Participants
Gerald Pascarelli; Analyst; Wedbush Securities, Inc. Mitch Pinheiro; Analsyt; Sturdivant & Co., Inc.Presentation
Good day and welcome to the MGP Ingredients First Quarter 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key and zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one on your telephone keypad. To withdraw your questions, please press star and two. Please note this event is being recorded. I would now like to turn the conference over to Mike Hobbs. Please go ahead, sir. Thank you or I'm Mike Houston with Lambert Global, MGP's Investor Relations firm. And joining me are members of their management team, including David Brasher, 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. 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, w. w. w. dot MGP Ingredients.com.
At this time, I would like to turn the call over to MGP's Chief Executive Officer and President, David Brasher, David. 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 31st, 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 edge and Distillery closure. Our distilling Solutions segment achieved sales growth when looking at our business today compared to a prior year period with how Diageo Civista 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.
Further highlights for the quarter included the promotion of a metal phases yet to the Chief Commercial Officer role, the commissioning of our newly built textured wheat protein facility, and several incredible brand initiatives, each of which we will talk about on the call today. Starting with the promotion of a mile to this newly created role, he will continue to leverage the business intelligence and predictive data insight to develop the SCIO. and apply them across all three business segments. Mlc wealth of experience and his unique strategic view of our business will be critical in driving the next phase of growth for NGP. We are excited about the inside of who 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 grounded 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 three 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 Barts town, 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 seating 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 shipped from LP into two new states during the quarter, our brand marketing initiatives during the first quarter included entering into a sponsorship, a published number, a car under Richard Childress racing, which boldly showcases our Rebel bourbon 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, Toca, Fidelity, Rio and Yellowstone run 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 carb 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 textured protein facility, which was dedicated to Ladd Seaberg. The Light has been of our Chairman Karen Seaberg. It was absolutely side, as I said, Karen and her family celebrate his memory and the indelible mark, you left on the company with such that 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. Brendan? Thanks, David. For the first quarter of 2020 for consolidated sales decreased 15% compared to the prior year period to $170.6 million due to the assets and Distillery closure. Excluding the impact of the assets and Distillery at 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 Luxtera distillery at Barts top 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 premium-plus printed spirits offerings in Q1 and as planned, the temporary shutdown of our Luxtera distillery of bars on Kentucky and the incremental costs incurred in Ingredient Solutions related to the drying of the waste streams ready for commercial sale as well as our new extrusion manufacturing facility. Excluding the impact of the U.S. and 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 spirits 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 $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 highlightexd on our previous earnings call. In accordance with the applicable accounting guidance, we no longer expect to present the results of the Edson distillery as discontinued operations in our financial statements. However, for reference, we have quantified the impact of the U.S. and Distillery results in a 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 billion.
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 matching whiskey put away the growing feature distilling solutions and branded spirits segment sales remains a key priority and as 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, dryer investment to support our lux road distillery expansion, the purchase of our previously leased bottling facility in St. Louis, Missouri and then fuel plant and assets in Kansas to better monetize the waste starch stream.
Our Ingredient Solutions segment. During the quarter, the Board approved a $100 million share repurchase program, and we repurchased 59,084 shares of our common stock for approximately $5 million. The Board of Directors also authorized a quarterly dividend of $0.12 per share, which is payable on May 31st to stockholders of record as of May 17th. The Board continues to be dividends as an important way to share the success of the Company with shareholders and will continue to focus efforts on optimizing product mix across all three 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 historical growth in our business remain intact throughout 2024. While we continue to monitor the potential impact of inventory levels at distributors overall, American whiskey supply and consumption patterns and inflation that consumers state 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 dollars 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 expected to be approximately 22.3 million at year end.
And now let me turn things back over to David for concluding remarks. Thanks, Brendan. We are pleased with our positioning to achieve our 2024 objectives. Demand for our products in each of the three segments remains strong and we believe our plans will continue to position the business for long-term success. Despite some reported softness 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 for our points of distribution, accelerating our sales velocity within those points of distribution through effective marketing, expanding our product offerings through innovation and closing on 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 bold to both Kraft 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.
Question and Answer Session
Gerald Pascarelli, Wedbush Securities. Thanks very much. Good morning, guys. Morning. Just on your book morning on your brown goods business within distilling solutions. Just I guess this is a housekeeping question, but the down three, 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 can 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 demand for new fill this year. Any color there would be helpful.Thanks. Yes, John, this is Brandon. On the quarter was in line with our expectations. In our prepared remarks. We mentioned on our reminded everyone of the closure of the Lux road distillery arm as we prepared for its expansion 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 I look at the brown goods growth on 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 your tone on underlying from our customers as we reiterated, we saw the vast majority of our sales committed, how we're working very closely with our customers to make that to make sure that we can execute and increase as they need it and done. So we reiterated reiterated our outlook this morning on that line. Yes, I would add that, Tom, as you think about what Brendan 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 this field 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. Perfect. Thanks very much for the color. And next question is just on branded spirits on when we look at your gross margin in that segment, which continues to expand nicely. If 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 my 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 on 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. Thanks. Yeah, and great question. So if it did the profit before tax 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 spirits side related to the Penelope acquisition. So that was $4.1 million in the period. So that is going to be a drag it down. But but you're exactly right over time as we continue to execute on our strategy, specifically a 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 investments. So again, just as a reminder, a lot of our brands in premium plus are younger in their life cycle, more emergent regional in nature as we continue to invest in raising that awareness with the consumer, we expect that to pay off over time. And Gerald, I'd add we've said last quarter I said again this quarter that we aspire to evolve to be a branded spirits company. And as such, we would fully expect that to both 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, you know, as we continue to evolve and focus on what's meaningful. That's the plan we should have that accretion ongoing. Perfect. Thanks very much, guys. I'll pass it on. Marc Torrente, Wells Fargo. Hey, good morning. Thanks for taking my questions. Just a couple of 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 was 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? Yes, Mark, thanks for the question. Yes, we wish we had a lot on the last quarterly call on that in anticipation of this is because there were some things to navigate and we went to to message that as clearly as possible to you and address the investor community. But yet, as you mentioned, Q1 played out exactly how we thought it might on maybe even slightly better in some ways. And our view for Q2 to Q4 are entirely consistent with what we shared on the Q4 call, we expect brand spirits sales to pick up as the year goes on primarily in Premium Plus, which is typical for our industry on the selling solutions side, as David mentioned, of Luxfer has come online in April. so we can utilize that facility and expansion we've gotten there on new distillate 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 them. 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 get into next year, that facility and our product line will become more and more accretive to that segment. Yes, I think as we look at our guidance numbers and think about our business moving forward from now from 90 days ago, Brendan, 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. 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 trend throughout the quarter? How much of that pricing is due to that underlying mix shift that you conveyed and how much of that is due to actual pricing. And then margins for the total segment also held up quite well and even with assumed lower mix maybe just how you see volumes first pricing and margins evolving through the rest of the year? Yes. Good question. So I'll start off with with volumes. We expect volumes to increase arm 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 attaining new distillate commitments. As far as the price, yes, price mix was down, but that was driven by mix. And that's why we, as shared on about kind of our mix evolution within Sealing Solutions on our last quarterly call. So new distillate sales were very strong in the quarter as anticipated. And then our aid sales also came in as anticipated, but the reason why the margins set on held steady in that low 40s as we as we shared it might because of the pricing we've been able to get there just so it even though it's a larger proportion of our total sales, but the price in that in the gross margin contribution is greater this year. And in future years, we anticipate that been answered in the past. Okay. Thanks, guys. I'll pass it on. Thanks. Thanks. Thanks for the next question comes from Sean McGowan, ROTH MKM. Thank you. Good morning, guys. A question on margins, but this time 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? Yes. So yes, as you as you noted, John, of gross margins for ingredients were in the 10s mid to upper 10s in the quarter. And it really three main drivers of the first one is the deep storage in your company credit. Our other segment used to receive on the apps and Distillery 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 side of the segment, but the other two items we view as more transitory and the first one being the incremental costs that we're incurring to dry and ready that start stream for commercial sale, and 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 in the third and final thing, which we also believe is more transitory is are the incremental startup costs associated with Proterra facility on this as it has 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 on 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 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. Okay. Thank you. 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 revenue? Yes, also some stabilization. Another main reason is the closure of the Aspen distillery Palm. As you'll recall, the product lines that we've sold primarily out of their industrial-grade alcohol, Al 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 number one raw material that we purchase on to 4%. So and with that, a lot of that risk with it. However, wheat flour on for our green solutions segment, which is now our largest input that we that we buy commodity wise was up about 2% in the quarter, whereas Ryan natural gas were both down year over year. And I will remind that remind you that a lot of our pricing on our brown goods, especially for new distillate, is model priced on for what's committed and contracted. So pricing for that will move up and down with its underlying commodities on so that we're able to lock in our margin. Okay. Thank you very much. Bill Chappell, Truist Securities. Thanks . Good morning. Good morning. And a just for our 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's kind of May Any update on where the distributor inventory levels sit? Are you continuing to see pressure there? Or is that for at least MGPI. maybe for the industry? Is that largely kind of passed at this stage? I'm not going to speculate on 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 North Africa and to meet customer demand. So, you know, destocking for us at a distributor level is not a core issue. Now so you see that as a favorable comp as we see it because the majority of the destocking was this time last year, is that correct? A favorable comp? Yes, sorry. Yes. Perfect. And then just also maybe a little clarification on you did 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 less, which that would impact for the full year. You know, just kind of an idea of how the brands are growing, excluding that rationalization? Yes. So on the median value decline in the quarter was primarily driven by the RNDC. 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 two product lines as the year plays out. And as we said on our last call, because of the rationalization on the rationalization, the prices we're taking on some of our mid and value brands as well as a load. And we expect a lot of that to largely offset the gains we expect to continue to make growth wise and 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. Yes, Bill, this ties perfectly with your other question. I mean, at this point last year, we were we were making a large wholesaler change, any problem in inventory. So as on a comparative basis, you know, over time we've been able to not only successfully make that change but get that inventory manage to the right level as well. Training them sneak in one more David, why do you think you have made another acquisition since Penelope and now almost a year, maybe quantify the number of opportunities you're seeing? Is it price or is it just really looking for the right fit, but it's really looking for the right fit. We are, you know, there are seeing, you know, obviously, with some of the headwinds we've seen in the overall industry. I think there are some people that would normally be on a 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 it 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 spirits company.
So to do that, we have been disciplined, very disciplined in our approach, but I have very, very high confidence that we're going to be able to do some things in this in the near future. Great. Thanks for the color. Ben Klieve, Lake Street Capital Markets. Please go ahead. Thanks for taking my questions. I just want a quick one for me. On the branded side, you talked about the vast majority of volume is committed for the balance of this year.
On the prior earnings calls, we've talked about how your sales forces looking into not bookings, you know, into 2025 Wondering if you can provide any updates on kind of the longer term sales funnel coming out of brown goods you've been looking at the 25? Yes, Ben, this is Brent. I'll start. So that's something we've highlighted about what we like about the new distillate business is that on 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 Mel's leadership and in some other efforts we've been making. We're looking into the U.S. as we always do, but we're also getting more and more optimistic about opportunity for our brands outside the US. So as the year goes on, we expect to provide updates along the way. Yes, I would add that Brady mentioned Amal, but that really is the key focus of what most folks is really thriving on right now is this distilled solutions business doing everything that we've already said to the one we've got to do? And then all the opportunities and brands is we'll hear taking on just the commercial aspect of that has really given us the platform to properly execute and do the things we've been talking about. And that is continue to do what we do in the US. Look at things internationally and how do we continue to to maximize the business. Got it. I appreciate that from both of you and congrats. Good start to the year here. I'll get back in queue. Thank you. Mitch Pinheiro from Sturdivant & Co. Hey, good morning. Just a couple of questions. In the EM branded spirits business of that, are you seeing them, I guess consumer behavior, I think trade down? I know you talk we talk premiumization, but, you know, are we seeing in other categories you're seeing the consumer get a little tighter in the in in spending? And then just curious what you're seeing or what you anticipate for the remainder of the year? Yes, I'll take that. We would obviously we continue to stay focused on the premium plus within the Premium Plus and you look at the price tiers within that by category by product, you do see some shifting and maybe from Ultra two to our 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 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 a little different decision. But what's great about our branded business is that we have total representation across those 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 still a premium plus market. Do you still have do you have levers like that you can pull on it should should things get maybe a little tighter or and is sort of what your plans are in place and they're kind of firm and not much variability there? Yes, on one of the best levers we have as a company, and we feel a little bit unique to us as 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 on the shelf on that only on the shelves in the chains and retailers that we're in, but also the 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 that. I think what Brandon said is right on because at the end of the day, I think we've got our growth.
The next section is about pod expansion. First and foremost, as we expand our pods, you'll see the increase, you'll see the margin accretion happening. You'll see the sales happened 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 hand in hand. We are at this moment continuing to expand our business on a pod driven basis and then back it up with the marketing to get it pulled through. Okay. And then I guess last question on on branded is in your view, David from your just your long history in the business, it seems at least from my view, and I'm curious, your view see there is a huge influx of just new brands, new new New Age classification, new toasted and all sorts of stuff that almost to the point where the proliferation seems some overkill and also maybe hurting the category. How do you do you think we're over branded in in the branded spirits business up and down to Category four. I guess just do you expect any any kind of pullback in brands or you think the SEC is going to stay. It firm will have 30 years of doing this. What I can tell you, what you're seeing in the calculus is American whiskey, as example, that's where your focus there are a lot of SKUs. I could go all the way back to the basket ACE data yourself, not there's still a lot of aka up on the shelf. You see that now on American whiskey, you're going to see that in particular, that's kind of the history of the industry, which if you think about in business fundamentals, are biasing. It means that suppliers like ourselves are shifting to where that consumer demand is, but the challenges 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 we can't sit on set on that all the time you have to have offerings and you have to be able to do 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 category's growth, it's a natural tendency for people to go in and bring more SKUs in. What we do is what you tried to do as we go in and we establish dominance on that particular tried to be the brand of choice, but don't take our eye off the ball of the other categories either. Okay. Thank you for taking the questions. Robert Moskow, TD Cohen. Hey, thanks for the question, fun. I 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 it is. And so if you look at the pro forma for last for 2023 for the Sealing Solutions, the gross margins for last year would have been right around 45%. We shared this on our last call, but I'm happy to have you to share it again on the mix shift is going to result in slightly lower margins. We expect it to be in the low 40%s on for this 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 on 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. Okay. Got it. And then I guess the follow-up to that is 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 now and excluding that factor? Without giving specific numbers, age pricing was up on a new distillate pricing. If you look at it on a customer-by-customer basis was also up. We did have one of our larger, relatively lower price 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. Very helpful. Thank you for that. You bet. Sean McGowan, ROTH MKM. I am saying that I know this could be 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 side? Yes, that's going to be out there on out through 2025 sort of December 2025 is when the earn-out is officially concluded with the Penelope transaction. So it we expected a group, you want it all in there from an accounting standpoint and a lot of Monte Carlo simulation. It's revisited, as you know, every quarter of IT spend, you know, plus or minus $4 million seemingly the last couple of quarters. And we expect it just to continue to ramp up on Schuh as the brand continues to perform in line with our expectations on similar similarly each quarter until we get to the end of 2025. Now on that number, it changes because of volatility in the market because of interest rates are forecast or actuals. So there's something some inputs that we provide on that that helps conclude what that number is in a given quarter. But there's also some external volatility measures as an example of that also impact that. So I would say, give you a more clear answer, Charles, but hopefully that color helps a little bit your model. That's exactly right. It will be a cash outflow. I want by the end of 2025 or sooner, if they hit their metrics sooner is the way it's drawn up. I 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 that means it's performing in line or better than our expectations. Okay. That's all I've got. Thank you. Yes. This concludes the question and answer session. I would now like to turn the conference back over to David Brasher for any closing remarks. Thank you for your interest in our company and for joining us today for our first quarter earnings call and we look forward to talking with you again after the second quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.
