Good morning, and welcome to the MGP Ingredients Fourth Quarter and Year End 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Houston, Investor Relations. Please go ahead.

Thank you. I' Mike Houston with Lambert Global, MGP's Investor Relations firm. And joining me today are members of their management team, including David Bratcher, Chief Executive Officer and President; and Brandon Gall, Vice President of Finance and Chief Financial Officer. We will begin the call with management's prepared remarks and then open the call to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of sales, adjusted EBITDA, adjusted basics earnings per share, gross profit, and effective tax rate, as well as statements on the plans and objectives of the company's 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. 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 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 MGP today, you can access it at the Company's website, www.mgpingredients.com. At this time, I would like to turn the call over to MGP's Chief Executive Officer and President, David Bratcher. David?

Thank you, Mike, and thanks, everyone for joining the call today. I am honored and grateful to serve in the role of CEO and President, and truly excited to build on the MGP legacy. On this call, we will begin with our overview of our performance for the quarter and full year ended December 31, 2023. We will 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. Our strong financial results for the quarter and year were a direct result of the continued strength of each of our business segments and the dedication of our team who are focused on implementing our business strategy. Consolidated sales for the year increased 7% to $836.5 million, while gross profit increased 20% to $304.7 million, representing 36.4% of sales. Adjusted EBITDA increased 20% to $202.5 million. During the year, we continued to experience healthy demand for new distillate and age whiskey in our Distilling Solution segment, which resulted in brown goods sales increasing 39% for the quarter and 26% for the year. These increases were driven by both price and volume. Our brown goods sales growth outpaced U.S. market trends for American whiskey in 2023, driven by both our craft and multinational customers. Our strong sales are a direct result of our exceptional American whiskey offerings and the relationships we have cultivated across our diverse customer base, which now stands at more than 840 brown good customers. Over the last two years, we have deliberately grown our new distillate whiskey commitments compared to aged whiskey sales to bring longer-term financial stability and visibility to our Distilling Solutions segment of our business. In 2023, new distillate sales exceeded aged whiskey sales for the…

Thanks, David. For the fourth quarter 2023 consolidated sales increased 13% to $214.9 million, as a result of increased sales in each of our three business segments. Gross profit increased 35% to $85.1 million, representing 39.6% of sales. Due to improved segment gross profit performance again, by all three business segments. For the year, consolidated sales increased 7% to $836.5 million. Gross profit increased 20% to $304.7 million, driven by a double-digit percentage improvement across all three segments. Despite the headwinds we faced in white goods and industrial alcohol, which were largely addressed by the recent closure of the Atchison Distillery, total company gross margin increased 400 basis points to 36.4% in 2023. Sales in our Distilling Solutions segment increased 8% in the fourth quarter to $108.9 million, reflecting a 22% increase in sales of Premium beverage alcohol. Gross profit increased to $40 million, or 36.7% of segment sales, compared to $31.7 million or 31.3% of segment sales in the fourth quarter in 2022. For the full year 2023, Distilling Solutions segment sales increased 5% to $450.9 million, reflecting a 14% increase in sales of Premium beverage alcohol due to continued strong new distillate and aged American whiskey sales. Gross profit increased to $145 million or 32.2% of segment sales, compared to $126.3 million, or 29.5% of segment sales in 2022. Sales for the Branded Spirits segment in the fourth quarter increased 19% to $72.6 million. Sales of our Premium Plus price tier brands grew 50%, driven by both the Penelope acquisition and our organic Premium Plus Spirits portfolio. Gross profit for the quarter increased to $33.1 million or 45.6% of segment sales, compared to $24.7 million or 40.6% of segment sales in the fourth quarter of 2022. For the full year, Brandon Spirit sales increased 7% to $253.9 million,…

Thanks, Brandon. We are very pleased with the strong results delivered in 2023. Healthy demand for our products continue and we believe our business remains well-positioned. We are also happy to report that we completed the construction of our extrusion manufacturing facility within our Ingredient Solution segment by the end of 2023 as planned. This facility will allow us to support our Proterra brand and offer us additional capabilities that we did not have prior to completion. I would like to thank and congratulate our engineering and operations team for delivering this project on time and on budget. As we move into 2024, our sales team is focused on taking advantage of this added capacity and capability. In closing, I would like to add that despite some reported softening within the Branded Spirits industry when compared to the COVID super cycle, we are very optimistic the long-term health of this industry. In 2023, Spirits growth continued within the total U.S. beverage alcohol market, relative to other alcohol categories. And while U.S. premiumization trends slowed broadly in 2023, we are encouraged by the continued growth in the American whiskey category as well as growth in other segments such as tequila. Additionally, recent industry reports indicated inventory destocking at a wholesale level, remain an issue for the Branded Spirits industry in 2024. Working closely with our distributors throughout 2023, we feel we have made significant progress in managing wholesaler inventory for our portfolio and remain focused on driving points of distribution and velocity across our brands with emphasis on our higher margin offerings. Our strategy is to build a portfolio of Branded Spirits through increasing 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. We believe the interconnectedness of our Distilled Solutions and Branded Spirits segments support continued growth and plan to use both segments to transform our company into a dedicated Brand Spirits company. As we begin the new year, we remain committed to leveraging the strong foundation we have established over the years with the objective of delivering sustainable long-term value for our shareholders. In closing, let me add, I am extremely honored to have been offered the opportunity to serve as CEO, President, and Board member of MGP starting January 1. I take the obligations that I have to our shareholders, employees, and other stakeholders very seriously. The team and I are committed to the continued long-term growth of our business. That concludes our prepared marks. Operator, we are ready to begin with the question and answer portion of the call.

We will now begin the question and answer session. [Operator Instructions] The first question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning.

Good morning, Bill.

Good morning.

Just wanted to go back on the kind of the new distillate sales, and I think one of the things you said was total sales would be down in '24 versus '23. So if you maybe could give some more color, I think you kind of explained what was some customer changes and stuff like that, but try to understand that? And then also, you had mentioned that you're monitoring the overall American whiskey supply levels, and that might be a headwind. So kind of maybe help us understand that? Are you talking about at retail or are you talking about supply of other players coming for new distillate?

Yeah, Bill. I'll start on that. Yeah, thanks for giving us the opportunity to clarify. So we do not expect new distillate sales to decline year-over-year. In fact, we expect brown goods sales in total to continue to grow in line with or better than the broader category of American whiskey in 2024. What we're trying to get across in our prepared remarks is that the proportion of new distillate sales versus aged sales has been growing. And that has been deliberate as David mentioned on the call. And the reason for that is as our customers that traditionally bought aged, as they continue to mature and grow, they're now better able to finance new distillate. And so we're leaning into that because there's a lot of attributes of new distillate customers that we find attractive, such as the greater visibility they provide and the greater cash flow characteristics of sliding (ph) distillate versus aged brings. As far as moderating the overall supply to the industry, that's not our plan. We're continuing to grow with our portfolio and with our customers. And as such, the mix may change more towards new versus aged, but we continue to grow at the same pace or better than the American whiskey category as we've done in recent years.

Yeah. I'll add to that too, just in clarification. The new distillate focus is really critical for our business. It gives us longer-term arrangements, financial stability, and visibility for multi-years on average. It's a better business for us in terms of understanding the impact financially on the overall business. It also is somewhat a normal cycle, as the category continues to grow and some of our previous craft customers become bigger, they're naturally going to switch over to new distillate supply, that's just normal. There is no -- we have no plans to moderate our supply to it. As a matter of fact, we've taken just the opposite approach, as you heard in our call (ph) script, that we're expanding one of our major distilleries in Kentucky, basically doubling its capacity and we expect it to come online mid-year. So we're very optimistic about Branded sales and a plan to expand and continue to grow with the segment.

Got it. Now that helps. And then if I'm looking at the, just the aged demand, I understand that you're naturally kind of leaning into the new, but are you hearing from your customers, now you have 800 customers, any worries that there's going to be a slowdown in brown good demand three, four years out from now, or is kind of the overall interest pretty much the same as it has been the past few years?

I think what we could say on that is that if we look at our aged distillate and when you referenced about 50% of it being obligated, that's actually pretty high number on aged because most of these tend to be craft customers or new entrants into the category. So actually we feel pretty good about the amount that we have contracted and how that relates to any potential unknown is, is that, those the craft -- the craft distilleries or craft brand companies are subject to the same inventory, retail, wholesale level type of inventory situations as anybody. And so with higher interest rates and everything else, they're being a little more cautious with their investment. In the past, we've saw them buy just so they could corner their piece of the business. Now you're starting to see them switch to more just-in-time type of demand. They want to transact, know they can fill the product and get it right through the shelf, given the high interest rates that they operate in.

Got it. And last question, just on the aged, sorry, on the Branded portfolio, your comments about there's still some destocking at distributors and stuff like that, does that mean, I thought most of the impact you kind of saw in the first half of last year, do you expect a quarter where we could be flat to down for that overall business, excluding Penelope or is most of the heavy destocking done?

The comment in general was about the industry overall. There is still a push on inventory destocking for the industry overall. As it relates specifically to our business, we've worked really hard in the past year to manage that -- actively manage that with our wholesalers. We believe we have it in a controllable area of data on hand. At the end of the day, the wholesalers do control the inventory and they place the order and they decide what the number is. I think our exposure on it for us is smaller than, let's say, our peer set because I think we've done a really good job of managing it in 2023.

Great. Thanks so much.

The next question is from Marc Torrente with Wells Fargo. Please go ahead.

Hi. Good morning. Thanks for the question. Just building on Bill's question. With new distillate outpacing aged going forward, or that's the expectation. We know new distillate carries a strong margin, but aged is likely even greater. So maybe anything to read into implications here? And then on the new distillate contract renewals, you mentioned before that the strong pricing there has been giving you cover to be more strategic on the aged side. So maybe any more color on pricing trends there and how long does this, I guess, contract cycle continue?

Yeah, Marc. You're exactly right. We have been successful on the new distillate side in getting more and more price, as contracts renew. On the aged side though, as David said, it's still a very important and valuable part of our business. But we are using this opportunity as our customers are demanding to lean more into the new distillate side of things, because as we mentioned, we feel like it sets us up better to longer term from that perspective.

Yeah. I would add to that too. And I think we call it out in our script. I think this shift to this new distillate is a good sign for the industry overall. If people are willing to contract multiple years out, I think that's a signal of their commitment to the category. Yes, new distillate margins for us are a little softer than aged, that's a given, and Brandon has talked about that in the past. But the benefit that we gain from a new distillate is that financial stability, that long-term visibility, and it still has very attractive margin portfolios. I look at it as a possible -- I look at it as a possible way, it's our effort to derisk the exposure on aged by increasing, as we said in our script, the new distillate category, it brings that stability that we need.

Okay. Great. And then just a little more color on guidance. Calls for top-line growth of about 2% to 4% on a pro forma basis and EBITDA growth around 6%. I guess, maybe if you could provide some underlying color on segment build-up and phasing through the year. There's clearly strong growth in your core categories in Q4, but the guide would imply fair amount of deceleration, was there any pull forward there?

Yeah. No pull forward. To your point, what we're seeing on a pro forma basis is growth in the 2% to 4%, which as you recall, is in line with kind of our long-term aspirations and algorithm. By segment, if we were to take it apart, we expect sales and Distilling Solutions to grow in the mid-single digits. And as I said, as brown goods continue to grow with or better than the category. Brands, we expect to be flattish to low single digits, which is probably a little counter to what maybe a lot of expectations would have been. Because while we do have incorporated into our guide, strong sales of Premium Plus again at/or better than the overall category for this price tiers, there is going to be a larger offset to mid in value in 2024 and there's two reasons to this Marc. The first one being mid and value has been on a steady decline, as we all know, as consumers drink less, but better. But the second one is, we've actually identified two to four very large volume -- mid and value brands in our portfolio. And we admit the decision to either take more price or rationalize in some cases the brands altogether, because as a result, it will be more accretive, both from a gross profit dollar and gross margin percent, although it will create an added headwind to revenue for the segment in the year. And then finally for Ingredients Solutions, sales growth for the year, we expect that to be in the mid-single digits as well. So that's where we get to our revenue guide and I know there is a lot of little bit more confusion around that with the Atchison Distillery closure, which is why I'm happy to share a little bit more detail than we have in past years.

Yeah. And I want to emphasize what Brandon said about the mid and value. We have a substantial portfolio in that area and one of the -- for quite some time, to be honest with you, our focus as a company has been always on being margin accretive. Having spent many, many years with the company before MGP, it really was a drive that we were pushing on to focus on Premium Plus categories. And to do that, you have to build that basis of Premium Plus and then strategically, relook at mid and value. And Brandon said it exactly right. We have some great products in that, that are margin dilutive. And when you're doing that and we're growing our overall business and try to generate cash flow, we have to pick and choose, which ones we're going to focus on to drive the business. And what do you do? Most of the time, the first thing you do is impact it on price. And that is no different than what we experienced. And that is why you've seen, and it's in our guidance number, that it's probably impacted -- it is impacted more than the other price points.

Last piece on that Marc, on EBITDA, we talked about it from a topline perspective, but yeah, and as David said, our midpoint on EBITDA growth is 6%, which again is in line with our long-term aspirations of mid-to-high-single-digit EBITDA growth on an adjusted basis. What we also shared in our prepared remarks was that the Ingredient Solution segment is going to incur $4 million to $6 million in incremental operating costs to ready the starch stream for sale. That is a change from what we knew in Q3. And so if you were to add that back or take that away, because that is only in our mind a temporary cost that we're going to have to incur until we get a longer-term solution in place. That growth is closer to 88.5% on an adjusted basis for EBITDA. So happy to provide that additional color to you.

Okay. Thanks, guys.

The next question is from Gerald Pascarelli with Wedbush Securities. Please go ahead.

Great. Thanks very much for the question. So, just going back to the guidance, I don't want to belabor the point here, but you have historically started out conservatively. You have consistent, beaten raises. And I guess, like I say that in the backdrop that, there is increasing concern around inventory building, etc. So can you maybe just talk about the degree of conservatism that may be embedded in your guidance just to start the initial year and maybe how that compares to years past? I think that'd be helpful. Thank you.

Yeah. Sure. I'll start. And then let Brandon chime in at the end. As we look at our guidance, we want to make sure we're providing as accurate -- as accurate numbers as we know at any given time, all right. So in preparing for those numbers, Brandon and I and our team spent a lot of time, long hours, going through various scenarios, looking at the impact on the start stream that Brandon just talked about, looking at shifts in inventory levels, looking at shifts in price points, looking at consumer demand. And trust me when I say, Brandon and I spent a lot of hours personally going back through our scenarios. What we provided, we feel is a realistic number for us for the year, that's why we provided that guidance. If we can always grow our business and do better, we're going to grow our business and do better. But what we provided is what we really feel strongly that we should be able to deliver.

Yeah. And to add to that, we shared the exact percentages of new distillate and aged commitments for the year to help kind of address this question. While we're still very confident in the American whiskey category, 50% of our aged, we still have to go find sales for. And so as the year goes on, we get more confident in that number, we'll factor that in. But on top of that Gerald, and as I already mentioned, we are still guiding to mid-to-high single-digit adjusted EBITDA growth after coming off multiple years of more than 20% growth. So while we've historically, in retrospect been conservative, as David said, we feel like this is the right approach to this year as we keep trying to grow from a bigger and bigger base.

Yeah. I adding that one last thing in closing off on that question. I mean, it's a given across -- you're hearing all of our peers talk about it. There is a reset going on in the industry. We get compared to the COVID super cycle, and those were great years for the industry. But if you start looking at what the industry is doing after 20-plus years of solid growth, that, yes, it might have slowed a little bit in '22 versus '23, it's still a very, very healthy industry. And it's my belief that, it will -- while we are normalizing, it may be hard as we start -- as an overall industry as you start to compare year-on-year, but I'm confident that it will reset to what we had saw pre-COVID, that's the industry in general. I think there's opportunity for us, because of our size and our opportunities as we mentioned in pods and velocity compared to our peer set that we're excited for and we also factored that optimism into our guidance.

Perfect. Thanks for the color. Just one more for me, it's kind of a housekeeping item, but some color on your accounts receivable days. It looks like they continue to increase and be stretched among all-time highs. And so, can you provide any color on your accounts receivable or if there's anything to glean from that? Thank you.

Yeah. Good point. Accounts receivable days stood at between 61 and 62 days at the end of the year, which was up about 9 days from Q4 of last year. We look at that kind of in combination, Gerald, with our other cash conversion metrics, one of those being DPO, which also increased from the beginning of the year to help offset some of that impact. But in this high-rate environment, and we shared this one-on-one on prior calls. Customers are looking to extend terms where they can, and especially our smaller craft ones that do have terms, not a lot of them do, a lot of them are prepay, but they do try to take their commitments as late as they can if they don't need it right away, and then they're paying more slowly. So it is up to your point, but if you look at our history of bad debt and inability to collect, it's actually pretty good. So we generally speaking feel pretty good about it.

Perfect. Thanks, guys. Appreciate it.

Thank you.

The next question is from Ben Klieve with Lake Street Capital Markets. Please go ahead.

All right. Thanks for taking my questions. A couple of quick ones for me. First of all on the guidance for 2024, and the relationship with Penelope. Can you comment on the contributions that you have baked into the guidance relative to the metrics that are laid out in your earnout with them? Are you guiding to kind of meeting that earnout schedule throughout the year or are you guiding below or above that?

Yeah. We're very pleased with the performance of Penelope, and relative to our underwriting assumptions, it continues to perform in line or better than those next expectations. And so, as we look at the guide for this year, it too incorporates those expectations that the brand continues to perform as we, in fact, hope for better.

Okay. Great. Thanks, Brandon. And then one more from me, Brandon. In your prepared remarks, you noted within the ingredients segment some challenges internationally. I'm wondering if you can comment on that qualitatively or quantitatively at all to kind of help us understand how significant this is?

Yeah. It's near-term something that we're looking at, but mid-to-long term, full confidence in Mike Buttshaw and that team to find a solution. But what I was highlighting in my prepared remarks were really two things. So, firstly, we've begun seeing increases in imports of commodity starches from Canada, Australia, and the EU, which is, for now resulting in some pricing pressure for our own clean-label commodity wheat starches, which represented at about 12% of segment sales in 2023. So that's one of the headwinds. The second international headwind is, we're also seeing some export headwinds of our specialty protein products into Japan, due mostly to unfavorable currency exchange rates. So what we're doing to counter these challenges is really focusing on our domestic commercial efforts to maximize our specialty wheat starch and protein sales here in the U.S. So we are seeing some early signs of success here and we're confident it's going to work out over the course of the year, but it will take a little bit of time.

Yeah. And I'll add to that, we continue to focus on what we do well in our Ingredient business, and that is our Premium type of products with the specialty products. Those are the things that we focus on. Commodity starch is obviously a piece of our business, but it's really more of a subset of what we do and really what we want to sell is our specialty type of products. The model we run for Ingredients is very similar to the model we run for Branded Spirits. We want to focus on those upside, upper and higher-end margin-type of brands. And commodity starch or clean-label commodity starches are exactly that. They're commodity-driven. It works by supply and demand. And yes, this year, as we look at imports and stuff coming in, it's created pricing pressure.

Got it. No, that makes sense. Very good, I appreciate you both answering my questions. I'll jump back in queue.

Thanks, Klieve.

The next question is from Robert Moskow with TD Cowen. Please go ahead.

Hi. This is Seamus Cassidy on for Rob Moskow, and thanks for the question. I just wanted to drill a little bit deeper on brown goods volumes. So you mentioned that they were up for the full year, but for the first three quarters you called out negative brown volumes, which, as you mentioned, was driven by sort of being more selective around the selling of aged barrels, given better contract visibility on the new side. So there wasn't pull-forward, but maybe higher than expected spot sales in 4Q, that maybe drove the sales beat. And if you could just offer any commentary on sort of your outlook for that in 2024 and how we should think about embedding that in Distilling Solutions' mid-single-digit growth as you called out? Thank you.

Yeah. And thanks for the question, Seamus. And, yeah, so in 2023, Q4 volumes were a big part of it of our sales in Q4, especially the growth. And volume did play a role throughout the course of the earlier quarters, although less so than price and so that was the point we were making in a lot of the quarters. As we look to '24, though, we do expect volume to play a larger role. And a lot of that is because we're moving more towards new distillate in that type of model. So while we expect to see good pricing at the new distillate and aged level continue into this year, 2024, that is, we do expect volume to be the main driver of the sales growth we see in this year.

Yeah. I'd add to that, too, that the other piece of that is the, other distillery coming online, the expansion on capacity. And as we look at our guidance and the numbers we provided, they're Q2 through Q4 focused because of that additional capacity that we'll have available. The other thing I would add in general is, our new distillate business, especially as we go into 2024 is really a model of the brand experience category. The people we're selling to are the people that are putting it in brands and putting it on the shelves. And traditionally in the industry, Q1 on average tends to be a slower quarter than the other quarters. And as we look at everything that we've talked about there, if you were to subtract our capacity, expansions, and stuff on the backside, it might look a little more normalized. But when we start to factor in everything going on with a lot of the craft customers, the aged that Brandon mentioned, and we look at the back half of this with our margin expansion, our numbers we anticipate should be better as Brandon indicated in two, three quarters.

That's helpful. Thank you. And then just one more for me. Given that you're moving more towards sort of this new distillate model, and you called out that inflation costs for a lot of your core commodities remain elevated, could you just offer us a little bit more detail on how that sort of flows through, given that a lot more of these volumes will be contracted and sort of how you connect with your customers on that side? Thank you.

Yeah. And that's another advantage of having the longer-term agreements in place because they are -- the pricing is input-based. And so, in addition to having a typical inflation factor year-over-year, what we also incorporate into our contracts and do distillate is pricing based off of raw material inputs, whether it's corn whether it's rye, malt, natural gas, the barrel, etc. So there are those mechanisms within our contract to help insulate us in our margins as we go forward in that type of environment.

Yeah. Especially true on the new distillate, because as Brandon alluded, the contracts when we go out multi-years, they're all based on that. People want to reflect whatever that current grain commodity may be, including the price of a barrel. As we look at our aged and our putaway, obviously those are impacting our future inventory costs and stuff, but in the big picture of things on aged, when the commodities vary like they have, it's not super significant on the overall margin capability, because at those point of age, as you guys alluded to, we can reflect that in the pricing as well in the future.

The next question is from Mitch Pinheiro with Sturdivant. Please go ahead.

Yeah. Good morning. Just a couple of follow-up questions. One is, if the customers are kind of leaning into the new distillate, what does that -- how should we interpret that related to their own inventory levels of age? Do they have ample aged, at this point?

Well, I would say that, yes, I would think that they're managing their aged imbalance. Our strategy, MGP strategy for a long time has always been taking a new customer that wants to be an entrant into the Branded Spirits category in American whiskey and bridging them to new distillate. This isn't really a brand new strategy, it's an evolution over time. And so as those customers build those age, they will naturally go to new discipline and they're going to be in a better financial shape to carry the own inventory costs as well. But it doesn't preclude that those same customers get additional sales in their products and need more aged to be able to make that transition to new discipline, which is what happens on a lot of the customers on the aged market. It's also a reflection of why it's easier to contract on the new distillate side because you're going to be doing it with larger customers that have larger brands. And on the aged side, they're able to come in because of our putaway plan and pick and choose what they need when they need it.

Okay. And then, when I look at your barrel distillate increasing, it gets us up 26% year-over-year. Some of that's obviously is Penelope. But I would imagine that as that barrel distillate grows, that growth is really earmarked for your own brands, Lux Row, Remus, Penelope, etc., is that correct?

Yeah. It's both. So, to date, it's been more outweighed for Distilling Solutions and our own brands. But as we go forward, Mitch, that is going to evolve and part of the benefit of selling more new distillate with our capacity is the cash flow impact. And so as we move forward, and this year is a good example, that net putaway at cost will be less than the $51 million we experienced last year. We're going to continue to invest in our putaway to line up with future demand for both of our segments, but that is one of the benefits we'll see this year.

Okay. And then just final question, you talked about wholesaler inventory destocking. Where have you seen -- have you seen any studies, your own surveys on cut consumer pantry destocking, that seems to me to be a significant event?

Yeah. No specific surveys to speak of on that. A lot of that, Mitch, as you know, is probably pretty anecdotal. And -- but what we have seen is resilient growth in American whiskey, despite the broader industry being flattish in 2023 and we expect that to continue.

Yeah. I would agree. Again, I haven't seen any set data on pantry destocking to be honest with you. I think that's a speculation of what can -- what we can understand is retail emphasis on that. And they've had the same pressure that you've seen at the wholesale level. I mean, they're carrying it at even higher costs than our wholesalers and when you're dealing with big retailers, they're watching their dollars as well. So I do think that as an industry, that is something that still we're going to continue to see in 2024. But as you look at our own business, it's what I said earlier, it's that compared to our peers, the opportunity to increase our points of distribution is reflective and is our guidance.

Okay. All right, well, very helpful. Thank you very much.

The next question is from Sean McGowan with ROTH MKM. Please go ahead.

Thank you. A couple of questions. So, in terms of margin, you've talked about some potential shifts to lower margin segments, etc., but at the same time, stripping out Atchison, the fourth quarter margins were at extremely high level. So can you give us some overall color on how you expect gross margins to trend in 2024?

Yeah. Thanks for the question, Sean. I'm glad we got to this. I thought we'd get to it earlier, actually, but, yeah, so, we got the closure of the Atchison Distillery. We anticipate it's going to be very creative for our overall consolidated gross margin structure. So in the performance that we provided this morning for last year, as an example, consolidated margins would be 42.5% in 2023. Going forward this year, we expect margins to be right in there in that low-to-mid 40% on a consolidated basis. By segment Distilling Solutions on a pro forma basis, it's a little bit north of 45%. We expect it to be in that low-to-mid 40s. The expansion is not going to be as strong as you might expect, but that's partly due to the brown goods sales mix that we've described. Within Branded Spirits, we do anticipate more expansion this year. So we finished the year in the mid-40s and we expect to be in the mid-to-upper 40s, potentially in 2024. Ingredients is going to be a little bit more challenged near-term, and there's really two main reasons for that. Number one is, the additional $4 million to $6 million in cost of drying, the start slurry. That's going to temporarily weigh on the segment this year until we get a longer-term solution in place to figure that out. But also, we're ramping up our new Proterra facility commercially. And we're not going to have it sold out in 2024. So, there's going to be more overhead to absorb as part of that. So for those two reasons, we actually expect Ingredient solutions margins to be in the mid-20s for the year. So hopefully, Mitch or I'm sorry, Sean, that answers your question.

Yeah. Very helpful. One other clarification and then a quick housekeeping one. When you talked about the first quarter being lower than the subsequent three quarters, I think that's typically the case. But are you trying to imply that the first quarter could actually be below last year on a pro forma basis?

Yes. That is, what we're implying. And there's four main reasons to that, and it spans in all four segments, some of them we touched on. One of the bigger ones, in fact, the biggest driver in our look forward is in our Branded Spirit segment, excuse me. And that's really the result of the timing and seasonality of our allocated and single barrel pick items within our Premium Plus brands. That usually is more weighted toward the back half over the last three quarters but this year it's going to be even more so. And those items, as you can imagine come with a lot of gross profit attached to them. So even on a year-over-year basis, we're going to do less in Q1 of this year than we did last year in Q1. And really the reason for that is, the ideal time to get those products out in the market is in Q3 and Q4. And then last year, when we're getting those products out, we experienced some delays operationally, and so some of them accidentally trickled out into Q1 of this year. So we're going to be lapping that. Brown goods commitments were the second one, while we feel really good about having the vast majority of those committed. It's not going to be equal across the year, as David alluded to and so that's going to be more weighted towards Q2 through Q4. We also mentioned the Lux Row expansion, which is going to take off in Q2 of this year. That's our American whiskey distillery in Kentucky. And so the new distillate sales we'll get out of that facility, will not have a chance in Q1 to take place, but will for the remainder of the year. And then again for Ingredients, I mentioned the commercialization of Proterra, that's going to ramp up as the year goes on. And then as we handle these international headwinds we're seeing, as we already discussed, we expect those to be offset, but not all at once in the first quarter, but as the year plays out as well.

Okay. Thank you. And then a quick housekeeping. What do you expect the effective tax rate to be for the year?

Yeah, between 24.5% and 25.5% this year. In another note, our A&P advertising promotion for Branded Spirits, while we're clicking through here, Sean was about 15% -- 15.5% in Q4. We expect that to be around the same in 2024. And the reason for that is again, flattish to low single-digit sales for Branded Spirits for the reasons I already described, but really ramping up our advertising and promotion investment into Penelope as the year goes on this year.

Okay. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to David Bratcher for any closing remarks.

Thank you for your interest in our company and for joining us today for our fourth quarter and full-year 2023 earnings call. We look forward to talking with you again after the first quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.