a review of the key metrics and numbers. Brandon?
Brandon Gall: Thanks, David. For the first quarter of 2024, consolidated sales decreased 15% compared to the prior year period to $170.6 million due to the Atchison distillery closure. Excluding the impact of the Atchison distillery in both periods, consolidated sales were in line with the prior year period. Also impacting consolidated sales during the quarter, branded sales were down 3% driven primarily by the temporary shutdown of the Luxury distillery of Barstow, Kentucky to complete the distillation expansion as well as expected declines in our mid and value branded spirits price tiers. As expected, gross profit decreased 10% to $62.8 million, representing 36.8% of sales. This decrease was primarily due to lower sales of mid and value price tier brands as a result of the distributor realignment in 2023, lower sales of allocated single barrel printing plus brand spirits offerings in Q1 as planned, the temporary shutdown of our Luxco distillery of Arslan, Kentucky and the incremental costs incurred in Ingredient Solutions related to the drying of the waste start streams ready for commercial sale as well as our new extrusion manufacturing facility. Excluding the impact of the Atchison distillery in the current period, gross margin was 37.3%. Advertising and promotion expenses for the first quarter increased $1 million to $8.7 million, primarily driven by increased advertising and promotion investment in support of our Premium Plus portfolio of brands. Brand sports-related A&P totaled $7.8 million for the quarter, represented 15.5% of segment sales. This remains consistent with our premiumization strategy. We will continue to invest in marketing spend against our higher-margin premium plus price tier brands. Operating income for the first quarter decreased 30% to $28.9 million. Adjusted operating income decreased 19% to $33.6 million. Net income for the first quarter decreased 34% to $20.6 million, while adjusted net income decreased 22% to $24.2 million. Basic earnings per common share decreased to $0.92 per share from $1.40 per share and diluted earnings per share decreased to $0.92 per share from $1.39 per share. Adjusted basic and diluted earnings per common share decreased to $1.07 per share from $1.40 and $1.39 per share, respectively. Adjusted EBITDA for the quarter was in line with our expectations and totaled $40.2 million, a decrease of 17% compared to the year ago period, driven by the factors highlighted on our previous earnings call. In accordance with the applicable accounting guidance, we no longer expect to present the results of the Atchison distillary as discontinued operations in our financial statements. However, for reference, we have quantified the impact of the associate results and the pro forma schedules included in this morning's earnings release. Moving to cash flow. Cash flow from operations was $24.6 million in the quarter, a record for any first quarter and up from $5 million in the first quarter of 2023. Our balance sheet remains healthy, and we remain well capitalized with debt totaling $300.8 million and a cash position of $19.5 million. Turning to capital allocation. We remain focused on organic and acquisitive growth opportunities that align with our long-term strategy as well as underlying consumer trends, which we believe our business is well positioned to leverage. We will continue to evaluate M&A opportunistically with the goal of accelerating growth and increasing our capabilities and product offerings. Effectively mentioning was we put away with growing future disown solutions and brand Spirit segment sales remains a key priority and is critical to our long-term strategy. Our investment in inventory of aging whiskey increased slightly this quarter to $254.5 million at cost, an increase of $4.3 million from the end of the year. Investing in capital expenditures to enhance our operational capabilities is another important capital allocation priority, and it resulted in capital expenditures of $13.1 million for the first quarter. We continue to expect approximately $85.8 million in capital expenditures for the year, which will be used for facility improvement and expansion, such as additional warehouses to support our recent capacity increases, driver investment to support our Luxco distillery expansion, the purchase of our previously leased bottling facility in St. Louis Missouri and a main fuel plant in Atchison, Kansas to better monetize the waste starts strain in our Ingredient Solutions segment. During the quarter, the Board approved a $100 million share repurchase program, and we repurchased 59,84 shares of our common stock for approximately $5 million. The Board of Directors also authorized a quarterly dividend of $0.12 per share. It was payable on May 31 to stockholders of record as of May 17. The Board continues to be dividends as an important way to share the success of the company with shareholders. We will continue to focus efforts on optimizing product mix across all 3 of our business segments and invest in areas that we expect to generate the greatest long-term value for our shareholders. We expect the consumer fundamentals that have supported the historical growth in our business to remain intact throughout 2024. While we continue to monitor the potential impact of the inventory levels of distributors, overall American Lite supply and consumption patterns and inflation on consumers. Despite these industry headwinds, we feel uniquely positioned to grow as a company in this dynamic operating environment. These factors, in combination with the strength of our underlying business support the confirmation of our 2024 financial outlook. Sales are projected to be in the range of $742 million to $756 million following the closure of the Atchison distillery. Adjusted EBITDA to be in the range of $218 million to $222 million, inclusive of the add back of share-based compensation expense. Adjusted basic earnings per common share are forecasted to be $6.12 to $6.23 range, with basic weighted average shares outstanding is expected to be approximately $22.3 million at year-end. And now let me turn things back over to David for concluding remarks.
David Bratcher: Thanks, Brandon. We are pleased with our positioning to achieve our 2020 objectives. Demand for our products in each of the 3 segments remain strong, and we believe our plans will continue to position the business for long-term success. Despite some reported softening within the branded spirits industry, we feel very optimistic about the long-term health of this industry and are encouraged by the continued growth of the Premium Plus category across the industry. Our strategy is to build a portfolio of branded spirits to increase our points of distribution, accelerating our sales velocity within those points of distribution through effective marketing, expanding our product offerings through innovation and closing a meaningful margin accretive M&A transactions. In closing, I would like to restate what I said last quarter and that we are committed to evolving our company into a dedicated branded spirits company with desirable brands across the price point universe with a special focus on premium plus and higher-margin offerings as well as continuing to supply our market-leading premium American whiskey in bulk to both craft and multinational entities. We believe this is the optimal way to provide desired returns to our shareholders. That concludes our prepared remarks. Operator, we are ready to begin the question-and-answer portion of the call.
Operator: We will now begin the question-and-answer session. [Operator's Instructions] The first question comes from Gerald Pascarelli from Belport Securities.
Gerald Pascarelli: On your brown goods business within distilling Solutions, just -- I guess this is a housekeeping question, but the down 3, I know you said on a consolidated basis, the quarter kind of came in, in line with your expectations. Was the low single-digit decline in brown goods in line with your expectation? And then as we look forward, do you continue to expect brown goods to outpace category growth? And then maybe just some commentary on if there's been any change of tone from your customers regarding the demand for Newfield this year? Any color there would be helpful.
Brandon Gall: The quarter was in line with our expectations in our prepared remarks. We mentioned -- or reminded everyone of the closure of the Luxco distillery as we prepared for its expansion and coming online in April. And so we were unable to sell new distillate out of that facility in the quarter. If you take that out of Q1 last year and you look at the brown goods growth year-over-year, it's actually up with that mine. So it was in line with our expectations. We do continue to expect brown goods to grow over the course of the year. And as far as tone underlying from our customers, as we reiterated, we saw the vast majority of our sales committed. We're working very closely with our customers to make sure that we can execute and produce as they need it. And so we reiterated our outlook this morning with that line.
David Bratcher: Yes, I would add that as you think about what Brandon and I said last quarter, we have really good visibility into the rest of the year because of the strategy that we put in place at the steel solutions. So as you continue on, I mean we haven't heard or seen or felt anything that's any different than what we had previously stated.
Gerald Pascarelli: Perfect. Next question is just on branded spirits. When we look at your gross margin in that segment, which continues to expand nicely, and we compare that to your profit before tax margin, there's a fairly meaningful delta there, not just this quarter, but even historically speaking. So I guess like understanding right now that you're in the process of building out your portfolio and the need to invest, I guess, longer term, can you talk about if there are opportunities or measures you could take to improve that profit before tax margin to maybe better align with finished goods peers? It does seem like that would offer a pretty big notable upside to earnings over time. So any color there would be great.
David Bratcher: Yes. And great question. So it did -- the prorata for branded spirits was low in the quarter. I'll remind you that a big reason for that is going to be the contingent liability that hits the SG&A on the branded spirit side related to the Beneli acquisition. So that was $4.1 million in the period. So that is going to be dragging down. But you're exactly right, over time as we continue to execute on our strategy, specifically the higher-margin premium plus brands, we expect to gain leverage from that on both the SG&A infrastructure we have in place as well as our A&P investment. So again, just as a reminder, a lot of our brands in premiums are younger in their life cycle, more emergent and regional in nature. And as we continue to invest in raising that awareness with the consumer, we expect that to pay off over time.
Brandon Gall: And Gerald, I’d add, we said last quarter and said again this quarter, we aspire to evolve to be a brand to spirits company. And as such, we fully expect that compared to our peer group, we need to have a margin set that’s comparable. And this is why we work the strategy that we work. So we – as we continue to evolve and focus on what’s meaningful, that’s the plan. We should have that accretion ongoing.
Operator: The next question comes from Marc Torrente from Wells Fargo.
Marc Torrente: Just a couple here. On the guidance from here, Q1 obviously had some headwinds to work through, which you called out at the start of the year. There's some modest upside in the quarter versus expectations. Guidance was maintained. Maybe just some comments on your increased level of comfort on the guide now and how you see the quarterly progression implied through the rest of the year?
Brandon Gall: Yes, Mark, thanks for the question. Yes, we shared a lot on the last quarterly call in anticipation of this just because there were some things to navigate. We wanted to message that as clearly as possible to you and the rest of the investor community. But yes, as you mentioned, Q1 played out exactly how we thought it might, maybe even slightly better in some ways. And our view for Q2 through Q4 are entirely consistent with what we shared on the Q4 call. We expect branded spirit sales to pick up as the year goes on, primarily in Premium Plus, which is typical for our industry. On the tilling Solutions side, as David mentioned, Luxco come online in April. So we can utilize that facility and the expansion we've gotten there on new deli sales. We also have our customer commitments ramping up for brown goods. And then finally, even within Ingredient Solutions, we've got a Proterra facility that just opened and we're really excited for. But we don't necessarily have the sales immediately now to offset and absorb a lot of those costs. As the year goes on and as we further commercialize that facility and that asset, those costs will be absorbed. And over time, probably as we can to next year, that facility and our product line will become more and more accretive to that segment.
David Bratcher: I think as we look at our guidance numbers and think about our business moving forward, from now from 90 days ago, Brandon, and I still feel very comfortable with the guidance and the expectations that we established. Our total team is focused on that, and we are moving in that direction.
Marc Torrente: Okay. Great. And then just a few on brown goods demand. Volumes held up pretty well in the quarter. We saw pricing was down 11%. How did the mix of new versus age trends throughout the quarter? How much of that pricing is due to that underlying mix shift that you conveyed? How much of that is due to actual pricing? And then margins for the total segment also held in quite well, even with assumed lower mix. Maybe just how you see volumes versus pricing and margins evolving through the rest of the year.
David Bratcher: Yes. Good question. So we can start off with volumes. We expect volumes to increase as we did in Q1, but throughout the rest of the year. And the reason -- the main reason for that is because of the success we've had in obtaining new distillate commitments. As far as price, yes, price/mix was down, but that was driven by mix, and that's why we shared about kind of our mix evolution within Distilling solutions on our last quarterly call. So new distillate sales were very strong in the quarter as anticipated. And then our aged sales also came in as anticipated. But the reason why the margin set held steady in that low 40s as we shared it might, is because of the pricing we’ve been able to get in new distillate. Even though it’s a larger proportion of our total sales, the price in the gross margin contribution is greater this year and in future years. We anticipate that has been in the past.
Operator: The next question comes from Sean McGowan from ROTH MKM.
Sean McGowan: A question on margins, but just one on Ingredient Solutions. Can you talk about what some of the puts and takes are going on there? And how should we look at what we saw in the quarter as indicative of what the rest of the year might bring?
Brandon Gall: Yes. So yes, as you noted, Sean, gross margins for ingredients were in the teens, mid-upper teens in the quarter and really 3 main drivers. The first one is the beef starch intercompany credit. The segment used to receive when the assistillery was operational is no longer there. And so that's going to be an ongoing item. That's going to be a natural headwind to the margin set of the segment. But the other 2 items we view as more transitory. The first one being the incremental costs that we're incurring to dry and ready that start stream for commercial sale. We expect that to continue being a headwind for the course of this year. But once we get the mini fuel plant distillery up and running, then we expect that to be largely offset and then, in fact, maybe have some positive gross profit to come with it at that point in time. And then the third and final thing, which we also believe is more transitory is are the incremental start-up costs associated with the ProTerra facility. As I already noted, we expect as time goes on and we commercialize that asset to have the revenue and the gross profit to absorb those costs. So again, as we get more into 2025, we expect the margins to be reflective of that. So that being said, we do view Q1 as a low watermark for gross margins for the segment. We expect the segment to finish the year probably as we've said last call, in the mid-20s gross margin-wise. But then as we get into next year for a lot of those things I mentioned to start benefiting the segment once again.
Sean McGowan: Okay. And I don't think I heard you talk as you usually do about some of the input cost headwinds. Is that because there's been some stabilization there? Or you just kind of cut it out for brevity.
Brandon Gall: Yes. So some stabilization. Another main reason is the closer of the Atchison distillery. As you'll recall, the product lines that we sold primarily out of their industrial-grade alcohol white goods and fuel are much, much more susceptible to even modest swings in underlying input commodity costs. So with the closure of that facility, corn and the related basis went from being our #1 raw material that we purchase. -- to fourth or fifth. And with that, a lot of that risk with it. However, wheat flower for our Green Solutions segment, which is now our largest input that we buy commodity-wise, was up about 2% in the quarter, whereas Rye natural gas were both down year-over-year. I will remind you that a lot of our pricing on our brown goods, especially for new distillate is model priced for what’s committed and contracted. So pricing for that will move up and down with those underlying commodities so that we’re able to lock in our margin.
Operator: The next question comes from Bill Chappel from Truist Securities.
Bill Chappell: Just first question on the branded spirits side, you'll face an easier comparison, certainly in the second quarter with the kind of the destocking distributors last year. Kind of maybe any update on where the distributor inventory levels sit? Are you continuing to see pressure there? Or is that for at least MGP and maybe for the industry, is that largely kind of path at this stage?
David Bratcher: I'm not going to speculate then for the industry because you do get kind of mixed views on that from what other report. I can tell you, in our business, yes, it's stabilized. We've worked really hard with our distributors and understanding the inventory levels and managing those levels within to meet customer demand. So destocking for us at a distributor level is not a core as you know.
Bill Chappell: So you see that as a favorable comp as we -- because the majority of the destocking was this time last year, is that correct?
David Bratcher: It's a favorable comp, yes, sorry. Yes.
Bill Chappell: Perfect. And then just also maybe a little clarification on the branded growth this year. I know you had talked about rationalizing a few brands. I didn't know if you quantified what that impacted in the quarter or what that would impact for the full year? Just kind of an idea of how the brands are growing, excluding that rationalization.
Brandon Gall: Yes. So the mid and value decline in the quarter was primarily driven by the R&DC distributor change and subsequent load-in of the mid- and value brands in Q1 of last year. So that's really what drove the majority of the declines in mid and value in the quarter. We expect to have easier comps for those 2 product lines as the year plays out. And as we shared on our last call, because of the rationalization, the rationalization, the prices we're taking on some of our mid- and value brands as well as the load-in. We expect a lot of that has largely offset the gains we expect to continue to make growth-wise in Premium Plus. So we still expect our branded spirits growth for the year to be flattish to low single digits, but we do expect to continue to get gross margin expansion as the year goes on.
David Bratcher: Yes, Bill, this is perfectly with your other question. I mean at this point last year, we were making a large wholesaler change, and you prep them in inventory. So on a comparative basis, over time, we've been able to not only successfully make that change, but get that inventory managed to the right level as well.
Bill Chappell: Great. And sneaking one more. Dave, why do you think you haven't made another acquisition since Penelope almost a year, maybe quantify just the number of opportunities you're seeing? Is it price? Or is it just really looking for the right fit?
David Bratcher: It's really looking for the right fit, Bill. There are things, obviously, with some of the headwinds we've seen in the overall industry, I think there are some people that would normally be on the larger scale multinational sellers sitting tight for the moment for all the reasons that you know of. But we're starting to see some movement. But the real reason is, is we want to do it the right way. We want to make sure that we’re finding something that goes into our portfolio that’s margin accretive, and that helps us evolve to that brand and spirits company. So to do that, we have been disciplined, very disciplined in our cost, but I have very, very high confidence that we’re going to be able to do some things in the near future.
Operator: The next question comes from Ben Klieve from Lake Street Capital Markets.
Ben Klieve: Just one quick one for me on the brown goods side. You talked about the vast majority of volume is committed for the balance of this year. Probably earnings call, you talked about how your sales force is looking into bookings into 2025. Wondering if you can provide any updates on kind of the longer-term sales funnel coming out of brown goods looking into '25.
Brandon Gall: Yes. Ben, this is Brandon. I'll start. So that's something we've highlighted about what we like about the new distillate business is that is that those sales and those contracts are multiyear in nature. So we do already have some visibility into 2025. We'll probably quantify that better for you as the year goes on just as we did last year. But what I will say is with EML's leadership and some other efforts we've been making, we're looking to the U.S. as we always do, but we're also getting more and more optimistic about opportunity for our brown goods outside the U.S. So as the year goes on, we expect to provide updates along the way.
David Bratcher: Yes. I would add that Brandon mentioned Amel, but that really is the key focus of what Amel's really thriving on right now is the distilled solutions business, doing everything that we've already said to you to what we're going to do and then all the opportunities in brands. His role here, taking on just the commercial aspect of that is really giving us the the platform to properly execute and do the things that we've been talking about, and that is continue to do what we do in the U.S., look at things internationally and how do we continue to maximize the business.
Ben Klieve: Got it. I appreciate that from both of you. Congrats a good start to the year here.
Operator: The next question comes from Mitchell Pinheiro from Sturdivant & Co.
Mitchell Pinheiro: Just a couple of questions. In the branded spirits business, are you seeing, I guess, consumer behavior, are you seeing trade down? I know you talked -- we talked premiumization, but are we seeing -- in other categories, you're seeing the consumer get a little tighter in spending. And I'm just curious what you're seeing or what you anticipate for the remainder of the year?
Brandon Gall: Yes, I'll take that. We -- obviously, we continue to stay focused on the premium plus. Within the Premium Plus and you look at the price tiers within that, yes, by category, by product, you do see some shifting and maybe from Ultra to premium or vice versa. We still see and believe and it shows in the data that, that premium plus category is still the focus area across the industry. It's where the opportunity lies to grow our business. I do believe, as you said, that as consumer inflation and economic conditions change, People do respond, okay? And they may make that a little different decision. But here's what's great about our branded business is that we have total representation across those price points in all the main categories. So in summary, yes, I think it's fair to say consumer pricing may shift a little, but I still and the data supports, it's still a premium plus market.
Mitchell Pinheiro: Do you still have -- do you have levers like that you can pull should things get maybe a little tighter? Or is sort of what your plans are in place and they're kind of firm and not much variability there?
Brandon Gall: Yes. One of the best levers we have as a company, and we feel is a little bit unique to us is points of distribution. And we feel like in the states we're in, in the United States, there's a lot of runway there for us to continue to expand our brands out on the shelf, not only on the shelfs in the chains and retailers that we're in, but also ones altogether. So that's what our focus is. We talked about it on previous calls, and we're going to continue to spend a lot of time executing there.
David Bratcher: I think what Brandon said is right on because at the end of the day, our growth in that section is about pod expansion first and foremost. As we expand our pods, you'll see the increase, you'll see the margin accretion append you'll see the sales happen. As you expand those pods though, we do through our marketing efforts and what I've said in the script, we really do focus on velocity, which is a marketing piece of it. So you have to go and and and we are, at this moment, continuing to expand our business on a pod driven basis and then back it up with the market needs to get it pulled through.
Mitchell Pinheiro: Okay. And then I guess last question on Branded is in your view, David, from your -- your long history in the business, it seems, at least from my view, and I'm curious in your view, there is a huge influx of just new brands, new age classifications, new toasted and all sorts of stuff, it almost to the point where the proliferation seems overkill and also maybe hurting the category. Do you think we're over branded in the branded spirits business up and down the category? Or do you expect any kind of pullback in brands? Or you think the set is going to stay kind of firm?
David Bratcher: Well, in 30 years of doing this, what I can tell you what you're seeing in the use American is as an example, that's where you're focused. There are a lot of SKUs. I could go all the way back to the bucket as we go to yourself now. There's still a lot of oc on the shelves. You see that now in American whiskey, -- you're going to see that on tequila. That's kind of the history of the industry, which if you think about it in business fundamentals, not a bad thing, it means that suppliers like ourselves are shifting to where that consumer demand is. But the challenge is, is keeping up with that consumer. That is the challenge at the end of the day. That's why when we talk about our business and our branded spirits business, yes, we're a leader in American whiskey, but we can't sit on that all the time. You have to have offerings and you have to be able to go across not only the price point and the portfolios because like you said, there are a lot of fast followers out there. When people see categories growth, it’s a natural tendency for people to go in and bring more SKUs in it. What we do is what you try to do is we go in and we establish dominance on that particular try to be the brand of choice. But don’t take our eye off the ball to the other categories either.
Operator: The next question comes from Robert Moskow from Cowen.
Robert Moskow: For the question wanted to ask about the gross margin dilution in distilling Solutions, I guess, down 100 basis points on a pro forma basis. Is that because of the mix shift? Is that the main driver of that?
David Bratcher: It is. And so if you look at the pro forma for 2023 for this telling Solutions, the gross margins for last year would have been right around 45%. We showed this on our last call, but happy to share it again. The mix shift is going to result in slightly lower margins. We expect it to be in the low 40s for the segment going forward, which is higher than I think a lot of people may have anticipated just because of the pricing we've been able to get on new distillates. So there is a little bit of a headwind there, Rob. But it's still a very, very nice margin for the segment, and it's one that we feel is sustainable as we go forward.
Robert Moskow: Okay. Got it. And then I guess the follow-up to that is in that you have price mix down 11%, and it really is that mix impact. But I don't remember you quantifying how much of that 11% was mix. Like can you quantify how much price was up excluding that factor?
Brandon Gall: We’re not giving any specific numbers. Each pricing was up in new distillate pricing. If you look at it a customer-by-customer basis was also up. We did have one of our larger relatively lower-priced multinational customers in the quarter by a lot. So they brought the average price down for new distillate. But like I said, on a customer-by-customer basis, we’re very pleased with the pricing, and we expect the same to continue as we go forward.
Operator: [Operator's Instructions] We have a follow-up question from Sean McGowan from ROTH MKM.
Sean McGowan: I know this gets added back for the adjusted EBITDA and adjusted net income. But how do we -- is there a way to know what that contingent liability is going to be? And how long will that be hanging out on the income statement?
Brandon Gall: Yes. That's going to be out there through 2025. So December 2025 is when the earn-out is officially concluded with the Penelope transaction. So we expected -- it's a goofy one, all met from an accounting standpoint. A lot of Monte-Carlo simulation is revisited as you every quarter. It's been plus or minus $4 million, exceeding in the last couple of quarters. And we expect it just to continue to ramp up as the brand continues to perform in line with our expectations, similarly each quarter until we get to the end of 2025. Now that number, it changes because of volatility in the market because of interest rates or forecasts or actuals. So there's something -- some inputs that we provide. That helps conclude what that number is in a given quarter, but there's also some external volatility measures as an example, that also impact that. So I wish to give you a more clear answer, Sean, but hopefully, that color helps a little bit in your model.
Sean McGowan: It does. But I just want to be clear on 2 things. One, is it eventually going to be cash? And second, is it the kind of thing like the better it is, the more -- the better we should feel about it because that means that they're outperforming.
David Bratcher: That’s exactly right. It will be a cash outflow by the end of 2025 or sooner if they hit their metrics sooner is the way it’s drawn up. It can be as much as approximately $110 million. And you’re exactly right. It’s definitely something as that number gets bigger, it’s a positive for the brand. That means it’s performing in line or better than our expectations.
Operator: This concludes the question-and-answer session. I would now like to turn the conference back over to David Bratcher for any closing remarks.
David Bratcher: Thank you for your interest in our company and for joining us today for our first quarter earnings call. We look forward to talking with you again after the second quarter.
Operator: The Conference is now concluded, thank you for attending today's presentation. You may now disconnect. Goodbye.
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