Q4 2024 MGP Ingredients Inc Earnings Call
Speaker Change: Good day, and welcome to the NGP Ingredients fourth quarter of 2024 Financial Results Conference call.
Speaker Change: All participants will be in a listen-only mode for the duration of the call. Should you need any assistance on today's call, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. And to withdraw a question, please press star, then 2. Also, please be aware that today's call is being recorded.
Speaker Change: I would now like to turn the call over to Amit Sharma, Vice President of Investment Relations. Please go ahead.
Speaker Change: Thank you. Good morning and welcome to MGP's fourth quarter earnings conference call. I'm Amit Sharma, Vice President of Investor Relations, and joining me is Brandon Gall, Interim President and Chief Executive Officer and Chief Financial Officer, and Mark Davidson, VP Corporate Controller and Head of Treasury.
Speaker Change: We will begin the call with management's prepared remarks before opening the call to analyst questions. We will begin the call with management's prepared remarks before opening the call to
Before we begin, this call may involve certain forward-looking statements.
Speaker Change: The company's actual results could differ materially from any forward-looking statements made today due to a number of factors, including the risk factors described in the company's annual report filed with the SEC.
Speaker Change: Company assumes no obligation to update any forward-looking statements made during the call except as required by the law.
Speaker Change: Additionally, this call will contain references to certain non-GET measures, which we believe are useful in evaluating the company's performance.
Speaker Change: A reconciliation of these measures to the most directly compatible gap measures is included in today's earnings release issued this morning before the market opens.
Speaker Change: If anyone does not already have a copy of the release, you can access it on our website MGPingredients.com.
Speaker Change: With that, I would like to turn the call over to Brandon Gall.
Brandon Gall: Thank you, Amit. Good morning, everyone. Before diving into our results and outlook for 2025, I want to take a moment to recognize our incredible team across the organization as they continue to act with speed, agility, and dedication in a difficult and volatile operating environment.
Brandon Gall: Their actions ensured that our fourth quarter results were in line with our expectations and our full year 2024 results were within our updated guidance.
Brandon Gall: We've made meaningful strides across two of our three operating segments.
Brandon Gall: However, this progress was more than offset by the faster-than-expected and larger-than-expected decline in our brown goods business, primarily due to elevated industry-wide barrel whiskey inventories.
Brandon Gall: As we look ahead, we are committed to maintaining our position as one of the leading suppliers of high-quality, differentiated, premium American whiskey.
Brandon Gall: Elevated inventories in high, albeit slowing, industry whiskey production will remain a headwind for our brown goods business.
Brandon Gall: But, we are taking decisive actions that are designed to navigate the current industry landscape and put us in a stronger, competitive position.
Brandon Gall: On the other hand, we are pleased with the trajectories of our brand and spirits and ingredient solutions businesses.
Brandon Gall: These two businesses, on a combined basis, accounted for a majority of our sales and gross profit in 2024. And we believe we are well-positioned to deliver attractive growth and make them an even bigger driver of our consolidated financial performance in 2025 and beyond.
Brandon Gall: As for the fourth quarter of 2024, results were in line with expectations.
Brandon Gall: Consolidated sales for the fourth quarter decreased 16% from the prior year period.
Brandon Gall: Factoring in the Atchison distillery closure, consolidated sales decreased by 7% as the expected declines in the distilling solutions and brand and spirits sales more than offset a return to growth in the ingredient solution segment.
Brandon Gall: Adjusted EBITDA decreased by 9% to $53.1 million, as lower SG&A expenses partially offset reduced gross profits.
Brandon Gall: Basic earnings per common share declined to a loss of $1.91 per share due to a one-time non-cash adjustment to Goodwill. Adjusted basic earnings per share decreased 4% to $1.57 per share.
Speaker Change: Before Mark and I discuss the results and our 2025 guidance in detail, let me take the next few minutes to highlight the current operating environment in each of our three business segments.
Speaker Change: Starting with the Branded Spirits segment, this business continues to perform well. It remains a cornerstone of our long-term strategy to establish MGP as a premier branded spirits company.
Speaker Change: Across the global alcoholic beverage segment, North America is one of the most attractive markets and American whiskey and tequila are among the most attractive categories.
Speaker Change: We are well represented across both these sectors, strongly positioning us for the long term.
Speaker Change: As we look ahead, many of our Premium Plus brands continue to gain traction in the marketplace. This is highlighted by the continued momentum of Penelope and El Mayor, two of our largest Premium Plus brands, whose sales were up strong double digits in 2024.
Speaker Change: The strong sales trend for Rebel 100 is another example of the upside potential of our Premium Plus portfolio.
Speaker Change: We see potential to employ a similar playbook with other brands in our portfolio.
Speaker Change: At the same time, our extensive portfolio of brands across the price spectrum positions us well to opportunistically meet consumers where they are, particularly in the current environment.
Speaker Change: We are pleased with the double-digit average annual growth of our Premium Plus portfolio over the last two years. In notwithstanding some near-term volatility, we believe that it remains well-positioned to grow ahead of the category over the long term.
Turning to our ingredient solution segment.
Speaker Change: Sequentially improving sales and gross margin performance in the fourth quarter reinforced our confidence in this business's attractive long-term growth and gross margin upside potential.
Speaker Change: Food, with better functional nutrition, such as high protein and high fiber, continues to meaningfully outgrow overall food industry spending.
Speaker Change: Our specialty starches under the Fibrosin brand and specialty protein products under the Arise brand are designed to meet these needs.
Speaker Change: Our innovation pipeline remains strong, with opportunities to expand into higher growth and markets.
Speaker Change: including plant-based foods and healthy snack categories. We continue to receive strong interests from both existing and new customers, and we are committed to working closely with them to develop ingredient solutions that align with emerging consumer trends.
Speaker Change: We're positioning this business to take full advantage of these tailwinds by sharpening our commercial and operational execution.
Speaker Change: We believe these initiatives will help to unlock additional growth potential of this business and further solidify our position as a leading specialty wheat ingredient supplier.
Speaker Change: Now, let me provide an update on our distilling solutions business.
Speaker Change: As we called out on our third quarter earnings call, soft whiskey consumption in elevated industry-wide barrel whiskey inventories are having a larger and quicker-than-expected impact on our brown goods results, and this pattern is continuing.
Speaker Change: Annual whiskey production in the U.S. has increased by nearly a million barrels since 2020 to nearly 4.6 million barrels.
Speaker Change: as a number of new and existing distillers have added or expanded distilling capacities to fulfill stronger demand from not just multinational and craft whiskey brands, but also private investment funds.
Speaker Change: However, with consumption normalizing from post-COVID levels, most of these demand projections turned out to be too optimistic and left brands with too much aging inventory relative to their current sales.
Speaker Change: This issue was initially more pronounced among our smaller craft brand customers.
Speaker Change: But we are now seeing similar issues from many of our other customers as well. As a result, to better align their inventories with current demand, they are cutting back their orders for both new fill and aged whiskey.
Speaker Change: These developments are putting even more pressure on distilling solution sales and gross profit in 2025 than we previously anticipated, and we believe this dynamic will persist into 2026.
Speaker Change: The good news is that our customers remain committed to the American Whiskey category, and the brown goods industry appears to be responding to this excess inventory.
Speaker Change: Industry data published by the TTB shows that after double-digit increases over the last three years, total U.S. whiskey production through October is down one percent in 2024, including a four percent decline in the last six months.
compared to the same periods in 2023.
Speaker Change: At the same time, TTB industry usage trends are improving, as total whiskey barrel dumps are down 1% in the last six months, relative to a 4% decline year-to-date through October and a 10% decline in 2023.
Speaker Change: We are encouraged by this nascent improvement in the industry supply-demand dynamics, even though total whiskey inventories remain elevated relative to historical levels.
Speaker Change: That said, we're not simply waiting for market conditions to improve. We're taking decisive, proactive actions designed to de-risk our brown goods outlook and emerge in a stronger competitive position from this period.
Speaker Change: As we mentioned on our last earnings call, we're optimizing our distillery cost structure to mitigate the impact of lower production volumes.
Speaker Change: Now, as we plan additional production cuts in 2025 and 2026, we have identified additional cost savings opportunities and are leaning more on our key suppliers and partners to further lower our overall cost structure.
Speaker Change: At the same time we are strengthening our key customer relationships. We have a strong reputation and a long track record of providing high quality aged and new distillate to many of the largest American whiskey brands.
Speaker Change: Our ability to produce unique and complex match builds at scale is unmatched in the industry.
Speaker Change: We are leveraging these strengths to plan more strategic partnerships with our top customers.
Speaker Change: Let me reiterate that we remain committed to our Brown Goods business. We're confident that our actions will help us navigate this challenging period and position us to capture the full value of our aging whiskey inventory over time.
Speaker Change: Putting it all together, our 2025 guidance signals that these ongoing challenges in the distilling solutions business will continue to overshadow meaningful strides in our branded spirits and ingredient solutions businesses.
Speaker Change: Specifically, for 2025, we expect net sales in the $520 to $540 million range.
Speaker Change: Adjusted EBITDA in the $105 to $115 million range and adjusted basic earnings per share in the $2.45 to $2.75 range.
Speaker Change: with average shares outstanding of approximately 21.3 million shares and full year tax rate of approximately 25%.
Speaker Change: Due to the factors in our proactive actions I mentioned earlier, the four-year guidance now assumes approximately 50% decline in distilling solution segment sales and a 65% decline in segment gross profit relative to our previous estimate of 35% and 50% declines respectively.
Speaker Change: Foyer branded spirit segment sales are expected to be relatively flat with gross margin in the high 40s in line with 2024 as we cut back on some of our single barrel programs as consumers and retailers become a bit more selective and as we sharpen our price points on some brands.
Speaker Change: We've accelerated our productivity initiatives to reduce costs across the business in this challenging environment, including a double-digit percentage reduction in our corporate headcount implemented earlier this month.
Speaker Change: We believe these initiatives will help offset the reinstated incentive compensation accrual this year and will remain a tailwind for the company beyond 2025.
Speaker Change: We're committed to investing behind our brands. At the same time, we're reducing and realigning our advertising and promotion spend to our most attractive growth opportunities. As a result, Branded Spirits A&P spend as a percent of branded sales
will be approximately 12% in 2025.
Speaker Change: That said, with most of our A&P spending behind our Premium Plus portfolio, Brandon Spear's A&P as a percent of our Premium Plus sales will remain high at approximately 25%, well ahead of industry spending levels.
Speaker Change: As we look at the quarterly cadence, first quarter tends to be our smallest gross profit and EBITDA quarter due to the seasonality of our business.
Speaker Change: We expect this dynamic to be even more pronounced in 2025 due to weather-related disruptions and the timing of onboarding new customers in our ingredient solutions business.
Speaker Change: We remain committed to generating strong cash flows. As part of this commitment, 2025 CapEx is expected to be approximately $36 million, down from approximately $73 million in 2024. And net whiskey put away is expected to be in the $15 million to $20 million range.
Speaker Change: down from approximately $33 million and $51 million in 2024 and 2023 respectively. Our 2025 Whiskey Put Away is primarily for our own brands.
Speaker Change: The vast majority of any impact would be from our tequila brands that are imported from Mexico as well as other imported products. We have contingency plans in place to focus on what we can control to help mitigate the potential impact of any tariffs.
Speaker Change: With that, let me hand it over to Mark for the review of our fourth quarter results.
Mark Davidson: Thank you, Brandon. For the fourth quarter of 2024, consolidated sales decreased 16% to $180.8 million.
compared to the year-ago period.
Mark Davidson: Within the distilling solution segment, reported sales declined by 25 percent.
Mark Davidson: Excluding the impact of the Atchison Distillery, segment sales declined by 6% as a 10% decline in brown goods sales was partially offset by a 15% increase in warehouse service sales.
Mark Davidson: Branded Spirits segment sales decreased by 12% due to the continued double-digit decline in our mid and value price brands, as well as a 12% decline.
Mark Davidson: and our Premium Plus sales as we lapped strong growth in the year-to-go period.
Mark Davidson: Ingredient solution sales increased by 4%. As expected, specialty protein sales posted its first quarterly growth of the year as new business wins offset the stronger US dollars impact on our international sales.
Mark Davidson: While we are proud of the progress we've made in generating specialty protein demand in North America, we expect order patterns to be relatively choppy in the early quarters of 2025 as we work to onboard new specialty protein customers.
Mark Davidson: Our specialty starch sales increased 8%, leading to a record year in 2024, as Fibrosome continues to benefit from long-term consumer-driven tailwinds.
Consolidated gross profit decreased 13%.
Mark Davidson: excluding the impact of the Atchison Distillery, consolidated gross profit declined by 15% to $74.5 million due to lower gross profits across all three operating segments.
Gross margin declined by 400 basis points to 41.2 percent.
Mark Davidson: Fourth quarter SG&A expenses declined by 21% due to the lower incentive compensation expense.
Speaker Change: and Steven Lewis, while advertising and promotion expenses decline 15 percent, largely due to the timing of certain A&P campaigns within the year.
Mark Davidson: Full year 2024 A&P spending increased by 6% compared to full year 2023.
Mark Davidson: Fourth quarter adjusted EBITDA decreased 9% to 53.1 million dollars as lower gross profits more than offset reduced SG&A in advertising and promotion costs.
Mark Davidson: During the fourth quarter, we recorded a $73.8 million non-cash adjustment to the caring value of Goodwill in the Branded Spirits segment, primarily due to certain unfavorable macroeconomic factors such as a high discount rate and lower peer valuation multiples.
since the 2021 Lexgo acquisition.
Mark Davidson: This non-cash charge is excluded from our adjusted metrics as outlined in our earnings release.
Mark Davidson: The impairment is not a reflection of the performance of the Luxco or Penelope acquisitions as each have performed well since their respective close dates.
Mark Davidson: Net income for the fourth quarter decreased to a loss of $42 million due to the previously mentioned one-time non-cash adjustment.
Mark Davidson: On an adjusted basis, net income decreased 6% to $34.4 million.
Mark Davidson: Basic earnings per common share decreased to a loss of $1.91.
while adjusted basic EPS decreased 4% to $1.57.
Mark Davidson: We continue to prioritize strong cash generation by managing our working capital and reducing our barrel inventory put away.
Mark Davidson: Net Whiskey Putaway declined from $51.1 million in 2023 to $32.9 million in 2024, helping to drive a 22% increase in full-year cash flow from operations.
to $102.3 million, a record year for the company.
Mark Davidson: Capital expenditures were $29.7 million during the fourth quarter and $73.2 million for the full year.
Our balance sheet remains healthy and we remain well capitalized.
Mark Davidson: with debt totaling $323.5 million as of the end of 2024.
Mark Davidson: leaving us with approximately 520 million dollars in availability under our debt facilities.
Mark Davidson: We ended the year with a cash position of $25.3 million, and our net debt leverage ratio remained largely stable at approximately 1.5 times at the end of 2024.
With that, let me hand it over to Brandon.
Speaker Change: Despite our lower year-over-year financial projections and the uncertainty we face as an industry at this point in the cycle, we remain confident
Speaker Change: We remain a leader in the contract distillation of American Whiskey, and we are committed to this business and our customers.
Speaker Change: We are also a leading supplier of specialty wheat ingredients. In both cases, we believe we will emerge stronger and more competitive in the years to come.
Speaker Change: What gives us even more confidence is the progress we are making toward our mission of becoming a premier brain and spirits company.
Speaker Change: Over the last four years, our Branded Spirits initiative has evolved from an aspirational idea to what we believe will be our largest segment by sales and gross profit in 2025.
Speaker Change: Our diverse portfolio of brands spans categories and price points, giving us the ability to meet consumers where they are.
Speaker Change: Our Portfolio Premium Plus price brand has performed well, growing to 46% of total segment sales and expanding gross margin by 1500 basis points since 2021.
Speaker Change: Our national sales and marketing platform, combined with the scale of our portfolio, allows us to be a critical partner with distributors.
Speaker Change: We believe this is yet another example where our commitment and leadership position us well to emerge stronger and more competitive in the years ahead.
Speaker Change: But what really gives me the most confidence is our people.
Speaker Change: Every day I am humbled and honored to work side-by-side with my colleagues at MGP.
Speaker Change: Our team is passionate, innovative, agile, and resilient. There's no other group of individuals more committed and capable than those on our team.
Speaker Change: In conclusion, we believe our business stands on strong financial footing. We remain well positioned in all three of the industries in which we compete, and our unique capabilities and product offerings give us the right to win.
Speaker Change: The current environment in the spirits industry is challenging. However, we believe our strategy and most importantly our people will steer us into greater success.
Speaker Change: That concludes our prepared remarks. Operator, we are ready to begin the question and answer portion of the call.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star, then 1 on your telephone keypad.
Speaker Change: If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, you may press star, then two.
Speaker Change: At this time, we will take our first question, which will come from Bill Chappell with Tourist Securities. Please go ahead.
Thanks. Good morning, everyone.
Speaker Change: All right, Bill. Can you just, I mean, talk a little bit more about your strategy for age going forward? And when I say that, it's not just...
Speaker Change: for, it seems like you've kind of shut down the spot market, which makes sense. But even for, you know, customers where you're making aids that they're gonna buy down the road, I mean, last quarter or the end of last year, you were kind of left high and dry by some customers that had committed to that inventory and then walked away from it.
Speaker Change: Are you putting anything in place? Are you calling the customer base of who you're going to do that for? Are you just trying to understand how you're de-risking that business a little bit more?
Brandon Gall: Yeah, thanks. Thanks, Bill, for the question. Yeah, this is Brandon.
Brandon Gall: So, yeah, you're exactly right on a lot of those points.
Brandon Gall: Last year, in 2024, as we said at the beginning of the year, age sales were going to be down year over year. New disability sales were up last year, mid-single digits. So, on the age front, it did play out largely how we anticipated. We expect this year to be down even more, just due to where we are at this point in the cycle for that business. However, that being said, we are not giving up on the age business.
Brandon Gall: This is important to our existing customers as it helps them fill gaps, and new customers as it speeds up their brand timelines.
Brandon Gall: As our increase focuses internationally, age will play an even more critical role in our success. So, we believe our long track record bill, our reputation for quality, and our commitment to our brown goods business and customers
Brandon Gall: will allow us to monetize the value of our age over time. Just to the point we're at in the cycle, it's not playing as prominent of a role as it has in the past.
Thank you for showing up.
Brandon Gall: Yeah, and Bill, the second part of your question is a really good one, which is...
Brandon Gall: So in response, we've done two things, two critical action steps. Number one, we made the strategic decision to begin outreach to our other contracted customers in an attempt to proactively align pricing to market levels in volume to their recalibrated needs.
Brandon Gall: While these conversations are still taking place, we assume this proactive partnership approach will result in additional reductions in sales and gross profit.
Brandon Gall: Simultaneously, we've also set in motion cost savings initiatives to offset some of these impacts. However, even with these measures, we expect distilling solutions sales and gross profit to be down now 50% and 65% respectively this year.
Speaker Change: So, to sum it up, Bill, we are really leaning into our relationships with our critical customers. Rather than waiting for our phone to ring.
Speaker Change: to see what customers are going to say. We're using the value of the relationship and the longstanding interactions we've had with them to proactively contact them.
Speaker Change: and ask them what their real needs are, and compare that to where the market prices are today. Because it's very critical for us, as we remain committed to this business, to expand that partnership and to work with them through these tough times.
got it so just to translate it
Speaker Change: From November, there's not much change to what your outlook was for age in 2025. But the real difference is now you have, I guess, a firmer after going to at least through a third of the customers and not half with new pricing and new volume. You've come up with kind of a new estimate of what new business will be in 2025. Is that the right way to think about it?
Speaker Change: volume volumetrically is largely what it was back in October, which was pretty small.
Speaker Change: especially related you know prior years you know if anything's changed we're probably going to get a little sharper on price there where we can but yeah the aged outlook hasn't changed you know
Speaker Change: We feel really good about our inventory position. We feel very confident that we're going to be able to monetize that over time.
Okay and then second just
Speaker Change: On the branded portfolio, it's tougher for us to understand the true growth, excluding what you're planning to cull.
Speaker Change: So, is there any way to, as you rationalize that portfolio, understand kind of what the drag will be in 25 for brands you're exiting or de-emphasizing versus just kind of the core growth?
Speaker Change: You know, we're expecting, you know, flattest sales for the year.
Speaker Change: And, you know, that, you know, the overall brand and spirits market is still trying to find its footing and stable and stabilization. So, you know, we feel that, you know, flattish growth, you know, especially some of those price points.
Speaker Change: It's prudent, although, obviously, we're going to aim for higher but we're trying to be realistic with our numbers for 2025 and the reasons that really is twofold. Number one what we taken out of the 2025 number that we had previously had a lot of success with are the single barrel offerings.
Speaker Change: to retailers. These are high margin, high priced, really good products.
Speaker Change: and really good offerings that were very, very popular when they first came out a few years ago. They were popular because they were very scarce and they were very premium and they were very original to what that retailer could offer, differentiated that retailer.
Speaker Change: But what's happened is a lot of other suppliers have gotten smart to it as well.
Speaker Change: And so the scarcity has gone away, and the high-priced nature is a little less.
Speaker Change: you know, consumable because of that from a consumer standpoint. So the demand has gone down on those, so we are taking that number down in our 2025 for our Premium Plus portfolio.
So that's Premium Plus.
Speaker Change: and Midden Value, collectively, is going to be down, you know, mid to high single digits.
Speaker Change: which sequentially is a really good improvement from 2024. And the reason for that is we are now no longer going to be lapping the repositioning of Rebel 80, which is a mid-price American whiskey that we, you know, discontinued in 2024. So that's now going to be out of the comparison periods, and we expect the mid-end value portfolio to perform relatively better sequentially.
Great. Thanks for the call.
Yep. Thank you, Bill.
Speaker Change: And our next question will come from Robert Moskow with TD Cowen. Please go ahead.
Speaker Change: Hi, this is Seamus Cassidy on for Rob Moskow, and thanks for the question.
Speaker Change: Yeah, great question. So we see this tough environment persisting through 2025 and into 2026, as we stated.
Speaker Change: And it really depends on the industry how much more beyond that it's going to last.
Speaker Change: However, we do expect over time industry players to behave more rationally, and like we shared, we're starting to see some signs of that, which is encouraging.
Speaker Change: running with greater efficiency and staying close to our customers. That being said, and like I said with Bill, we still believe that our age will remain valuable.
Speaker Change: And although we remain committed to this business, it's worth noting that it's going to be a much smaller part of our overall business in the coming quarters and years than it's been in the past.
Speaker Change: Got it, that's helpful. And then maybe one more from me. There's an S3 out this morning with Chairman Don Lux listing his shares for sale. Given his significant ownership stake, is there any appetite by the company to maybe step in and repurchase some of these shares, especially in the context of the increased share repurchase activity in 4Q?
Speaker Change: Yeah, great question. So, yeah, the S3 that went out this morning is more of a housekeeping item. When we did the Luxco acquisition, it was actually part of the agreement that we would do, you know, a number of those on behalf of Don and his family. I believe this is the second one that we've done, so this is exactly that.
We wanted it.
Speaker Change: We wanted to we wanted to do it in the back half of last year but there was some information that the board was aware of that prevented us from doing it so that's why we filed it today.
Understood. Thank you.
Thank you, Amit.
Speaker Change: And our next question will come from Mark Torren with Wells Fargo. Please go ahead.
Mark Torren: typically entering a year, you would provide an idea of your visibility ahead. You guys typically cite, you know, amount of distilling plan already contracted for the year.
Speaker Change: So, maybe, I guess, entering this year, new environment, help us get some comfort around the outlook. Could you maybe provide some context around the buildup of the guide, particularly for distilling, and also any cadence considerations, perhaps by segment for the year? Thanks.
Yeah, thanks, Mark. Yeah, so.
Speaker Change: You know, even more of our expected sales are under commitment through New Distillate.
and what we're doing in response.
Speaker Change: We increased the year-over-year decline in that business to 50% sales and 65% gross profit. That gross profit impact is approximately $21 million incrementally.
Speaker Change: to what we had shared a few months ago and that's netting out a lot of the really, really great cost savings initiatives the team's identified and is putting in place. So that number otherwise would have been much bigger.
Speaker Change: So, you know, from a confidence standpoint, we feel we're doing all the right things.
Speaker Change: We are getting out in front of it. We are anticipating, rather than hoping that our contracts hold, we are now building into our guide for the first time that the contracts are going to be possibly renegotiated closer to what our customers need and closer to the market price for those products.
Speaker Change: So, that is a first for us, that is us being proactive, and that is us really trying to partner with our customers and show our commitment to them and to this business.
and rest of the year.
Speaker Change: And to give you an idea of that Q1 of 24, we had approximately 22% of our gross profit. In the first quarter of 24, it'll be even more pronounced than that, a lower respective gross profit is expected in the first quarter of 25.
Speaker Change: Okay, thank you for that, Collar. And then, how are you thinking through cash flow progression for the year? Earnings are under pressure, you've rebased CapEx.
Speaker Change: even with, I think, some carryover projects. And then there's a likely potential for the penultimate PR and out. So, just any additional color on how you're thinking about cash needs for the year and management throughout. Thanks.
Yeah, yeah, I'll start on that one.
Speaker Change: Yeah, great question. So yeah, last year, as Mark shared, cash flow from operations was a record for our company, over $100 million for the year.
Speaker Change: And, you know, this year, despite, to your point, Mark, you know, the pressure on earnings and the lower EBITDA outlook, we still expect this to be a very strong.
, , , , ,
Speaker Change: And this year, we think it's going to be approximately $36 million, somewhere in that range. But still, we are not walking away from very positive ROI projects that are going to help us strategically position ourselves in the future.
Speaker Change: And then additionally, our putaway is also going to be reduced on a net basis this year. So we're forecasting probably $15 to $20 million in net putaway. Last year, it was roughly $32, $33 million. In the year before that, it was closer to $51 million. So just through those actions alone, we're able to free up a lot of cash and use that at our disposal, whether that's to pay down debt or do other things opportunistically
That being said...
Speaker Change: You know, our net leverage ratio at the end of the year was approximately one and a half. We do expect that with the lower earnings to be pushed upward possibly, but we don't see it going above two times before the end of the year.
Speaker Change: Oh, and one other thing, Mark, for the PNLP earn out, that's not slated to be paid out until Q1 of 2026.
Okay, great. Very helpful.
Speaker Change: And our next question will come from Sean McGowan with Roth. Please go ahead.
Thank you. Two questions. One, yeah, can you hear me?
Speaker Change: Okay, how confident are you, given the changes in inventory and what's going on in the industry, how confident are you of the carrying value of the distillate that you have on your books?
Speaker Change: Yeah, we're confident, Sean. Our carrying value remains far below where market prices are, and you know, you can imagine just at our size and scale, you know, that you know, our costs can be relatively, you know, low within the industry, and so there's no cause for concern at this point in time there.
Speaker Change: Okay, my other question was, you know, you talked about the vast majority of the tariff exposure being on tequila. But can you talk a little bit about, you know, the Europe, I mean, yeah, the European tariffs kind of resuming?
Speaker Change: at the end of next month and, you know, what portion of your output is eventually, you know, on the part of your customers bound for Europe and what kind of exposure does that represent?
Speaker Change: Yeah, today it represents very little exposure is the answer, but that's, but we don't view that necessarily as the case longer term.
Speaker Change: But yeah, as far as our guidance goes for 2025, Sean, not a big number is incorporated into that for international sales.
Okay, thank you. Bye, bye, bye.
Thank you, Sha.
Speaker Change: And our next question will come from Ben Cleavey with Lake Street Capital Markets. Please go ahead.
Ben Cleavey: All right, thanks for taking my questions. First question on the ingredient business. I'm wondering if you can elaborate a bit on the magnitude of the 1X costs in that segment in 24 and expected continued expenses on a 1X basis in the first half of 25 as you kind of transition that segment post-Atchison.
Ben Cleavey: B-Search credit. We had about around eight million dollars in other operational costs and headwinds, including incremental costs to dispose of the B-Search slurry byproduct.
Ben Cleavey: which is something that we are mitigating with our biofuel facility in the second half of 2025. And then lastly approximately two and a half million dollars of cost to operate the
Ben Cleavey: per tariff facility that, you know, did not exist in 2023. So those are really the one-time costs, the remainder of the decrease in gross profit related to sales decreases, particularly in specialty protein.
Yeah, so just to build on that.
Speaker Change: Yes, the specialty protein business that was the business that took a hit last year to the strong FX headwinds of the strong US dollar.
A lot of our Arise 500 business goes to Japan.
Speaker Change: So, after losing a big slug of that business last year, the team's done a really, really nice job of finding domestic customers for that in the time since.
Speaker Change: We saw that come on in Q4, which if you look at our specialty protein product line, it was the first quarter of growth of the year for that product line. And although it's going to be choppy as these new customers are onboarded in 2025, we do expect there to be more demand for that product, which is great news.
Speaker Change: Secondly, Mark mentioned Proterra. We are very excited for this new capability. Just as a reminder, this commenced in Q2 and went online, and we're making more and more progress.
Speaker Change: So it's still going to be a slight drag to the ingredients, solutions, business, P&L, and 25, but much less.
Than it was last year.
Speaker Change: Just a couple updates there. We have two new accounts expected to come online in the second half that are very, very large accounts for that business. And we also have three new ingredient inclusions that are expected to be released and ready for sale in Q3 and Q4.
Speaker Change: So again, very excited for that business. This has been a very, very challenging year operationally. Separating it from the distillery came with a ton of complexity, and that's what's resulted in a lot of these one-time costs.
Speaker Change: But I'm very, very proud of the team for how they've responded, and I'm also very, very excited to share the news earlier in the year about the promotion of Mike Buttshaw to president of Ingredient Solutions.
Speaker Change: his ability to work collaboratively now with not only the commercial team, but across functions is just going to be incredibly creative to that business over time.
Speaker Change: Have they gone to another, you know, another ingredient within, you know, within their recipes, or are they expected to come back on here, maybe as their inventory levels come down or as, you know, Forex pressures mitigate.
Speaker Change: Yeah, great question. So, as a reminder, our Arise product line in Specialty Protein, just like our Fibrosin product line in Specialty Starch, are very proprietary to us.
Speaker Change: We are leaders in those two areas, and in terms of specialty wheat ingredients. And so, yeah, so the Japanese business, as an example, did go away quite a bit in 2024, and also in 2025.
Speaker Change: But, you know, their substitutes for what we do are hard to come by. And so we are seeing, as the U.S. dollar has weakened a little bit over the last, say, number of months, relative to the Japanese yen, we are seeing that interest come back.
Speaker Change: Very good. I appreciate you guys taking my questions. Thanks a lot. I'll get back to you.
Thank you, Ben.
Speaker Change: Again, if you have a question, you may press star then 1 to join the queue.
Speaker Change: Our next question will come from Mitch Penhero with Sturdivant. Please go ahead.
Hi, good morning.
Hi, so...
As far as, you know, looking at your put-away for...
Speaker Change: 2025. You're going to have some put away, but I'm curious, I guess that's all for your branded spirits business. There'd be no need to really put away for, you know, wholesale customers.
Speaker Change: Yeah, that's our thinking right now. It's primarily going to be for our own brands.
Speaker Change: But, you know, as we watch the dynamics in the industry, you know, that's a decision that we revisit every month. So, but similar to last year, we expect this year's net put away to be down year over year and most of that is going to go to brands.
Speaker Change: Absolutely, and we do that all the time. In fact, it goes both ways. If there's, you know, if there's a branded spirits barrel that, you know, maybe the innovation team decided to go a different direction on, then those get freed up. Likewise for Distilling Solutions customers. So yeah, it's a very symbiotic relationship between the two segments as it relates to inventory.
Okay, and then, um,
So
You know as
The distilling solutions business recovers.
for more information.
Speaker Change: Yeah, so the way we look at it and the way we're really trying to dial it in is focusing on
Speaker Change: you know, certain customers, but also where we're differentiated. And where we're differentiated is in the higher RIE match bills that we provide. We're also differentiated in that a lot of these customers we've, you know, we've supplied for a long time. So we are almost synonymous, if not fully synonymous, with their taste profile.
Thank you. Bye-bye.
But also, you know, the other answer is, is that
Speaker Change: But that's where we that's where we come in handy, Mitch, is, you know, we're able to help them innovate, we're able to help them blend, we're able to help them come out with new products to stay fresh in the mind of consumers.
Speaker Change: with their age, and we're able to, you know, give them affordable, you know, new distillate and warehouse it for them over time to grow.
Speaker Change: And then just one more question, so I mean this down cycle
Speaker Change: in the industry, and particularly as it relates to your wholesale business, the distilled, you know, distillery product segment. Is this, this is basically accelerating your business transformation to being a.
Speaker Change: a pure play branded spirits business. Is that correct? Is that the right way you're gonna strategically handle this? I know you have long-term customers that are gonna be with you for a while, but it looks like this could be the,
Speaker Change: I mean the catalyst to really accelerate the transformation. Is that is that the right way to look at this?
Speaker Change: You were with us when we first announced that we were going to start building organically our own Branded Spirits initiative and capability in-house back in 2014. We switched from building it in-house to acquiring in 2020 after we realized that, you know what, the brown goods business is a great business, but it's very volatile.
Speaker Change: And we also realized that building a brand and spirits business organically, it's A, really hard, and B, it takes a long time, and C, it costs a lot of money. So that's when we switched from build to buy. And I think we all know where that led.
Speaker Change: Fantastic acquisition of Luxco in 2021, followed by another fantastic acquisition of Penelope in 2023.
Speaker Change: And then it's also going to be the business that's going to enable us to grow much, much faster and bigger into the future. We're very proud of the progress we've made, and we're really proud of how we're positioned going forward.
Speaker Change: And just a final question, and you sort of touched on it in that answer.
Speaker Change: In terms of M&A and some of the smaller craft, I mean, there are some good craft brands out there. Are there any conversations increasing? Do you anticipate doing, you know, any acquisition? Or is this a hunker-down year and we'll look at acquisitions next year?
Speaker Change: Yeah, so the non-negotiable number one priority for us is stabilizing our business.
Speaker Change: primarily our Distilling Solutions business and that's through greater focus and partnership but that focus and partnership applies to our other businesses as well because we've got we always feel there's improvements to be to be made.
Speaker Change: You know, but M&A is going to remain, you know, part of our long-term strategy.
Speaker Change: So we're not putting our head all the way down, ever. We have to always, in my view anyway, Mitch, keep our eyes open as opportunities come. Because sometimes the best opportunities come in tough times, and we don't want to turn our head to that.
Speaker Change: More specifically, well, you know, we didn't share it on the call, but our customer count last year as we entered 2024 was more than 840 customers.
Speaker Change: So, you know, we don't know where things are going to go, but I do know that as we partner closer and closer with all of our customers, that that's going to be, you know, always going to be a possibility, just as it's been in the past.
Speaker Change: Okay. All right. Well, thank you for the insights. Appreciate it. Thank you. Thank you, Mitch.
Thank you for your interest in our company.
All right, John.
Thank you.
Speaker Change: This concludes our question and answer session. I'd like to turn the conference back over to Brandon Gall for any closing remarks.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.