Q4 2022 MGP Ingredients Inc Earnings Call
[music].
Good day and welcome to the N G P ingredients fourth quarter and full year 2022 financial results conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key Pollo bites.
Yeah.
Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone can withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mike Houston Investor Relations. Please go ahead.
I'm, Mike Houston, with Lambert and company <unk> Investor Relations firm.
And joining me are members of their management team, including Dave Colo, President and Chief Executive Officer, and Brandon Gall, Vice President of Finance and Chief Financial Officer.
We will begin the call with management's prepared remarks, and then open up the call for questions.
However, before we begin today's call. It is my responsibility to inform you that this call may involve certain forward looking statements.
Such as projections of sales operating income gross margin and effective tax rate as well as statements on the plans and objectives of the Companys business and overall consumer and industry trends.
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 today.
Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance are.
A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release, and supplemental information furnished to the SEC under form 8-K.
If anyone does not already have a copy of the press release issued by M. D. P. Today, you can access it at the Companys website Www Dot M. G P ingredients dot com.
At this time I'd like to turn the call over to M. G Pease, President and Chief Executive Officer, Dave Colo Dave.
Thank you, Mike and thanks to everyone for joining the call today.
This call will begin with an overview of our performance for the quarter and full year ended December 31 2022.
Provide updates on key financial performance metrics and discuss the progress we have made against our strategy.
At the end of the call we will open the line for Q&A.
The strength and value of our business model and long term growth strategy underpinned our performance during 2022.
Strong execution from the team enabled M. G P to meet increased customer demand for our products and deliver another year of record results across each of our segments.
During the year, we continued to experience healthy demand for new distillate, and aged whiskey and our sealing solutions segment.
While also continuing to invest in marketing support and innovation to grow our American whiskey and Tequila brands.
Additionally, our ingredient solutions segment recorded another record year from a sales and gross profit perspective, there's consumer demand for plant based high protein and lower net carbohydrate foods continued.
Consolidated sales for the year increased 25% to $782 $4 million, while gross profit increased 27% to $253.3 million.
Representing 32, 4% of sales.
Operating income and adjusted operating income increased 18% and 23% respectively to $149 million.
Adjusted EBITDA increased 20% to $169 $3 million.
The demand for American Whiskey continues to drive growth in our distilling solutions segment and resulted in brown goods sales, increasing 65% and 42% on a quarterly and annual basis, respectively.
Our premium plus spirits brands grew 23% in the quarter driving further gross margin expansion and our branded spirits segment.
Our ingredient solutions segment delivered record results, both on our fourth quarter and full year basis with sales growth of 28% and gross profit growth of 42% for the year.
Looking at each segment in greater detail.
Sales in our distilling solutions segment increased 22% for the year to $428 $5 million.
Gross profit for the year improved to $126 $3 million or 29, 5% of segment sales.
Full year sales of premium beverage alcohol increased 28% versus the prior year, driven primarily by strong demand for both new distillate and aged whiskey.
Brown goods sales growth continues to outpace longer term market trends and has it been primarily driven by craft as well as multinational customers.
Our team has done an excellent job capturing market share and unfilled demand and our strong sales results would not have been possible without our sales teams expertise and the relationships we have cultivated across a diverse customer base, which now stands at more than 750 brown goods customers.
Yes.
This expertise and strengths of customer relationships have resulted in the vast majority of our new distillate whiskey being committed and the majority of our aged whiskey being committed for 2023.
We're pleased with the improvement in demand visibility and consistency that we have achieved and brown goods.
Full year sales for white goods decreased 2% versus the prior year.
The decline was primarily due to lower sales volumes for white goods premium beverage products.
Sales of our industrial alcohol products decreased 25% for the year also due to lower sales volumes.
The impact of increased input costs, primarily corn and natural gas costs, along with excess supply available in the market remains a drag to white goods and industrial alcohol gross margins.
As we have previously discussed on prior calls these unfavorable dynamics resulted in negative gross margins for industrial alcohol and white goods and reduced gross profit by $21 $2 million and gross margin by approximately 600 basis points on a combined basis.
When compared to the prior year.
As we look ahead to 2023, we anticipate these headwinds to continue and comparing the 2022 we estimate 2023 industrial and white goods gross profit dollars on a combined basis are anticipated to decline another 4 million to $7 million.
That said, we have taken steps to mitigate these headwinds overtime.
Over the past two years, we have shifted volume from industrial alcohol to white goods, which historically have better margins and better customer retention characteristics.
If the market dynamics have continued to evolve due to the additional capacity for both industrial and white goods that has entered the market in combination with higher corn and natural gas costs. We are implementing further reductions in volumes of our industrial alcohol and white goods premium beverage products to minimize the impact on our.
Business as we enter 2023.
These reductions will result in lower volumes of decrease in full year revenue and an unfavorable impact to gross margins for these respective product lines, which have been factored into the fiscal year 2023 guidance. We will discuss later in the call.
Moving to branded spirits segment sales for the year increased 30% versus the prior year to $237 $9 million.
The full year increase was primarily driven by the inclusion of the Lux co brands acquired as part of the merger on April one 2021.
For the last three quarters of the year total branded spirits revenue was consistent with the prior year as we continue to focus on investing behind our premium plus brands, while allowing our mid and value priced brands to perform in line with the overall category declines in these price tiers.
At the same timeframe investment in premium plus brands have resulted in revenue, increasing 17% and 23% in the fourth quarter, primarily driven by our American whiskey and Tequila brands performance.
For the full year premium plus brands revenue has increased from 30% of total branded spirits revenue in 2021% to 36% in 2022.
Our team continues to innovate around these brands and we're proud of the progress we've made on that front with announced line extensions that include remiss Gatsby Reserve Yellowstone single mall.
As you arrived seven year and L may or Crystal Lino.
Importantly, these products are margin accretive to the respective brand families into our overall branded spirits gross margin profile.
Gross profit for the segment increased to $95 $5 million for the year or 41% of segment sales, which is a 600 basis point improvement in gross margin percentage versus the prior year.
This increase can primarily be attributed to continued focus on investing in our premium plus American whiskey and tequila brands.
Turning to ingredient solutions sales for the year increased 28% to a record $115 $9 million, while gross profit increased to $31.5 million or 27, 2% of segment sales.
The increase was driven primarily by higher sales of specialty wheat, starches and specialty wheat proteins is strong consumer demand for foods containing higher levels of plant based proteins and lower net carbohydrates continues.
We have also begun initial shipments of pro Tara season, crumbles utilized as a meat alternative to colleges and universities as we pilot the development of this product line in the foodservice channel.
Construction of the textured protein extrusion facility that we previously announced remains on schedule with an expected startup date during the fourth quarter of 2023.
We believe the continued momentum we have realized across our specialty wheat and emerging P. Based products will enable long term sustainable growth for the segment.
Our experienced sales innovation and R&D teams continue to work effectively and collaboratively throughout the year to meet our customers' needs as we accomplish these record results for the year.
These achievements were supported by record production levels, a direct result of productivity improvements due to our continuous improvement initiatives.
Before I turn the call over to Brandon I want to thank our team for their tremendous efforts and continued execution.
Their ability to build on the momentum we have generated throughout the year and the continued alignment of our product offerings to meet consumer trends enabled us to deliver strong results for the year.
This concludes my initial remarks, let me now turn things over to Brandon Gall for a review of the key metrics and numbers Brandon.
Thanks, Dave before I begin an overview of the financials I'd like to remind everyone that we closed the merger with watsco on April <unk> 2021 and as a result, <unk> 'twenty 'twenty. One numbers only include three quarters of contribution from the acquisition.
Whereas 2022 benefited from the acquisitions inclusion for the whole year.
This rally during 2021 there were a number of nonrecurring items that we have adjusted out to assistant in analyzing and assessing our business.
A list of these adjustments as well as a bridge to the corresponding GAAP reported metrics can be found in our earnings release disclosed this morning.
For the fourth quarter 2022, consolidated sales increased 15% to $191 million as a result of increased sales in our distilling solutions and ingredient solutions business segments.
Gross profit increased 20% to $63 $2 million, representing 33, 1% of sales due to improved segment gross profit performance by all three business segments.
For the year consolidated sales increased 25% to $782 $4 million due to record results for all three business segments gross profit increased 27% to $253 $3 million driven by double digit improvement across all three segments.
The headwinds we face in white goods and industrial alcohol total company gross margin increased by 70 basis points to 32, 4% in 2022.
Advertising and promotion expenses for the fourth quarter increased $4 $7 million or 75% to $10 $9 million as compared to the fourth quarter 2021. This increase reflects our continued efforts to increase marketing spend on our premium plus price tier brands as part of our premium amortization strategy.
Our A&P spend this quarter was the highest of any quarter since Lux co merger.
For the full year branded spirits, A&P spend increased to $27 $3 million, which represented 11% of branded spirits sales with the vast majority being spent on our premium plus brands.
Forward, we will continue to invest in marketing for our branded spirits segment to promote our premium plus price to your brands.
Corporate selling general and administrative expenses for the fourth quarter increased $5 $1 million and $22 $6 billion due primarily to higher expenses associated with incentive compensation and retirement.
For the full year, corporate SG&A expenses increased $1.8 million to $74 $6 million.
Operating income for the fourth quarter decreased 34% to $29 $7 million due primarily to a $16 $3 million favorable insurance recovery recorded in the fourth quarter of 2021.
Adjusted operating income increased 3% to $29 $7 million for.
For the full year operating income and adjusted operating income increased 18% and 23% respectively to $149 million.
Our corporate effective tax rate for the fourth quarter 2022 was 19% compared with 26, 8% from the year ago period for.
For the full year, the corporate effective tax rate was 22, 3% compared with 25% in 2020 one the decrease for the quarter and full year corporate effective tax rate was primarily driven by an increase in state tax credits and further integration of the Lux co merger and the associated tax attributes we anticipate our.
Our effective tax rate to be in the range of 24% to 25% in 2023.
Net income for the fourth quarter decreased 29% to $22 $5 million due to the $12 $2 million tax affected favorable insurance recovery recorded in the 2021 fourth quarter.
Adjusted net income for the quarter increased 16% to $22 $5 million.
Basic earnings per common share for the fourth quarter decreased from $1 44 per share to $1 <unk> per share due to the 56 cent per share favorable insurance recovery.
On an adjusted basis basic EPS increased from 88 per share to $1 <unk> per share.
Factoring in the additional shares associated with the convertible note offering that closed in November 2021, fully diluted EPS decreased $1.01 per share in the quarter from $1 44 per share in the year ago period.
Fully diluted adjusted EPS for the quarter increased to $1.01 per share compared to 88 cents per share in the year ago period.
Net income and adjusted net income for the full year increased 20% and 23% respectively to $108 $9 million.
Basic EPS increased to $4 94 per share from $4 37 per share in 2021.
On an adjusted basis basic EPS increased to $4 94 per share compared to $4 26 per share in 2021.
Factoring in the additional shares associated with the convertible note offering fully diluted EPS increased to $4 92 per share compared to $4 37 per share.
Fully diluted adjusted EPS for the year increased to $4 92 per share compared to $4 26 per share in the year ago period.
Adjusted EBITDA for the fourth quarter increased 2% to $35 $1 billion adjusted EBITDA for the full year was $169 $3 million, an increase of 20% from the prior year.
The increase was primarily driven by strong performance of all three business segments.
Corn wheat flour and natural gas represent our three largest commodity expenses and each continue to experience elevated prices throughout the quarter.
Relative to the prior year fourth quarter, our input costs for corn increased 41% wheat flour increased 20% and natural gas increased 37%. Despite these elevated input costs, our risk management process and our focus on products that are premium and more specialty in nature have enabled us to mitigate the impacts of inflation. This.
Here in the majority of product lines.
Furthermore, we did not experience any significant supply chain disruptions in 2022.
Cash flow from operations was $88 $9 million in 2022, which was up slightly from $88 $3 million in 2021, reflecting the consistent cash generating capability of our business.
Inclusive in this is our investment in inventory of aging whiskey, which stood at $199 million at cost at year end, a net increase of $25 million at cost during the year.
Matching whiskey put away, but growing future distilling solutions and branded spirits segment sales is one of our priorities and long term strategies.
Cash flows for the quarter and year further emphasize the strength of our.
Portfolio.
And the value of our long term strategy and continue to support our company as we pursue M&A opportunities and expansionary projects.
Our balance sheet remains strong and continues to support investment opportunities that support growth and return cash to shareholders, we remain well capitalized with debt totaling $233 million and a strong cash position of $47 $9 million.
Turning to capital expenditures, our previously announced expansionary projects remain on track from a timing and cost perspective, our continued focused on strategically deploying capital to enhance our operational capabilities resulted in capital expenditures of $47 $9 million for the year, we anticipate approximately $58 million in cap.
Expenditures for 2023, which will be used for facility improvement and expansion such as our new <unk> facility in accessing Kansas, our distillation expansion at La Bistro Distillers in Bardstown, Kentucky, and the addition of whiskey barrel warehouses to support continued growth at our Lawrenceburg and Bardstown distilleries.
We will also continue to invest in facilities sustenance projects as well as environmental health and safety projects.
The board authorized a quarterly dividend in the amount of <unk> 12 per share, which is payable on March 24, 2023 to stockholders of record as of March 10. The board continues to view dividends as an important way to share the success of the company with shareholders. Our capital allocation strategy remains consistent with what we have communicated in recent.
We continue to believe that our focus on organic and acquisitive growth aligns well with our long term strategy as well as the underlying consumer trends our business is well positioned to leverage we remain deliberate and disciplined as we can.
To evaluate M&A opportunities invest and put away of American whiskey, and conduct expansionary projects that accelerate growth and increase our capabilities and product offerings and now let me turn things back over to David for concluding remarks.
Thanks, Brad.
We're very pleased with the strong results delivered this year, despite increased cost and broader macroeconomic uncertainty demand for our products remains strong and we believe our business continues to be well positioned.
We remain confident in our strategy and believe recent distilled spirits council of the United States or discus data further emphasizes the value in our approach.
In 2022 spirits gained market share within the total U S beverage alcohol market for the 13th straight year and surpassed beers U S market share on a revenue basis for the first time.
The growth in both revenue and volume for U S spirits, primarily reflects premium amortization and the American whiskey and tequila categories, which is consistent with our strategy and our branded spirits segment.
As we mentioned earlier in the call Brown goods sales increased 65% in the fourth quarter and brown goods inventory increased $13 $3 million at cost during the quarter.
The ability to increase brown goods inventory, while at the same time supporting significant revenue growth. During the quarter is the result of expanding the principles of continuous improvement practices across other areas of the organization.
Our American Whiskey distillery in Lawrenceburg, Indiana is one such example, where during the year Brown goods volume production surpassed our previous annual record by more than 25% with no capital investment required.
As we enter 2023, we will continue to focus efforts on optimizing product mix across all three of our business segments.
And invest in areas that generate the greatest long term value for our shareholders.
We expect the consumer fundamental set of supported historical growth in our business to remain intact. While we also expect inflationary pressures to persist and input cost primarily in corn and wheat throughout the year.
We will continue to explore further actions that can be taken with respect to our white goods and industrial alcohol products to minimize the headwinds associated with these product lines.
These factors in combination with the strength of the underlying business supports the following financial outlook for the fiscal year ending December 31 2023.
Dallas is projected to be in the range of $815 million to $835 million.
Adjusted EBITDA to be in the range of $178 million to $183 million.
And adjusted basic earnings per common share in the range of $5.05 to $5 20 per share.
With that backdrop, let me discuss expectations for the first quarter, which have already been factored into our full year 2023 guidance.
We expect quarterly sales and gross profit results for the first quarter of this year to come in below the subsequent three quarters for the balance of 2023.
This expectation can be attributed in part to the timing of customer commitments for brown goods post.
Post holiday seasonality in branded spirits and signs of elevated distributor inventory levels relating to our premium plus brands.
We continue to be pleased with the strength of our branded spirits depletion patterns and we believe distributor inventory levels will begin to normalize in the second quarter.
We continue to make progress on our sustainability initiatives, we have completed a holistic assessment of the company's ESG program to ensure we have an effective and optimized approach to our sustainability journey going forward.
We have identified for ESG pillars people planet product and process, which align with our commitment to our employees the communities in which we operate our products and our business processes.
Our approach to ESG is based on a commitment to a culture of continuous improvement in which our shareholders employees and the communities, where we operate all benefit from our business platform based on sustainable growth.
Our inaugural sustainability report for calendar year, 2022 will be published on our newly renovated company website Www Dot M. G. P ingredients dot com in April of this year.
As we begin the new year, we remain committed to leveraging the strong foundation, we have established over the years with the objective to deliver sustainable long term value for our shareholders.
That concludes our prepared remarks, operator, we're ready to begin the question and answer portion of the call.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You're using a speaker phone please pick up your home take the follow up question Nicky.
That's what I need time. Your question has been addressed and you would like to withdraw your question. Please press Star then.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Vivien <unk> with Cowen. Please go ahead.
Thank you good morning.
I wanted to start on the Brown goods, a sub segment and just the way products are thank you for for noting that the customer count and the level of commitment.
Put that in context, given the fact that brown goods came in much stronger certainly than we were expecting throughout the year, what does that look like in the year ago period in terms of the level of confidence. Thank.
Thank you.
Hi, Vivien this is Dave Yeah, we've we had a lot of success you know this past year end.
Being able to increase the number of commitments, we have with customers on both.
New distillate and aged.
This is a 2022 Ah was probably our best sure. It was our best year in gaining those commitments. Prior to 2022, we were successful in getting commitments on new distillate from customers that historically, we've had very limited success yeah.
Commitments on aged whiskey.
And what's been driving that and our ability to increase commitments is just the tightness of supply in the overall market on both new distillate.
And aged whiskey. So obviously, we've been able to take advantages that as customers look to secure supply for their growing brands.
Understood that's really helpful context.
So up to that could you. Please talk about your appetite to collaborate with the branded spirits supply chain to maybe satisfy incremental demand on the semi product, but thank you.
Yeah, We you know we basically the way that we look at our supply as we we have adequate supply to protect our branded spirits growth.
As well as adequate supply to service, our bulk customer business.
So we we really don't anticipate any issues with supplying both branded spirits within our own portfolio as well as our our bulk customers business.
Understood. Thank you so much.
The next question comes from Marc <unk> with Wells Fargo. Please go ahead.
Hey, good morning. Thank you for taking my questions just starting high level love to hear your thoughts on the spirits industry outlook more near term coming off several years of above average growth. We've heard some narrative of market normalization given commentary on premium Asian slowdown. So what are you seeing out there in the industry.
Maybe if he could you offer some refresh perspective on your relative positioning.
Sure Thanks, Mark Yeah.
As you saw in our fourth quarter results, our premium plus brands grew 23% for the quarter.
I think in Q2, they grew 12% Q3, they were up like 16%.
So we've we've continued to see strength in the premium plus a portion of our portfolio.
I think if you look at you know some of the data out there.
American Whiskey continues to be projected to grow in that 5% to 7%.
Compound annual growth rate now that takes into account all price tiers.
Our expectation is that premium plus price tier brands, but most likely grow above that rate, while obviously mid value brands are gonna grow below that rate but.
That's been consistent by the way over the last four to five years that American whiskeys grown.
5% to 7% compound annual growth rate, we're not seeing presently any indications that that's going to slow down in our branded spirits business Award, our our distilling solution segment for that matter.
Okay, Great and then on the selling side, specifically brown goods has there been any easing on industry supply constraints with you there capacity coming online or demand normalizing and whats your outlook for the progress here.
Yeah, I think that the demand remains strong for both new distillate and aged.
Obviously, there's been a lot of expansions announced and distilleries, whether they're distilleries that are owned by some of the multinationals.
Or some of our competitors in the bulk spirits space.
But at this point in time, Mark we're not seeing.
Any excess capacity on the market a lot of that capacity is being added in anticipation of international growth.
Our American whiskeys.
And again, we we feel like we're well positioned from a supply point of view in our own business.
We are we announced on this call you know we had a 25% improvement in our total <unk>.
Output in our Lawrenceburg, Indiana distillery, we previously announced are both fermentation and distillation expansions at our Lux ROE distillery in and Bardstown. So we feel well positioned and we think theres going to be adequate demand going forward to support continued growth.
And then just one more on advertising expense, that's been stepping up as a percentage of sales specifically within branded spirits clearly the premium part of the portfolio is mixing higher what are you seeing in terms of the effectiveness of this spend and where it is directed and how should we think.
At that level going into 2023.
Yeah, I'll talk about the effectiveness in unbranded can address how we're looking at it in 'twenty three but again with the growth we're seeing in our premium plus brands for the last three quarters and particularly in Q4, where we had heavy A&P spend on.
On advertising, we think the effectiveness of the spend has been very good.
And those growth rates, obviously are coming in our highest margin a spirits brand. So we're pleased with the effect on the effectiveness of the spend and we will continue to invest behind these brands as we go into 2023 and I'll, let Brandon address the those spend levels, yeah, and thanks, Dave and Mark as you know the.
The $27 3 million of the total A&P spend during 2022 wasn't branded spirits. So that's that's really what we mean when we when we talk about A&P and so that represented approximately 11% of branded spirits net sales.
And.
As we go into 2023, we expect we expect to spend at that site.
At the same level and even possibly slightly above so that's how we're looking at it going into the new here.
Okay. Thank you very much.
The next question comes from Ben <unk> with National Securities Corp. Please go ahead.
Hi, Thanks for taking my questions and this.
This is a vancouver from a waste of capital markets actually now.
We've moved onward and upward.
The first of all congratulations on a very successful 22 I'll Echo the earlier comments congratulating you guys and thank you for the context on brown goods customer count and commitments.
Two quick questions for you first of all Brandon in the guidance for 'twenty. Three can you comment on the on what is implied in that guidance from the expansion initiatives throughout both the ingredient and distillery segment.
Yeah. Thanks for the question Ben Yes, starting with the ingredient solutions.
The gains that we expect to get in 2023 relative to 2022 are really going to be on an organic basis. The the new upper tower expansion facility isn't going to be placed into service until Q4, and so we're not we're not.
<unk> you know anything involving that in our guide at this point and as Dave said the expansion initiatives. We are seeing in the distilling solutions and in branch spirits is incorporated in to certain extent, but again the distillation expansion for branded spirits won't be ready until the end of the year and.
And that's really as you know Ben that that production is going to go into a branded spirits future sales portfolio. So.
So as far as our expansion efforts are concerned that's how we're thinking about it for 'twenty three.
Got it Okay very helpful. And then just maybe a little premature given that the pilot for pro Terror really has just started but but do you have any.
Do you have any color that you've received from your potential customers. In this pilot program that you've gotten to date that you can share.
Yeah, Yeah, and they are the feedback from the colleges and universities that actually are purchasing the product has been fantastic its been very well received we this.
This year, an antidote, we actually had one of the universities some of the students complain to the university that they were serving real meat.
In their plant based section of the cafeteria and in fact, it was pro Tera so that the feedback overall has been very positive.
You too.
You know go out and try to sell an additional colleges and universities, but the.
The functionality and the performance in the taste profile of the product has been very well received.
That's great that's a great little anecdote very good well best of luck as that product rolls out and good luck to here coming up in 'twenty three and thanks for taking my questions I'll get back in line.
Okay.
The next question comes from Bill Chappell with terrific acuity.
Thanks, Good morning.
No.
Hey.
I might've missed this comment but can you say that your.
On the premium spirits.
The new distillate in the east is fully committed for 2023.
Yeah, We said the vast majority of new distillate is committed.
And the majority of aged is committed.
Okay. That's what I thought so that means you have barely barely a great visibility into that business and the profitability for all of this year, what's I mean, and that's different from prior years, I mean, especially on the new it seems to be kind of you'd wait for the orders to come is there just let's start with the new.
Is there just that much demand, where you're trying to manage.
Manage the distillery production schedule, a little bit better and so you have it.
I mean is there really any upside from there on the new side.
Yeah I mean.
All the with the market dynamics the way they are right the last call it 18 months, where.
Demand has been in some cases higher than supply across the industry not just for us.
That's led customers, but to be much more willing to commit to forward purchases to make sure. They have the inventory to protect their brand growth.
So that's why we've had much more success.
We enter 2023 with committed commitments, if you will a new distillate and the same thing can be said for aged as you know we've historically not been successful in getting any commitments on aged inventory.
But this is we were looking in 2022 to secure business for 2023.
The same market dynamics, we were able to get commitments for the majority not as much as one new distillate, but still a significant amount of aged commitments for 2023.
So I mean, yes.
No go ahead bill.
Oh I was just trying to understand I mean sticking on new I think you'd also started some continuous improvement programs on on the new or on the distillery.
Months ago, do you think that's going to yield some capacity added.
The added capacity, where you could add you know on top of what we're already committed.
Yeah, I think you know I don't know if you caught in my prepared remarks, but in 'twenty 'twenty. Two we were able to increase the capacity of our lawrenceburg, Indiana distillery by 25% versus its previous record production.
So the teams are already making great strides.
And to your point.
We have capacity to entertain spot sales if you will.
But what we also tried to do is make sure we've got a great balance between how much new distillate, we're selling on an annual basis to make sure. We can also lay down whiskey and age at up to support future H cells. So that's the balance we constantly watch and if opportunities present themselves you know to potentially sell.
L more new distillate, we'll certainly evaluate that and take advantage of it if we feel it's the right decision.
Got it and then on aged I mean, you said fully committed but obviously you have.
A lot more inventory than than maybe what you've totally committed to so when would you make the decision to I guess commit more oh, the age as customers come in and meeting it and is there I assume that's where there's some significant or meaningful upside potential this year.
Yeah kind of the same thing there bill as we.
You know the the majority of aged as committed we still have aged available for.
For spot sales, so, but what we also tried to do is make sure that we don't oversell, our H position in any one year. So that we have adequate age to sell in future years.
So that's that's how we look at it and we try to make sure you know as we've discussed before we could probably sell a lot more aged AR in any given year, but then your jeopardizing growth and in your out years. So we try to make sure we balance that appropriately.
Sure last one for me just on on the Lucky business being down kind of 1% in the quarter is that more just the tough comp was that a was there a big difference between white goods and brown goods within that portfolio or you know any more color around the kind of the quarterly performance for that would be great.
Yeah, I mean on brand as you're asking about branded spirits Bill.
Correct, Yeah, Yeah, I think the dynamic in our branded spirits segment. It is we still have from a volume perspective.
The majority of our case volume is still in the mid and value price tiers.
Which are declining right in our business as well as across the board in the industry.
And so what we tried to do in this business is have the gains in our premium plus brands, which are the much higher margin products and also where the consumer demand.
Is if you will have the growth in our higher margin products offset the decline in our mid and value tiers.
And that's pretty much what's played out this year, but the good news is by focusing on the premium plus brands, they're much more profitable and it expands the overall gross margin profile of our branded spirits business and to that point you know we've been able to grow the gross profit by 600 basis points.
Ah in 2022 versus 2021.
Yes.
Got it thanks, so much.
Thank you.
Your next question comes from Sean Mcgowan with Iraq.
Please go ahead.
Oh, Thank you I appreciate it.
Questions on cost are so big improvement in the gross margin and <unk>.
There's still a business is that something you think will sustain or where do you see kind of a regression back to some lower levels going forward.
Are you sure clarity are you talking about the cost side for new distillate or or the revenue side.
I'm talking about gross margin.
Yeah.
Yeah, we believe given the current dynamics, we believe that the the pricing we're seeing in the demand. We're seeing is sustainable in the near future and in.
In fact, they've already spoke quite a bit about the commitments, we're seeing for 2020 three we're already looking forward as a team Jan 2023, and starting to get commitments in line for 2024 and beyond and what we can see over that timeframe Sean.
Sean as you know it just continues to strength in demand and strength in pricing.
Good news.
SG&A was there anything unusual in the corner that drove that big.
Dollars.
Do you think that this is kind of the new normal or is this level of spending.
Yeah. Thanks.
Thanks for the question SG&A for the quarter was up by about <unk> $5.1 billion versus last year and a lot of that is going to continue on part of part of the increase this year was due to incentive comp and some retirement expenses that came through in the quarter and so you know we.
We feel like our SG&A as a percentage of sales is in line with our peers in the industries. We compete so we feel like we're in a good place.
Okay. Thank you very much.
The next question comes from Gerald Pascarelli Regrets Bush Securities. Please go ahead.
Hi, good morning, Thanks, very much for the question.
A follow up to some of your previous commentary as it relates to your branded spirits portfolio. I believe you had the goal to grow that portfolio in total in line with the spirits category and so my question is is that still the goal and does that even really matter at this point given the outperformance that you've seen in Europe .
Premium offerings and kind of like the positive mix and the margin accretion you're able to generate off those select brands anyway. Any color you can provide there on your thoughts would be helpful. Thank you.
Yeah, Gerald I mean, the ladder is definitely our priority right. We want to continue to grow the premium plus brands in our portfolio, because that's where the consumer demand is those brands are our highest gross margin brands.
And you know we we.
We don't really focus on top line net sales growth in branded spirits because of that where we're trying to grow the premium plus brands increased the margin profile.
And as a result increase the overall profitability of branded spirits.
Thank over time as the organic growth of the premium plus brands continues.
It will become a larger portion of our overall portfolio.
And at some point will drive topline growth.
But in the near term our focus is expanding those brands improving gross margin profile and driving profitability, yeah, and just to add to that if I could fourth quarter is a great example of exactly what Dave just outlined to your point and to Bill's point topline for a branch spirits segment was.
Basically consistent or flat to the prior year, but the premium plus our price tiers of our portfolio were up 23%, which resulted in an 18% increase in gross profit dollars and a gross margin expansion of 630 basis points. So.
The fourth quarter I think is a really good playbook for what we're trying to accomplish.
Perfect. Thanks, very much a last one for me is just on the M&A landscape. When you look at the industry. When you look at potential deals has anything really changed you know.
Currently relative to maybe where we were six months ago.
You know just looking at your balance sheet your.
Have very low leverage you have the capacity to add more debt. So any color you could provide just around what you're seeing in terms of potential deals are attractive categories would be helpful. Thank you.
Yeah. The the dynamics are pretty consistent with what they've been the last year there.
Were still very strong demand for premium boat brands, primarily in American whiskey, and tequila categories as well as others.
The polls remain very high.
And our desire to do M&A remains high so we're consistently looking at opportunities from an M&A perspective that can help position us for future growth, but overall the what we're seeing in the market really hasnt changed over the last six to 12 months.
Understood. Thank you very much for the color.
The next question comes from Mitch.
Okay.
Please go ahead.
Yeah, Hey, good morning, most of my questions have been asked I do have a couple here I don't know if you talked about input cost how they factor into your your 2023 guidance.
Yeah.
For the question Mitch.
As we shared on the call in Q4.
We saw elevated input.
Input costs corn was up over 40% wheat flours, 20% natural gas, 37% as we look forward to 2023, we are still seeing elevated costs, even even compared to what we saw in 2022.
You know looking across all of our inputs we're into the double digit increases again.
As we shared on on these calls you know we do enter any given year with the majority of our of our sales contracted and committed to going forward. So were able we are pricing this through and if you look at our our product lines that are more premium in nature in 2022 as an example, we've had fairly good and not really good.
Success in pricing through these increases the continued item that we're watching where it remains a little bit more challenging as industrial alcohol and white goods, so but other than that we feel like we're in a good position as we enter 'twenty three.
Okay, and then E on.
On your A&P spend where it's being spent I mean is it more a than less P or evenly split.
Yeah, I mean, the majority of it in advertising.
We really are.
Focused.
Advertising dollars on the brands that we think have the most growth potential.
One example that we've talked about is our Yellowstone Bourbon brand.
And.
If you're a yellow stone series fan you probably noticed that we have commercials running when the series is running and the cost to run those commercial is very high and Thats part of what drove the increased spend in Q4 of the year, but we're trying to make sure that the A&P spend it's working A&P dollars versus.
Non working if you will and that's proven to be pretty successful to date.
Okay.
That's all I had.
Thanks, Matt Thanks Rich.
This concludes our question and answer session.
I'd like to turn the conference back over to Dave Calder for any closing remarks.
Okay. Thank you for your interest in our company and for joining US today for our fourth quarter and full year 2022 earnings call. We look forward to talking with you again after the first quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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